Covid-19 has far-reaching effects for the South African taxpayer and, unbeknown to many, may be silently increasing their tax liability for the 2021 year of assessment.
There is a causal link between travel allowances (and the same applies to company vehicles) received by employees in the current tax year, and for which business travel was not possible.
In this article Thamsanqa Msiza, head of individual tax returns, and Taritha Oosthuizen, tax consultant, revisit the general taxing principles of a travel allowance and reimbursement of travel expenses claims, as well as consider how Covid-19 may increase the tax burden of an employee.
The general taxing principles of a travel allowance and a reimbursive travel allowance
The travel allowance “deduction” operates on the premise that an allowance is included in a person’s taxable income (see section 8(1)(a)(i) of the Income Tax Act), to the extent that the allowance has not actually been expended on business travel (see section 8(1)(a)(i)(aa)).
In summary, private travel is taxable and business travel is not taxable. Interestingly, the term “travel”, whether for business or private, refers to travel by “an engine powered road going vehicle”, as contained in SARS Interpretation Note 14.
The SARS External Guide for Employers in respect of allowances specifically states that:
“A travel allowance is any allowance paid or advance given to an employee in respect of travelling expenses for business purposes. Any allowance or advance in respect of travelling expenses not to have been expended on business travelling … shall be deemed not to have been actually expended on travelling on business.
Where the employer is satisfied that at least 80% of the travel appertains to business mileage then only 20% of the allowance is subject to the deduction of employees’ tax. Should this not be the case then the allowance should be taxed at 80% on the payroll.”
There are currently only two inclusion percentages that should be applied on the payroll, namely the 80% or 20%. Since the release of the 2019 SARS BRS Change – Patch Phase 3, it should be noted that the 100% inclusion rate is no longer applicable and should therefore not be implemented on payroll.
To explain this by way of a practical illustration:
Should an employee incur 80% or more on business mileage per annum, the allowance should be taxed at 20%, i.e., where it is proven that 20% or less of total mileage will be attributed to private use.
Should an employee incur less than 80% business mileage per annum, irrespective of what that amount is, the allowance should be taxed at 80%, i.e., where it is proven that more than 20% of total mileage is attributed to private use.
Reimbursive travel allowance
An alternative to providing an employee with a monthly travel allowance amount is to provide the employee with a reimbursive travel allowance. A reimbursive travel allowance is an allowance paid to an employee for actual business kilometres travelled, according to either the SARS determined rate – which is R 3.98 per kilometre from 1 March 2020 – or as determined by the employer.
The taxing of the reimbursive allowance has fundamentally changed from 1 March 2018. Where an employee is reimbursed using a rate higher than the SARS prescribed rate, the differential between the SARS prescribed rate and the rate utilised by the employer will be subject to employees’ tax (PAYE), regardless of the number of business-related kilometres travelled.
It is advisable that employers prudently consider their reimbursement rates against the prescribed rate. An unintended consequence of reimbursing an employee on a higher rate will increase the employee’s PAYE liability and may result in lower employee take-home pay.
An alternative to avoid this possible occurrence would be for the employer to reimburse the employee at a rate below the prescribed rate of R 3.98 per kilometre. The reimbursement will not attract PAYE and will also not be taxable on the employee’s personal tax return.
In our practice we have a golden rule when it comes to employee travel debates, i.e. company car vs. travel allowance vs. reimbursive structure: an apples-with-apples computation must always be done. This means your opinion is only valid once you have done the actual computation on what gives the tax optimal outcome.
Although the reimbursive changes have not altered an employee’s ability to claim against a travel allowance, they have introduced an additional record-keeping requirement. This especially becomes complex where travel reimbursive rates have changed during the tax year.
On 5 May 2020, the Commissioner for SARS gave taxpayers a valuable insight in what can be expected in the coming months in light of Covid-19. Although not stated expressly, with a grim outlook on the decrease in revenue collection, SARS will look to extract every cent possible from the tax base.
Building on their 2019 tax season approach, SARS will most likely enhance their robust stance on verifications and audits of tax returns. It is now, more than ever, particularly important to maintain an accurate and detailed travel logbook and to adopt good tax filing and compliance strategies.
…To reiterate: private travel is taxable and business travel is not taxable.
Similarly, the Covid-19 restrictions will have a direct impact on the business claim lodged against the fringe benefit. This may very well create an employee’s tax exposure for those employers who apply the 20% rule or otherwise will cause an unwelcome surprise tax liability….
Could the current context of Covid-19 restrictions introduce an added interpretation problem on what constitutes business travel? Where an employee falling under the essential services category has travelled for business purposes during the lockdown periods, one would not anticipate any dilemma in claiming against a travel allowance.
Considering that the restrictions announced by Government were legally binding, it will be interesting to see whether a claim for business kilometres travelled by a non-essential service employee, during the same period, will also be considered as valid business kilometres.
This may very well become an added SARS audit requirement….
Covid-19 and travel allowances
The travel allowance will become a contentious item where employees are receiving a travel allowance for business travel and such business travel is not possible, under the levels of restriction. Consequently, employees will be required to take extra care in preparing their logbooks.
In determining the taxing rate of the travel allowance – that is whether taxes should be withheld on 80% or 20% of the travel allowance – the employer and employee would have adopted a rate based on the actual travel performed in previous years, and on which much anticipation has been placed for the 2021 year of assessment.
Regardless of the rate adopted by the employer, the sudden impact of Covid-19 and the limitations placed on the employee’s business travel may translate into a 2021 tax liability for the employee on submission of the related return.
Employers that have resolved to taxing 20% of a travel allowance paid to an employee who is not an essential services employee should perhaps consider adopting the 80% rate. This will likely assist the employee to “prepay” the pending tax liability resulting from an expected reduced travel allowance claim.
In case of a reimbursive travel allowance, the above dilemma appears to be conveniently avoided, even where a tax liability arises.
A reimbursive allowance is paid to an employee at a rate multiplied by business kilometres travelled. This thus creates a relationship between the allowance and the business kilometres travelled.
Employees will find that the risk of a deferred 2021 tax liability is eliminated, as their business travel claim will be directly aimed at the reimbursive allowance. The importance of a well-maintained travel logbook, for such employees, must be emphasised.
In addition, it is best practice that the employer’s resolution to tax more of the allowance should be performed on a case-by-case basis and based on the factual circumstances of the employee, as opposed to a blanket approach.
The change in withholding taxes will reduce take-home pay and will be felt immediately in the employee’s pocket, although preventing a cash flow burden in the long run.
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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)