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Are Travel Allowances still worth claiming? (15min)

SARS expects the amount of the allowance to be based on the expected business related expenditure (i.e. the cost and use of the vehicle).

Part of the 2010 / 2011 changes to the Income Tax Act is the scrapping of the deemed business kilometre practice. Employees are expected to prove actual usage by submitting logbooks containing detail on all the kilometres travelled for business.

Another change to the Income Tax Act that is an increase in the amount of tax that needs to be withheld. With effect from 1 March 2010, 80% of the motor vehicle allowance is subject to PAYE.

Travel Allowances Structuring Principles
Like any other business, SARS is expecting Employers (Agents of SARS) to withhold the correct amount of PAYE. Determining the amount of a travel allowance that would be justifiable to SARS should thus start with an estimate of the recipient's claim for business purposes as disclosed in his/her annual tax assessment.

The following examples illustrate some of the principles.
 
Example 1 – 2009 / 2010 Tax Year
An individual, driving a vehicle costing R228 000 (inclusive of VAT) and travelling 25 000 kilometres per annum, of which 11 000 is estimated to be for business purposes, can currently justify an allowance in the region of R118 800 per annum (R9 900 per month). The calculation thereof is as follows:

Estimated Annual Costs
Standard fixed cost        R  76 041
Standard variable costs       R  31 975
  - Standard fuel cost (25 000km * R0,815)     R  20 375
  - Standard maintenance cost (25 000km * R0,464)    R  11 600
Total Estimated Costs       R108 016

The total estimated costs are then split as follows:
- Private use (R108 016 / 25 000km * 14 000km)   R  60 489
- Business use (R108 016 / 25 000km * 11 000km)   R  47 527

The ideal travel allowance should result in as little as possible tax payable or receivable on assessment (assuming no other timing differences being present).  In the previous tax year, 60% of the travel allowance was subject to PAYE. The justifiable (breakeven) travel allowance then resulted in the claim for business use being equal (or close) to the portion (currently 40%) of the travel allowance that would become taxable on Assessment.

The breakeven allowance in Example 1 is thus calculated as follows:
Estimated business claim (representing 40% of the allowance) R  47 527
Estimated annual breakeven allowance (R47 527 / 40%)  R118 817

SARS expects that 80% of the travel allowance be subject to PAYE in future. The justifiable (breakeven) travel allowance should still result in the claim for business use being close to the portion of the travel allowance that would be taxable on Assessment (i.e. 20% as from 1 March 2010).
 
Example 2 – 2010 / 2011 Tax Year
For illustration purposes let's assume that an individual who will be driving the same vehicle in exactly the same way as in Example 1 above, would be able to justify an allowance in the region of R237 600 per annum (R19 800 per month), which is double the breakeven allowance of last year.

Assuming no change to the standard costs in Example 1 above, the breakeven allowance in Example 2 would be calculated as follows:
Estimated business claim on assessment (20% of the allowance) R  47 527
Estimated annual breakeven allowance (R47 527 / 20%)  R237 635

The Immoral Obligation
Let us assume that the individual in Example 1 above earns a total package of R360 000 per annum, the justifiable allowance last year (i.e. R118 817 per annum) was equal to almost one-third (33%) of his/her package then.

Now that the increase in the withholding tax (based on 80% of the travel allowance) is implemented, the justifiable allowance in Example 2 above (i.e. R237 635 per annum) would be equal to almost two-thirds (66%) of the same package.

Sometimes Employers (unnecessarily) feel obliged to limit the amount of the justifiable travel allowance. This is not a requirement of SARS nor is there any justification for such limitations.

Where an individual will be able to motivate a substantial portion of the distance travelled as being for business, the amount of the justifiable travel allowance can easily be greater than his/her total package. The following example illustrates the limitation.

Example 3 – Structuring Limitation
An individual, driving a vehicle costing R228 000 (inclusive of VAT) and travelling 25 000 kilometres per annum, of which 20 000 kilometres (i.e. 80%) are estimated to be for business purposes, could last year justify an allowance in the region of R216 000 per annum. If the individual were to earn a total package of R420 000 per annum, the justifiable allowance would have been more than half (51.4%) of his/her total package.

Now that the increase in the withholding tax has been implemented, the breakeven travel allowance above would increase to R432 000 per annum (R36 000 per month). This is more than (102.8%) of the same package.

It is clear that this individual would not be able to select a travel allowance that would result in the correct amount of tax being paid throughout the year. Whichever amount is selected as travel allowance for the current tax year would result in an overpayment of tax.

No doubt SARS will expect Employers to (unjustifiably) limit the amounts of travel allowances. It remains to be seen what directions SARS will give to Employers in order to prevent or at least reduce what will become unnecessary overpayments in personal tax.

Conclusion
If the amounts of the allocated travel allowances are lower than the justifiable breakeven allowances, for whatever reason, it will result in an unfair overpayment of PAYE, which SARS will have to pay back on assessment. Any unjustifiable limitation on the breakeven travel allowance will have an unreasonable negative impact on the Taxpayer's monthly cash flow.

Should SARS expect the future motor vehicle allowance to be limited to the estimated claim for business and should that the monthly equivalent of the justifiable allowance be subject to PAYE (which seems to be the position that we are heading towards) it would result in the total amount of tax withheld in respect of the travel allowance becoming repayable on assessment. Such a situation would not make any business sense and would be totally unfair to individual taxpayers.

Author: Hennie Gildenhuys is the Executive Consultant: 21st Century Pay Solutions Group.

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