Travel Allowance: Tax-Deductible Or Not?

The South African Revenue Service (SARS) allows employees to claim a tax deduction on their annual income tax return for the use of a private motor vehicle for business travel. This deduction is available to those who receive a travel allowance from their employer or principal. To claim this deduction, individuals must keep a logbook of their motor vehicle's odometer readings and record details of business travel, including the kilometres travelled and the reason for the trip. The logbook must be retained for at least five years and correspond with the service history of the car. SARS provides a standard format for the logbook, which is generally recommended to ensure a smooth claims process. It is important to note that travel between an individual's home and regular place of work is considered private travel and cannot be claimed as business travel.

What is a travel allowance?

A travel allowance is a form of financial assistance provided by employers to their employees to cover their travel expenses. This can include expenses incurred when travelling for business purposes, such as transportation, lodging, meals, and other incidentals. It can also cover commuting costs, helping employees offset the costs of travelling between their residence and their workplace.

Travel allowances are typically given to employees either before or after their business travel is completed. They can be provided as a fixed travel allowance, a daily travel allowance, or a travel reimbursement. A fixed travel allowance is a flat rate offered to an employee, irrespective of the level of expenses incurred. Employees are responsible for managing their expenses and determining how to use the money to best accommodate their needs. A daily travel allowance, also called a per diem, is an amount provided for each day of travel and can be used for lodging, transportation, meals, and other expenses. A travel reimbursement requires the employee to submit receipts for their actual expenses, which are then reimbursed by the employer.

The specifics of how a travel allowance works can vary depending on the employer and the applicable tax laws and regulations. In the UK, for example, travel allowances are subject to taxation and may be considered a taxable benefit or an expense reimbursement. Employers need to ensure proper taxation and reporting of the allowance according to the guidelines set by the tax authorities. Employees may also be eligible for tax relief on their travel expenses if certain conditions are met.

Overall, a travel allowance is a valuable tool for managing employee travel expenses and controlling costs. It provides travellers with flexibility and control while increasing compliance with tax regulations.

What is a travel reimbursement allowance?

A travel reimbursement allowance is a way for employers to manage employee travel expenses and control costs. It is compensation paid to employees to cover expenses incurred while travelling for business. This includes expenses like lodging, transportation, airfare, meals, and other business travel-related costs. There are different types of travel reimbursement allowances, and they can be given upfront or based on a reimbursement schedule.

One type is the fixed travel allowance, which is a flat rate offered to an employee regardless of the level of expenses incurred. Employees are responsible for managing their travel expenses and determining how to best use the money to accommodate their needs. Typically, if the employee spends less than the allocated amount, they can keep the difference, and if they spend more, they need to cover the difference themselves.

Another type is the daily travel allowance, also called a per diem. This is an amount provided for each day of travel to cover expenses like lodging, transportation, meals, and other travel expenses. The employee usually needs to submit an expense report and receipts to reconcile the per diem. Any unspent money is returned, and they are reimbursed for any expenses exceeding the daily allowance.

The travel reimbursement allowance requires employees to submit receipts for their actual expenses, which are then reimbursed by the employer. This process can be time-consuming and cumbersome, especially if reimbursement is delayed, as it puts a financial burden on the employee who has lent money to the company. However, modern technologies are available to simplify reimbursement processes.

Additionally, there is the mileage reimbursement allowance, which is typically used when employees use their personal vehicles for business-related travel. This type of allowance reimburses employees for the miles travelled on business, and modern technologies have made tracking and reimbursing mileage more accurate and simpler.

How do I prove travel was for business?

To prove that your travel was for business, you must meet certain criteria. Firstly, you need to leave your "tax home", which is the locale where your business is based. Travelling for work is not technically a "business trip" until you leave your tax home for longer than a normal workday, with the intention of conducting business in another location. The trip must also consist "mostly" of business. The IRS measures your time away in days. For example, if you go away for a week and spend five days meeting with clients, and two days vacationing, that qualifies as a business trip. However, if you spend three days with clients and four days on vacation, it is considered a vacation. Importantly, the days that you travel to and from your location are counted as workdays.

The trip also needs to be an "ordinary and necessary" expense. This is a term used by the IRS to designate expenses that are "ordinary" for a business, given the industry it is in, and "necessary" for carrying out business activities. For example, if there are two identical conferences, one in your hometown and one in Honolulu, you cannot write off the trip to Hawaii.

