A South African View: Travel Benefits for Entrepreneurs
The basic premise is: if an employer requires an employee to use their private vehicle to travel for business purposes, the employer should compensate the employee for this. But what is unclear to many is whether it is cheaper to:
- Reimburse the employee for actual business travel, or
- Incorporate a travel allowance into their remuneration package, or
- Provide them with a company vehicle?
Each of these options have a different impact on the payroll taxes and ultimately the business overheads. In this article we will look at the financial implications of these options and provide some guidelines you can use to select the most suitable option.
The available travel benefit options summarized
As we mentioned there are a few options available to compensate the employee who travels for business purposes and we will look at each of the below options and discuss their relevant financial and tax implications. To summarize, the options are:
- Reimbursing travel expenses after they have been incurred by employees;
- Including a travel allowance in the structured monthly remuneration package of employees;
- A combination of the above two options;
- Providing the employee with a company vehicle.
The travel reimbursement
A reimbursement is the funding of actual expenses incurred by the employee for business travel after the costs have already been incurred by the employee. Although it might seem straight forward, the calculation of the claim can be problematic. When using a private vehicle, the employee has not only incurred petrol costs, but potentially also:
- Additional repair and maintenance costs;
- Depreciation on the vehicle;
- Higher insurance premiums;
- Toll fees and parking fees;
- Other related costs.
In the event where the employee was required to purchase a vehicle or a more suitable vehicle to address the job requirement, an apportionment of these costs may be reimbursed as well. Ultimately, the extent of the reimbursement will depend on the frequency of travel by the employee and the nature of their work. Any excessive reimbursement which is unrelated to the employer’s business are to be regarded as private costs and must be taxed accordingly by the employer. As a side note, it is advisable to detail what type of expenses will be reimbursed in the company policy, to what extent and under which circumstances to avoid any confusion.
Currently, SARS has determined a tax-free travel reimbursement rate of R3.98 per km. Any reimbursement in excess of this amount must be subjected to PAYE and should so reflect on the pay slip and IRP5 of the employee. Although this is a fairly easy process to administer, it may potentially negatively affect the employee where their expenditure incurred exceeds the reimbursement rate. In such cases, the employer has to consider alternative means to compensate the employee adequately.
The travel allowance
It is advised to only provide a travel allowance in instances where employees travel for business as a general rule. SARS considers an allowance to be an amount paid by the employer in anticipation of business expenditure which will be incurred by the employee unlike the travel reimbursement which is the compensation of expenses already incurred. The employee will not be required to account to the employer for the manner in which the allowance was spent but will be required to account for the correct portion of business travel undertaken when submitting their annual personal income tax returns. It is therefore imperative for the employee to diligently maintain a logbook for the entire time a travel allowance is received. The bare minimum information required to be documented in the logbook includes:
- The date of business travel;
- The business kilometres travelled;
- The business travel details (location and the reason for travel).
It is often difficult to determine future business travel expenses as it has to be isolated from overall or personal related travel expenses. It is however necessary to do so as this allowance is not meant to fund private travel. Instead it is a mechanism to compensate employees for using their private vehicles for business purposes. When calculating the allowance, the employer in conjunction with the employee, need to estimate how much business travel and total travel the employee will incur as well as the anticipated potential additional costs such as petrol, maintenance, toll fees, etc., the employee will likely incur on that basis.
When granting an employee a travel allowance, the employer has to consider whether the employee is remunerated on a CTC basis or a basic salary plus benefits model. This consideration is important to determine whether a structured travel allowance will cost the employer more. Where the employee is remunerated based on a CTC basis, the travel allowance could either:
- be structured into the employee’s existing CTC, or
- granted as an increase in CTC.
Let’s look at an example:
The CTC for an employee is R 400 000 p/a consisting of a basic salary of R 370 000 and R 30 000 for other benefits. If the employee requires an annual travel allowance of R 70 000 to be included into this CTC, the basic salary can be reduced to R 300 000 per annum and other benefits of R 30 000 remain unchanged. The total CTC for the employee will remain R 400 000. However, it can also be structured as an additional benefit which would end up costing the employer R 470 000 which includes the basic salary of R 370 000, a travel allowance of R 70 000 and other benefits of R 30 000. Keep in mind, the tax withheld would also be different in each of these cases.
Considering the allowance is for business travel, the employee might not appreciate the fact that the travel allowance is coming out of their pocket (when included in the CTC), effectively funding the employer’s expenses, even taking into account the advantage of a 20% saving in PAYE. To resolve this the employee can be refunded for actual expenses or the travel allowance can be structured to supplement the basic salary, thus increasing the CTC.
Since the allowance is meant to fund business travel, it is arguable that it should not be taxable, however employers are required to withhold PAYE from a portion of the travel allowance. Currently 80% of the travel allowance is subject to PAYE unless the employer is satisfied that 80% of the travel allowance will be utilised for business purposes. In these cases, the employer may choose to subject 20% of the allowance to PAYE.
