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What is A Travel Allowance?

It has been about 5 to 6 years when we published our initial article about travel allowances. Although tax law did not change that much, the industry did, and we thought it appropriate to update the previous article. Currently, many people still read the previous article, so we decided to keep that one intact and write this one to enhance the previous article. 

This article will discuss a travel allowance, a travel reimbursement allowance as well as the use of a company car or a leased company car and the tax implications of these.

At FMJ Tax Consulting, we also assist with your SARS audits and specialize in assisting clients with any tax-related queries.

 

Understanding a travel allowanceTravel allowance

A travel allowance is when an employer pays an allowance to an employee for business kilometers travelled on behalf of his employer. In practice, employers often give a fixed amount monthly to the employee and may or may not issue the individual with a fleet or petrol card. In the case of a fixed allowance only, the amount paid during the tax period would appear under code 3701 on the IRP5. Where a petrol card is issued to the employee, the amount of petrol would also be added to the amount. To make sure this part is clear, let’s use an example:

Example 1

An employee is given a fixed amount of R5 000 per month for using his personal vehicle to travel for business in execution of his duties. An amount of R5 000 * 12 months = R60 000 should appear under code 3701 on the IRP5 issued around May / June each year. Where the employee maintained a proper logbook during the year, a claim of up to R60 000 may be deducted against his income. Where the claim exceeds R60 000, SARS would limit the deduction to the amount under code 3701, 3702 and 3722 (These are all local travel codes which we will look at later)

Example 2

An employee is given a fixed amount of R5 000 for executing his duties and a petrol card has been issued to the individual. Assume an amount of R50 000 was incurred on the fuel card during a tax period. Result, an amount of R5 000 * 12 months = R60 000 + R50 000 (use of petrol card) = R 110 000 would be included under code 3701. The deduction remains limited to the amount under code 3701.

Once the amount is established (found on the IRP5) the next step would be to consider a tax deduction. For this, a valid logbook must be maintained. A valid logbook must have the below minimum information:

  • Opening and closing km
  • Date of travel
  • Area traveled from and to
  • The amount of business km travelled
  • The reason for the trip

In the event that any of the below information is missing, the logbook may be dismissed by SARS resulting in an additional assessment. SARS may contact the individual to have the logbook corrected during the audit process. However, this should be done correctly from the start.

Travel allowance

  • When submitting a return, always ensure that the opening km matches last year’s closing km. if the odometer does not match, SARS may dismiss the claim. If there is a reason for the mismatch, write a letter to SARS explaining the reason for the odometer mismatch. This could be for example, that the previous year’s logbook did not end on 28 February or that this year’s logbook did not start on 1 March in the current year. Whatever the reason is, make sure that a letter is written and that a reason be given for the odometer mismatch to avoid an additional assessment by SARS.
  • Check the logbook for correctness by calculating closing km – opening km = private and business. This is a test to ensure that the car did not put on more km than the amount by which the card travelled for both private and business. For example, if closing km are 20 000 and opening was 5 000km then 20 000km – 5 000km = 15 000km travelled. If private was 8 000km and business was 8 000km then there is an error which needs to be corrected first.
  • Make sure that the logbook corresponds with the service history of the car. Again, SARS may dismiss the entire claim when a discrepancy is found here on grounds that accurate records were not maintained.
  • Ensure that private km is not unreasonable. Remember that a taxpayer wants the best result and SARS wants the best result also. Being too aggressive with business km could end up having the claim disallowed as the system could have picked up an unfavorable variable and human may agree. Further investigation may be warranted which could lead to a higher-level audit such as a forensic audit. Avoid this by maintaining accurate and reasonable records. In practice, we often see individuals having their claim denied as they tried to state that only 2 000 or 1 000 km were personal. Unless there are especially warranting circumstances, this would generally be wrong and could lead to complications.
  • Trips between home to a person’s regular place of work is seen as private and not business km travelled. (Unless you are a judge) Thus, the area is from a taxpayer’s home to his regular place of work should be allotted to private travel.

