Travel Allowance: What's The Average?

A travel allowance is a sum paid or advanced by an employer to an employee for the use of their private vehicle for business-related travel. This can be a fixed allowance paid regularly or a reimbursement for expenses such as petrol, garage, and maintenance. The full amount of a fixed travel allowance is reported under code 3701 and is subject to tax. Reimbursements for expenses are generally non-taxable and not reported on employees' IRP5 certificates unless they are for expenses related to a motor vehicle, in which case the 80/20 rule applies, assuming that only 20% of the vehicle's use is for business purposes.

Travel allowance vs reimbursement

Travel allowances and reimbursements are both ways for employers to compensate employees for expenses incurred while working. However, there are some key differences between the two.

Timing

A travel allowance is typically used for future expenses or purchases, while a reimbursement is used for expenses that have already been incurred. This is the first and primary difference between the two.

Tax Treatment

The second major difference is how they are treated for tax purposes. Payroll allowances, such as travel allowances, are often subject to payroll taxes as they are considered part of the employee's pay package. This affects both the employer and the employee. Since the employer must collect payroll taxes from employee wages, payroll allowances must be classified correctly.

On the other hand, reimbursements are typically not taxed. Companies reimburse employees for business-related expenses paid from their own funds. If the business expense is deductible, the reimbursement won't be taxed. Business-related expenses are deductible if they are "ordinary and necessary" for the business's day-to-day operations. As employers do not usually reimburse employees for non-business-related expenses, it is rare for a reimbursement to be taxed.

Record-Keeping

Allowances and reimbursements also differ in terms of record-keeping requirements. For allowances, employers must ensure that any payroll systems they use handle them correctly for superannuation, PAYG withholding, and payroll tax. Reimbursements, on the other hand, require employees to submit proper documentation, such as receipts or a logbook, to provide proof of expenses.

Advantages and Disadvantages

Allowances offer simplicity and the ability to address fixed costs, especially for lower-mileage employees. However, they are subject to taxes, which can eat up a significant portion of the allowance. They can also result in inequitable outcomes, with some employees being under-reimbursed while others are over-reimbursed.

Reimbursements are tax-free and simple to administer. However, they may require more time and effort for mileage tracking. Additionally, equity can be a challenge, as employees with different travel patterns may end up being over or under-reimbursed.

Combining Strengths

To address the weaknesses of both approaches, a combination of allowances and reimbursements can be used. This involves a fixed stipend to address fixed expenses, along with a variable rate based on mileage. This approach, known as a Fixed and Variable Rate (FAVR) reimbursement, provides the tax benefits of a reimbursement while also addressing the fixed costs covered by an allowance. It also helps ensure that employees are appropriately compensated based on their travel patterns and regional differences in travel costs. However, it does require more administrative work than a standard allowance or reimbursement alone.

Tax implications

The tax implications of a travel allowance can be complex and depend on several factors, including the type of allowance, the amount, the vehicle used, and the proportion of business and private use. Here is an overview of some key considerations:

Type of Allowance

There are typically two types of travel allowances: a fixed monthly allowance and a reimbursable travel allowance. A fixed monthly allowance is a set amount paid regularly to an employee, while a reimbursable allowance is paid based on the actual distance travelled for business purposes, usually multiplied by a prescribed rate per kilometre. The reimbursable allowance can be further categorised into two: one that is exempt from tax and one that is taxable. A non-taxable reimbursable allowance meets three criteria: it does not exceed the rate per kilometre set by the government, the total business kilometres reimbursed do not exceed a certain limit, and no other form of compensation, such as a fixed travel allowance, is given to the employee.

Taxation of Allowances

The taxation of travel allowances can vary. For a fixed monthly allowance, the full amount is typically reported under a specific tax code and is subject to tax. The reimbursable allowance, on the other hand, may be non-taxable if it meets the criteria mentioned above. If it exceeds the prescribed rate per kilometre, only the portion above the prescribed rate is subject to tax. When an employee receives both a fixed and a reimbursable allowance, SARS combines the amounts and treats them as a taxable travel allowance, and the employee can then claim a travel deduction on their personal tax return.

Business vs Private Use

The proportion of business and private use of the vehicle impacts the taxation of the travel allowance. If an employee incurs 80% or more of their mileage on business, the allowance is typically taxed at 20%. If they incur less than 80% business mileage, the allowance is taxed at 80%. This determination must be made on a monthly basis. Additionally, it is important to note that travel between an employee's home and regular place of work is generally considered private use and not business travel.

Logbook Requirements

To claim a tax deduction for a travel allowance, employees must maintain a detailed logbook recording the necessary information related to business travel. This includes the date of business travel, business kilometres travelled, and travel details such as the destination and reason for the trip. SARS has provided an acceptable format for the logbook, and it is recommended to follow this format to ensure the claim's validity.

Company-Provided Vehicles

When an employee uses a company-provided vehicle for business travel, they cannot claim a tax deduction against their travel allowance. However, they can claim a reduction in the fringe benefit constituted by the use of the company vehicle. This reduction operates on the same principle as the travel allowance deduction, where private travel is taxable and business travel is not.