As mentioned earlier on, the allowance should be calculated by the employer, in conjunction with the employee. Relying on the employee’s estimation alone or comparisons to previous years can be risky. If the allowance is completely misaligned with the actual business travel incurred, SARS can seek to recover under-deducted PAYE and raise penalties and interest on the portion not subjected to PAYE. Another risk is the employee could artificially overstate/inflate their logbook and claim a higher deduction than the actual business travel they incurred when the allowance is excessive to what is actually required. In this case SARS could hold the employer accountable for enabling the employee to overstate their travel claim by paying the employee an excessive travel allowance. Therefore, we have to reiterate that employers take caution when increasing the allowance beyond the amount actually required by the employee for business travel. It is advisable to rather top-up this benefit by means of reimbursing travel expenses based on proven cost where the business travel undertaken exceeds the allowance provided.
The use of a company vehicle is regarded as a fringe benefit and employees are to be taxed on this benefit insofar as it is used for private purposes. It is the responsibility of the employer to determine the value of this benefit and to accordingly deduct the relevant amount of PAYE.
The tax implications
Firstly, the value of the vehicle has to be determined before the value of the benefit can be calculated and taxed. Start by determining the retail value of the vehicle, inclusive of VAT but exclusive of all finance charges and interest.
Let’s look at some guidelines in determining the retail value of the vehicle:
- Vehicles purchased by the employer – use the purchase price including VAT.
- The employer is leasing the vehicle – use the retail market value.
- The employer is a manufacturer, dealership or rental company – use the billing price/recommended selling price including VAT.
- If the employer placed a limit on the value of the vehicle the employee can choose from but the employee chooses a more expensive vehicle and makes a contribution to cover the difference, use the original value or limit set by the employer.
- If the employee starts using the vehicle more than 12 months after the vehicle was acquired by the employer, the value of the vehicle can be decreased by a depreciation allowance of 15% for each completed 12 months.
Once the value of the vehicle is determined, the next step is to calculate the value of the benefit the employee has to be taxed on. This is done by multiplying the value of the vehicle by 3.5% or 3.25% (if the purchase price includes a maintenance plan) respectively for each month the employee has the benefit of using a company vehicle. The benefit amount may also be apportioned where the vehicle was used for less than a full month.
The final step is to calculate the taxable portion as only the private use is subject to PAYE. As a general rule 80% of the benefit is subject to tax however if the employer is satisfied that at least 80% of the use will be for business purposes, the taxable portion may be reduced to 20%. Remember to include this benefit on the pay slip, deduct the tax accordingly and reflect the total benefit for the year on the IRP5.
Let’s look at an example:
The employer purchased a vehicle for R 100 000 on 01/03/2019. The vehicle is not subject to a maintenance plan. The employee has use of company vehicle for the first time from 15/03/2020 and uses the vehicle for 17 days of that month. The employer is satisfied that the employee will use the vehicle for business purposes at least 80% of the time.
R 100 000 – (R 100 000 x 15%) x 3.5% x 17/30 = R 1 685.83 (value of the benefit for March 2020)
R 1 685.83 x 20% = R 337.17 (portion of the benefit subject to tax for March 2020)
When the employee submits their annual tax return, they are allowed to claim deductions against this benefit insofar as it relates to actual business travel incurred. This will be calculated by reducing the benefit in the same proportion of business km travelled to total km travelled. Keeping an accurate logbook is therefore of utmost importance to benefit from this deduction. The minimum requirements of the logbook have been addressed earlier in this article.
In some cases, the benefit will not be regarded as a fringe benefit and the obligation to deduct tax falls away. It will in cases where:
- The vehicle is a pool vehicle;
- Private use of the vehicle is infrequent;
- The vehicle is not usually kept at or near the employee’s residence outside of business hours.
- The employee’s duties require the use of the vehicle for work purposes after hours, and the employee is not allowed to use the vehicle for private purposes, other than travelling between home and work.
An employer-provided vehicle may not always benefit an employee as sometimes there may be more tax payable on this benefit compared to on a travel allowance. It all depends on the value of the vehicle and the number of kilometres travelled. As this article will not address these specific calculations, it is advisable to contact your tax consultant to assist with various calculations in comparing the different options before deciding on one or the other.
Considerations when structuring the travel benefit
When considering the issue of a travel allowance, travel reimbursement or company vehicle, the employer and employee need to be clear on whether the intention is to provide an additional benefit, or whether the purpose is to reimburse the employee where they travel extensively for business, or a combination of both. Employers need to give consideration to:
- The industry they are in;
- Which categories of staff they have;
- Their business requirements;
- The extent to which travelling is a requirement for each category of staff;
- The cost of traveling;
- What will be funded by the employer;
- Relevant cashflow and tax implications.
An individual required to travel extensively for work, for example a sales consultant, require suitable compensation for the amount of travelling they do when using their private vehicle. Depending on their remuneration structure, they may require a travel allowance to address their cash flow issues, particularly if a large portion of their package consists of variable remuneration. However, an office bound individual will not require an allowance and should rather be compensated on a reimbursement basis.