Understanding a travel reimbursement allowance:

Some companies require that a form be completed or that a business trip be recorded electronically, and that the employee would then be reimbursed a certain rate per business km travelled. An employer would not be interested in the opening km, closing km, etc. They are only interested in the amount of km travelled and the area travelled to. As such, a reimbursement record would not fulfil the requirements as above as expected by SARS. Thus, submitting this record to SARS would possibly lead to the claim being disallowed, subsequently, leading to unnecessary complications. A proper logbook must still be maintained according to SARS standards. (Also see SARS interpretation note 14) 

The way reimbursement allowances are taxed has changed over the last few years. As at the 2024 tax year, a travel reimbursement allowance is stated on one’s IRP5, under code 3703, as exempt where all the criteria are met for the allowance to be free of taxes. In other words, the income is still stated on one’s IRP5 but there is no taxes withheld by the employer for this type of reimbursement allowance and the amount is not subjected to taxes when the return is filed providing no other type of travel allowance is given to the employee (such as a fixed travel allowance or the use of a fuel card), the employer paid the employee for actual business km travelled and the rate does not exceed the SARS rate of R4.64 per km travelled during tax year 2024. (This figure is updated annually with the budget speech). Since the statutory tax tables have not changed from 2024 to tax year 2025, the same rule will apply to tax year 2025. 

Please note that it would be impossible to give an employee an exempt reimbursement (3703) with a petrol card since “other compensation” is paid. The code would be changed to 3702 meaning that the amount becomes taxable on assessment, but the individual would be permitted to claim against the amount. Where the travel claim is less than the allowance, the balance would become taxable on assessment.  

During tax year 2019 (March 2018 to February 2019) SARS brought in code 3722 which come as a result of code 3702 (a taxable travel reimbursement allowance) In our previous article we stated that an amount given by an employee under code 3702 is not taxed upon receipt but is included as income on assessment and fully included as income. A deduction could be made against this income so included, but where the full allowance is not claimed, an amount must be paid in when the return is filed. Due to this, many people that had a travel reimbursement allowance during a year of assessment ended up filing their return and having to pay in on that return. This was especially the case where an employer pays a high rate (such as R5 or R7 per km travelled) and the individual has a low value car and travelled extensively during a tax period. To mitigate this problem, a new SARS code was introduced, 3722. Where an individual is paid more than R4.64 (tax year 2024) per km travelled, the amount paid in excess would be placed under code 3722 and the employer would tax this amount upon receipt. (We welcome this approach)  

Example 1

An individual is paid R7.50 per km travelled and has travelled 10 000km for business. Therefore, R4.64 * 10 000 km = R46 400. (Placed under code 3702) and (R7.5 – R4.64) * 10 000 km = R28 600 under code 3722. This means that the employer will not tax R46 400 upon receipt by the taxpayer but the R28 600 will be subject to PAYE upon receipt. The employee may claim the full amount under code 3702 and 3722 amounting to R46 400 + R28 600 = R75 000 when completing their annual return providing the SARS formulae allows for this given the value of the car, the total km travelled and the business km being sufficient to claim the full allowance amount. In this example code 3703 (exempt travel allowance) may not be used since a rate is higher than the annual prescribed rate of R4.64. 

Some people ask why an amount has to be paid in against these allowances while other people receive a tax refund when claiming against a travel allowance. The reason for this is that employers do not deduct taxes from an amount under code 3702. This could be illustrated in the following way. Imagine a bonus of R100 000 was paid to an employee and no taxes were deducted. When the return is filed the R100 000 would correctly be included as income but since no tax was paid on that amount, taxes would be paid on assessment. In a similar way, where an allowance is given without the employer deducting taxes on such amount, the amount remains income when the return is filed and unless the full allowance is claimed, an amount would be due to SARS. Income cannot be received without taxes being imposed on the recipient. 

A travel allowance (fixed amount per month with or without a petrol card) is different and such amount could be taxed at a rate of 20%, 80% or 100% upon receipt. The custom is to tax such amount at 80% which means that most of the allowance was taxed unlike a reimbursement allowance which was not taxed at a zero rate. 

Example 2 

An individual is on the 41% tax margin and received a travel allowance of R60 000 and this allowance was taxed at a rate of 80% upon receipt. The taxpayer maintained a proper logbook and was able to claim the full allowance of R60 000 as the taxpayer travelled enough business km to have the allowance claimed in full. The taxpayer could thus expect a refund of R60 000 * 80% * 41% = R19 680. 

