Ron Warren*

02 October 2009 - MoneyWebTax

What you should know.

The South African Revenue Service's (Sars's) proposed March 2010 tax changes involving travel allowances being subjected to PAYE of 80%, rather than the 60% taxed at present, and log books becoming mandatory for all taxpayers claiming car allowances, are measures being taken to curtail tax evasion and at taxpayer substantiation of business portions of travel allowances, and not at unfairly penalising those who receive car allowances.

Dishonest taxpayers, have, for many years, been fraudulently maximising employee travel allowances, by asking employers to pay them a travel allowance, usually as a component of their total package, that is greater than that which they will be recompensed for according to their allowable travel expenses, so that they can have less PAYE deducted from their salary than should be deducted.  

In this case the taxpayer will eventually have to pay in the under-deducted PAYE when they receive an assessment and if the assessment is received on average 8 months after the end of the tax year, they will have had free use of money that should have been paid to Sars for periods ranging from 20 months (when your first PAYE deduction for the tax year was made) to 8 months (when your last PAYE deduction for the tax year was made).

While some may argue that this is legitimate tax planning, it is not. It is plain tax evasion, and no less wrongful because it is widespread. It also overlooks the fact that should a PAYE audit take place an unrealistic travel allowance will be treated by the tax auditor as a hidden salary, of which 100% (not 60% or 80%) should have been subjected to PAYE.  The employer will have to pay Sars the additional PAYE that should have been deducted, plus a penalty of up to 210%, plus interest from the date it should have been paid to Sars.   Log books to substantiate travel allowances
A log book will with effect from March 2010 be required by Sars to substantiate the business portion of a travel allowance, and the present practice of deeming 18 000 kilometres to have been travelled on business in the absence of a log book will fall away.

Office bound employees who do not use a car for business purposes should not receive a travel allowance - not a difficult concept to grasp! However, in many companies a travel allowance is granted to employees above a certain grade, regardless of whether or not they are required to use their cars for business travel. This seems to be a practice that has grown over the years, and is applied without thought by human resource managers who are not aware of the law and who should know better.

As employees who genuinely use their private cars for business purposes will now be forced to keep a log book if they want to claim a deduction against their travel allowances, the best solution would be for travel allowances to be dropped and instead employees be reimbursed for business kilometres travelled.  

In this instance the employee keeps a log book detailing odometer start and end readings for each business trip undertaken, and the name of the business or person visited.   At the end of each month, a photocopy of the log book pages can be taken, and a claim lodged with the pay office for the number of kilometres travelled at the appropriate rate per kilometre taken from the table of vehicle costs published by Sars.  This can then be put through the payroll and the amount claimed included on the payslip.

Such reimbursements are not subject to PAYE, and will only be reflected on tax certificates if more than 8 000 kilometres are reimbursed in a year.   They will then be assessed as a travel allowance, but as a log book is available, the full amount received will be allowed as a deduction.

A side benefit of this to the employer is that as such a reimbursement falls outside the definition of remuneration in the Fourth Schedule to the Income Tax Act, it is not subject to the Skills Development Levy.  The employer will save the levy of 1% that would have been payable had the amount been paid as a travel allowance (on the 80% of the allowance which is subject to PAYE).

A similar saving of 1% would be enjoyed if the employee's earnings did not exceed the UIF earnings limit up to which UIF contributions are payable (R12 478 per month at present, but likely to be increased in the not too distant future).

However, what if the employee is paid on the basis of a total package, and previously the travel allowance was taken as a component of the package?  Such an employer would not want to bear the extra cost that would be incurred if the reimbursement was paid in addition to the remuneration specified in the total package.

There is in fact no problem in making the reimbursement a component of a total package. There is also nothing immoral or illegal in doing this, and could be done quite openly and legally if structured into the employee's package properly.   There is an oft-repeated legal adage that a taxpayer is entitled to arrange his affairs in a manner that attracts the least amount of tax, as long as this is not done illegally.

This structuring as well as the calculation of the value of the monthly kilometres travelled can be set up and automatically controlled within a flexible computerised payroll package, without any human intervention and at no extra effort on the payroll department other than entering the number of kilometres claimed by employees each month. Provided the cost of the car and the estimated total annual kilometres that will be travelled are held on the payroll (entered once only), all calculations can be performed by the payroll system.