The Income Tax Act defines a travel allowance as an allowance and the right of use of a motor vehicle as a taxable fringe benefit. Although these two terms, allowance and fringe benefit, are closely related, their treatment for tax purposes differs.
A travel allowance is normally paid to an employee to compensate the employee for the use of his/her own vehicle in the execution of his/her duties (e.g. a sales representative who has to visit clients to market an employer’s products). This allowance is usually calculated according to the distance that the employee will travel in the execution of his/her duties, the value of the employer’s vehicle, and also the maintenance costs and fuel usage of the vehicle. This can be either a fixed amount or a compensatory allowance based on the distance (tariff per kilometre) that the person has travelled.
The employer is obliged to calculate employee tax on 80% of the travel allowance paid to the employee, unless he is convinced that the employee has travelled more than 80% of the total distance for business purposes, in which case employee tax needs to be calculated on only 20% of the travel allowance.
The employee may, in turn, when submitting his/her personal tax return, claim a deduction against the travel allowance received for the portion of business kilometres travelled during the year. This deduction is calculated by apportioning the actual cost of the vehicle (wear and tear, fuel and maintenance) between the business and private kilometres, or by applying the cost scale of the South African Revenue Service (SARS), whichever is the most advantageous.
Right of use of a motor vehicle:
As distinct from a travel allowance, the right of use of a motor vehicle occurs when a motor vehicle belonging to the employer is allocated to an employee to use either for private purposes or for private and business purposes. This is an example of a fringe benefit that is not paid in cash but has tax consequences for the employee in the sense that the employee is taxed on the private portion of the use of the motor vehicle. Employee tax is thus calculated monthly on 80% of the cash equivalent of the right of use, or on 20% thereof if the employer is convinced that more than 80% of the distance travelled was for business purposes.
The value placed on the private use of a motor vehicle is 3.5% (or 3.25% if the vehicle is subject to a maintenance plan), of the ‘determined value’ of the vehicle for each month or part of a month during which the employee was entitled to use the vehicle. The determined value of a motor vehicle is generally calculated to be the cash value of the vehicle at the time of purchase (excluding financing costs). It should be noted that the determined value includes VAT on the vehicle. There is, however, a reduction if the employee is given the use of a vehicle owned by the employer, that was not previously allocated to someone. This reduction in value is calculated at 15% of the determined value per annum according to the reducing balance method, for each completed year during which the vehicle was not allocated to an employee.
The cash equivalent (the 3.5% or 3.25%) can also be reduced by the amount that the employee contributes with regard to the use of the vehicle, excluding license, maintenance and fuel costs. (For example: The determined value of a motor vehicle without a maintenance plan is R114 000, inclusive of VAT. The employer expects the employee to contribute R1 500 for the use of the vehicle. Thus the monthly cash equivalent of the fringe benefit is R2 490 [(R114 000 x 3.5%) – R1 500]).
An employee who has the right of use of a motor vehicle is also entitled, when submitting his/her income tax return, to claim a deduction for business kilometres travelled during the year. The deduction is calculated by multiplying the cash equivalent of the benefit with the business kilometres and dividing by the total kilometres. (For example: The taxable benefit for the year amounted to R50 000, business kilometres were 12 500 and the total kilometres amounted to 18 000. Thus the deduction that may be claimed is R34 722.22 [R50 000 x 12 500km ÷ 18 000km]).
Which of the two methods is the most advantageous from a tax point of view?
This is, unfortunately, a difficult question to answer because it depends on several factors:
- The value of the vehicle;
- The total distance travelled;
- The ratio between private kilometres an business kilometres;
- Who receives the travel allowance / right of use;
- To what degree the employer contributes towards the fuel, maintenance and insurance of the vehicle;
- If the vehicle is a delivery vehicle, in which instance VAT may be claimed.
Therefore, each case must be considered individually to ascertain the most beneficial choice for both the employer and the employee.
Important to remember:
The distance between a taxpayer’s home and place of work is regarded by SARS as private kilometres and cannot be claimed as a deduction against a travel allowance or reduction in the right of use.
If an employee wishes to deduct business kilometres for tax purposes, full records must be kept in the form of a logbook with particulars of business trips and the odometer reading of the vehicle.
Supporting documentation should be kept of fuel and maintenance expenditure since this could be more beneficial than using SARS’s cost scale.
Where the employee has the right of use of more than one vehicle, further considerations and tax implications, which are not discussed in this article, apply. Please contact us for more information in this regard.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)