Logbook requirements

To claim a deduction on your annual income tax return for the use of a private motor vehicle for business purposes, you must keep a logbook. Here are the logbook requirements:

• Record your motor vehicle's odometer reading on the first day of the tax year (March 1st).
• Keep a logbook throughout the year, recording details of business travel, including kilometres travelled, start and finish times, start and finish odometer readings, the total number of kilometres, and the reason for each journey. It is not necessary to record private travel details.
• Record your motor vehicle's closing odometer reading on the last day of the tax year (February 28th/29th).
• Calculate your total kilometres for the full year by subtracting the opening odometer reading from the closing reading.
• Calculate your total business kilometres for the year by summing up all business trips.
• Keep your logbook for at least five years from the date of your tax return submission, as you may need to submit it to support your claim.
• If you use more than one vehicle for business travel, maintain a separate logbook for each.
• You can use the SARS eLogbook, which provides a template with the required information.
• While not mandatory, including departure and arrival addresses can make it easier for a SARS auditor to review your claim.
• If you are an employee, you must include 80% of your travel allowance in your remuneration for PAYE calculation purposes. This percentage drops to 20% if your employer is satisfied that at least 80% of your vehicle use is for business.
• If you are self-employed or a sole trader, you can choose between the logbook method, the cents-per-kilometre method, and the actual expense method for claiming deductions.
• As a self-employed individual, you must keep logs of all driven kilometres and expenses related to your vehicle.

Calculating the claim

There are two methods of calculating the deductible amount against the travel allowance: the actual costs method and the deemed costs method. Each method has its own set of requirements.

The actual costs method

This method requires accurate information in the form of receipts, tax invoices and other relevant source documents. For the purpose of finance charges and wear-and-tear expenses, the maximum vehicle value is R595,000.

The qualifying deduction is based on computing actual expenditure per kilometre and multiplying it by the business kilometres.

For example, Mr X owns a vehicle valued at R280,000 and incurred the following expenses:

Wear-and-tear expenses: R40,000 (R280,000 ÷ 7)

Mr X travelled a total of 32,000 km, of which 8,000 km were for business purposes, as evidenced by his logbook. Mr X received a total travel allowance of R48,000 for the 2020 year of assessment. As a result, Mr X would be able to claim R21,637.50 (8,000 km ÷ 32,000 km x R86,550) as a deduction against his travel allowance.

The deemed costs method

The deemed costs method comprises three components: the fixed costs, the fuel costs and the maintenance costs. SARS provides a table from which the taxpayer determines the appropriate deemed cost elements based on the vehicle value. The table can be found on the SARS website and is revised annually. Taxpayers who want to claim using this method must bear maintenance costs and fuel costs themselves.

Considering the information provided in the previous example, the fixed cost, fuel cost and maintenance cost components can be referenced as follows (as per the SARS eLogbook for 2019/2020). Figures below are relevant for a vehicle fitting into the R255,0001 to R340,000 cost bracket.

• Fuel costs per kilometre: R2.896 (R92,683 ÷ 32,000 km)
• Maintenance costs per kilometre: R1.767
• Fixed costs component: R4.663
• Total cost per kilometre: R9.326

Using this method, Mr X would be able to claim R37,304 (8,000 km x R4.663 per km) as a deduction against his travel allowance.

In our experience, the deemed costs method requires less administration and is almost always more favourable than the actual costs method.

COVID-19 considerations

The COVID-19 pandemic has had far-reaching effects on taxpayers in South Africa, and many are unaware that their tax liability for the 2021 year of assessment may be silently increasing. This is particularly true for those who receive travel allowances or company vehicles for business travel, as the restrictions imposed during the pandemic may have prevented them from conducting business travel. As a result, they may face unexpected tax implications when submitting their personal income tax returns.

The taxation of travel allowances is complex and depends on various factors, including the percentage of business mileage, the rate of reimbursement, and the value of the vehicle. During the pandemic, many employees may have received travel allowances as a fixed monthly cash payment, even if they were unable to travel for business. This could result in tax consequences when submitting their personal income tax returns.

To avoid unpleasant surprises during tax assessment, both employers and employees should review and discuss the taxability of travel allowances. Employers may need to adjust the PAYE (Pay-As-You-Earn) withholding rate from 20% to 80% for employees who are not using their vehicles for business travel due to COVID-19 restrictions. Employees, on the other hand, may need to consider requesting a reduced travel allowance for the remainder of the tax year or asking their employers to withhold additional PAYE each month to prevent a substantial tax payment upon assessment.

It is crucial for employees to maintain accurate and detailed travel logbooks, especially during the pandemic. The logbook should include information such as opening and closing kilometres, areas travelled, the number of business kilometres travelled, and the reason for each trip. This will be essential in supporting any claims made against travel allowances or company vehicles.

In addition, the impact of COVID-19 restrictions on business claims should be carefully considered. For example, a non-essential service employee who travelled for business during lockdown periods may face added scrutiny from SARS when claiming against their travel allowance. Employers should also be mindful of the potential tax exposure for employees who are taxed at the 20% rate if their business travel is significantly limited due to COVID-19 restrictions.

Overall, the COVID-19 pandemic has created a complex and challenging situation for taxpayers in South Africa, particularly those receiving travel allowances or company vehicles. To navigate these complexities, it is advisable to consult with a tax practitioner or specialist who can provide guidance and help prevent unexpected tax liabilities.

Frequently asked questions