Steve Krause outlines recent changes to the South African tax system in respect of travel allowance claims.

Introduction

As from 22 February this year, when amendments were announced in the Government Gazette, the rates per kilometre that you could claim for your travel allowance had been fixed according to the following schedule. To determine the value of vehicles the original cost, including VAT - but excluding finance or interest charges - should be taken. The 60% taxability for PAYE purposes has not been adjusted.

Risk management

Since amendments made in March 2002 it has become increasingly difficult to structure effective staff packages. The rise in the inflation rate has placed an additional burden on companies to provide increases that would retain staff. To that end structuring of travel allowances, in certain instances, has become a favoured method.

Other entities prefer to apply structuring based on grading systems such as, for example, Peromnes, where all staff members within grade 1 to 7 are entitled to a travel allowance. Furthermore, SARS has launched a marketing campaign requesting that companies remove their travel allowances.

The risk

The provisions of section 8(1)(b)(ii) of the Income Tax Act provides that the employer has to make a payment to the employee which will be used for the defrayment of expenses when using a motor vehicle for business purposes. The advance or allowance is based on actual expected business travel.

Accordingly, the employer makes an allowance or advance payment to an employee who will use that payment to cover costs incurred for business purposes.

When carrying out an audit, SARS will review the employees’ letters of appointment to ensure that they have received the instruction to use their motor vehicles for business purposes. Failure to have that instruction in the employment letter could lead to the disallowance of the travel allowance.

Secondly, SARS would also review the travel allowance to see whether it is realistic. Employers are advised not to make use of a percentage of package, as it is required that the allowance or advance be based on expected business travel.

For example: A person has been in the same position for two years and on average he or she travels 20,000 km per year. No material change has occurred to the employee’s duties and obligations and, therefore, an allowance based on 32,000 km would be viewed as excessive.

Grading systems

Grading systems place employees of different job descriptions in the same package position. The employee in marketing, however, is more likely to be required to travel than an employee in the payroll department. Employers should ensure that all employees within a grade level have realistic allowances based on their duties and obligations. Failure to do so would result in disallowance or a reduction of the allowance.

Removing travel allowances

Finally, tread carefully when removing the travel allowances of staff. Staff members remaining in the same positions as before, whose allowances are now based on the compliance requirements using actual kilometre readings instead of the past perceived 32,000km, find that they have to make large payments on assessment and often request that the allowances be removed. Such actions place a higher risk on the company when undergoing a SARS audit.

The statement above is simply based on the following logic: If the employee is not entitled to the allowance in the current year and the employee’s duties and obligations are the same as in previous years, the employee should not have been entitled the allowance previously.

Any adjustment to the package should be reflected in an addendum to the employee’s letter of appointment.

Fuel, maintenance and reimbursement payments

A common error found at payroll reviews is additional benefits provided for the running of motor vehicles that are not recorded against the travel allowance on the IRP 5. If an employee receives an allowance or an advance, all payments made over and above in terms of expenses for motor vehicles should be added. Those would include costs for fuel, maintenance and kilometre reimbursement rates. To avoid that risk there should be an open line of communication between accounts, human resources and payroll departments.

Simplified rates

Where an employee uses a motor vehicle for distances less than 8 000 km, the rate applicable is equal to 292 cents per kilometre.

Daily allowance

How should employers now determine the daily allowance in respect of meals and incidental costs for the purposes of section 8(1) of the Income Tax Act? The Commissioner announced the new deemed amounts in relation to the provisions of section 8(1)(a)(i)(bb) of the Act that will apply as from 1 March this year.

Where the accommodation to which the allowance or advance relates is in South Africa the amount will be deemed to be:

• Incidental costs only - R 73.50 per day; or
• The cost of meals and incidental costs - R 240.00 per day; or
• Where the accommodation to which the allowance or advance relates is outside the country the amount to defray the cost of meals and incidental costs is equal to US$ 215 per day.

Those amounts are in addition to an employee’s package.

Finally, as from 1 March the official interest rate (referred to in paragraph 1 of the Seventh Schedule to the Income Tax Act, 1962) has been set at 12%.

The above article was produced by Steve Krause, KrauseFouche, and is reproduced with the kind permission of TAXtalk, South Africa's leading tax publication (www.etaxes.co.za).

Article Added Friday, 19 September 2008 | 3663 Hits

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