You must also plan the trip in advance. A business trip needs to be planned ahead of time, with a clear itinerary and schedule. This helps prove that there was professional intent behind your trip.

If you are travelling in your own vehicle, there are two ways to deduct business travel expenses. The "actual expenses" method involves totalling the actual costs associated with using your vehicle (e.g. gas, insurance, parking fees) and multiplying it by the percentage of time you used it for business. The "standard mileage rate" method involves keeping track of the business miles you drove during the tax year and then claiming the standard mileage rate.

It is important to keep good records, such as receipts, cancelled cheques, and other documents that support a deduction.

What is the difference between private and business travel?

When it comes to differentiating between private and business travel, the primary purpose of the trip is the key distinguishing factor. Private travel typically involves trips for leisure, family visits, or personal growth, while business travel is undertaken for work-related reasons and often includes attending conferences, meetings, or visiting clients. Here are some key differences between the two:

Purpose and Motivation:

Private travel is usually motivated by personal interests and allows individuals to visit new places, explore cultures, and spend time with friends and family. On the other hand, business travel is primarily focused on attending business events, meetings, and generating revenue for the company. The itinerary for business travel is often determined by company guidelines and revenue-generating potential.

Planning and Booking:

Business travel is generally more complicated and involves adhering to company travel policies. Corporate travel agents are often utilised to ensure compliance with company guidelines and to save time on expense reporting. Business trips are typically shorter and involve specific deadlines and itineraries to ensure travellers arrive ready to work.

Payment and Expenses:

Business travel is typically planned and paid for by the employer, whereas private travel expenses are usually covered by the individual. Business travel expenses may include transportation, accommodation, and meals, which can be reimbursed by the company or claimed as tax deductions, provided they are properly documented.

Insurance:

Another crucial distinction is the type of travel insurance required. Business travel insurance is designed to address the unique risks associated with work-related trips, such as coverage for business equipment (laptops, phones), trip cancellations, theft, medical emergencies, and emergency evacuation. Personal travel insurance, while important, may not offer the same level of protection for work-related equipment and business-specific needs.

Safety and Responsibility:

Companies are responsible for the safety and well-being of their business travellers, which includes providing assistance in case of trip interruptions, flight delays, lost luggage, or accommodation issues. Leisure travellers, on the other hand, are typically responsible for their own safety and well-being during their private trips.

In summary, the key difference between private and business travel lies in the purpose and motivation for the trip, with business travel being primarily work-related and private travel being for personal leisure or non-work reasons.

What is the impact of COVID-19 on travel allowances?

The COVID-19 pandemic has had a significant impact on travel allowances, particularly for employees who receive travel allowances for business travel that is no longer possible or required. The pandemic has disrupted the purpose of travel allowances, as business travel may no longer be necessary or feasible due to restrictions, remote work, and changes in company culture and practices.

During the initial stages of the pandemic, travel restrictions were implemented globally, prohibiting or severely limiting travel. While these restrictions have since eased in many places, the effects of the pandemic on business operations and travel continue. Many companies have adopted remote work policies, with employees working from home or given the option to do so. As a result, virtual meetings have become commonplace, reducing the need for travel to meet clients or attend conferences.

The decrease in business travel has led to a re-evaluation of travel allowances. Employers and employees must carefully consider how these allowances are structured and taxed. In some cases, employers may need to adjust their tax withholding strategies to align with the changed circumstances. This could include withholding taxes at a higher rate to help employees prepay their anticipated tax liability resulting from reduced travel allowance claims.

The impact of COVID-19 on travel allowances is also reflected in the reimbursement of travel expenses. A reimbursive travel allowance, which is based on the actual business kilometres travelled, may be seen as a more suitable option in the current context. While this approach may result in a tax liability for employees, it eliminates the risk of a deferred tax burden by directly aligning the reimbursement with the reduced business travel.

To support their tax claims, employees must maintain accurate and detailed travel logbooks. The South African Revenue Service (SARS) is expected to enhance its robust stance on verifications and audits of tax returns, making it crucial for employees to provide comprehensive documentation.

Overall, the COVID-19 pandemic has had a significant impact on travel allowances, disrupting business travel and prompting a re-evaluation of allowance structures and taxation strategies. Employees and employers must navigate these changes carefully to ensure compliance and manage potential tax liabilities.

Frequently asked questions