Travel Allowance Tax - Driving you To Distraction

The Weekender / Business Day 15/16 July 2006

About travel allowance tax: employers often use salary sacrifices and other schemes to save tax and increase the take-home pay of their employees. Most popular of these was the granting of either a travel allowance or the use of a company car to employees.

Over the last year or two, however, the taxman has clamped down heavily on the granting of these fringe benefits and stamp out perceived abuses by Joe Public.

A travel allowance exists when your employer reimburses you for the business use of your own vehicle. When you use a portion of this allowance for private travel, such portion will be included in your taxable income, hence travel allowance tax.

A company car exists when your employer owns a car which you may use for business and private travel.

Changes to travel allowances mean that the maximum value that may be included is R360,000. Vehicles exceeding R360,000 carry the same fixed cost, fuel cost and maintenance cost as those in the R340,001 to R360,000 band.

The effect of this is that you will no longer be receiving a larger travel allowance tax subsidy if your weakness is expensive motor cars. So, if you have a luxurious car costing R1,000,000 you will be entitled to claim the same as a person with a vehicle costing R360,000. The taxman has also become more severe about the fixed cost of your vehicle. Fixed costs were revised downwards for the 2006/07 tax year. Previously, fixed costs assumed a rate of depreciation that would result in your vehicle being worth nothing at the end of a five-year term.

The revised fixed costs are more in line with reality in that your vehicle will probably have a residual value after five years.

The receiver expects taxpayers with a travel allowance keep a log book recording the actual business kilometers traveled during the tax year. They will then qualify to deduct the business portion of the costs of running the vehicle for the year. The business portion or percentage is the business kilometers traveled for the year divided by the total mileage for the year.

For people who do not keep a record, the South Africa Revenue Service (SARS) provides for deemed private mileage. This means that as long as you did a lot of traveling, you may get a travel allowance tax deduction.

It has now also become more important for you to keep accurate records of your travel as the mileage deemed for private use has increased (and the deemed amount that you may claim for business travel has been reduced).

The mileage deemed for private use for the 2005/06 tax year is 16,000km, and 18,000km for the 2006/07 tax year. Many people who do not keep a log book of their travel will simply not travel enough, and consequently not qualify for any travel allowances.

From 1 March 2006, your employer will deduct employees tax of 60% from your travel allowance.

Be careful of the travel allowance tax. It has bitten many an unwary traveler in the behind. According to my colleague, Richard Sparg, many people bank on their travel allowance being fully tax deductible, but at the end of the tax year, they cannot properly substantiate their travel claims. This plays havoc with their cash flows when they have to pay it in.

Measures also have been implemented to prevent people from just moving over to a company car.

Previously, if you had a company car, 1,8% of the cash cost of the vehicle exclusive of VAT a month was added to your taxable income. From 1 March this year, this has been increased to 2,5%.

You may be wondering which option is the most tax efficient. It depends to a large extent on your mileage and personal circumstances. If you own your own motor car and travel less than the deemed private mileage, a company car may be the better option for you. If your mileage is comfortably more than your deemed private mileage, a car allowance may be a more travel allowance tax-efficient option.

Sometimes the choice is not yours. Your employer may not offer you a company car.

If you have your own business, a company car may be the most tax efficient. It may be possible for you to use the depreciation allowance within your business.

My advice is to proceed with caution. The free lunch is over.

Select a fee-based qualified financial planner or a tax-consultant accountant to assist you in making the most tax-efficient decision. You may also visit the website of the Financial Planning Institute, at www.fpi.co.za to select a qualified reputable financial planner.

Debbie Netto-Jonker, CFP™, is founder of Netto Financial Services and was financial planner of the year in 2001.