Assume the same situation under a travel re-imbursement allowance where the R60 000 was taxed at a rate of 0% 

R60 000 * 0% * 41% = R0 (Since no taxes were withheld upon receipt) 

Where the full amount cannot be claimed, then the inverse is true. Assume the individual can only deduct against his income an amount of R40 000 which means that R20 000 cannot be deducted. 

R20 000 * 100% (not taxed) * 41% = R8200 to be paid in. 

A reimbursement allowance in our view generally causes complications when the returns are submitted. 

How to manually calculate your travel claim or structure a travel allowance

Below is an extract from the SARS tax tables for tax year 2024. Step 1 is to calculate the value of the car used at the time of purchase (not the current market value) Use the purchase agreement for this and remember to include service and delivery fees, VAT and any extras to the costs but exclude any interest charges. Let’s assume the value of the car is R750 000 at the time of purchase. This means that SARS will grant R209 685 as a fixed cost for that car for a full period. If the car was not used for the full period, the amount must be apportioned by calculating the number of days the car was used over the number of days in a tax year (365 or 366) This is the amount SARS will grant for the car irrespective of the amount of km travelled during the year of assessment. Divide this amount by the total number of km travelled (both private and business km should be added) with this car for the year. This will give a rate per km travelled for that car. Add to this amount the below rate per km for fuel and maintenance to arrive at the total amount allowed as a deduction per business km travelled during a tax period. 

Example 3 

An individual received a total travel allowance of R150 000 under code 3701 and used a car with the value of R750 000 during the period of assessment. A total amount of 20 000 km was done of which 10 000 km were from business and the taxpayer maintained a proper logbook. 

  Result: 

Value of 

R750 000 

 

Fixed cost  

R209 685 

 

 

 

 

Total km travelled 

20 000km  

 

 

 

 

Fixed cost per km 

10,484 

 (R209 685 / 20 000km) 

Fuel per km  

2,343 

 

Maintenance per km  

1,131 

 

 

 

 

Total 

13,958 

 

 

 

 

Business km 

10500 

 

 

 

 

Claim for car  

R146 562 

 

Example 4 

An individual with a travel allowance of R150 000 travelled 20 000km of which 10 500 km were for business between 1 April 2023 to 29 February 2024 using a vehicle to the value of R750 000. Calculate the travel claim: 

  Result: 

Value of 

R750 000 

 

Fixed cost  

R209 685 

 

 

 

 

Fixed Cost Apportioned  

R191 925 

(335 days / 366 days) 

 

 

 

Total km travelled 

20 000km  

 

 

 

 

Fixed cost per km 

9,596 

 (R209 685 / 20 000km) 

Fuel per km  

2,343 

 

Maintenance per km  

1,131 

 

 

 

 

Total 

13,070 

 

 

 

 

Business km 

10 500  

 

 

 

 

Claim for car  

R137 238 

 

Example 5 

Assume the same information as with example 4 except that the allowance under code 3701 was R100 000: 

 Result: 

Value of 

R750 000 

 

Fixed cost  

R209 685 

 

 

 

 

Fixed Cost Apportioned  

R191 925 

(335 days / 366 days) 

 

 

 

Total km travelled 

20 000km  

 

 

 

 

Fixed cost per km 

9,596 

 (R209 685 / 20 000km) 

Fuel per km  

2,343 

 

Maintenance per km  

1,131 

 

 

 

 

Total 

13,070 

 

 

 

 

Business km 

10 500  

 

 

 

 

Claim for car  

R137 238 

 

 

 

 

Limited to allowance  

R100 000 

 

Travel allowance

  • When purchasing a new car, consult with your tax practitioner to determine the bracket in which the new car will fall. It may be worthwhile paying a bit more (add an extra or two) to get the car in a higher bracket. Example, if the car is sold for R695 000 why not add something to get the value over R700 000 so that a higher deduction bracket is applied when filing the next return. 
  • Ensure that the travel allowance granted by the employer is enough in relation to the value of the car and the amount of business km travelled. If a car is being used for business travel and many km are racked up, the deduction would be limited to the amount on the IRP5. The balance would be disregarded and lost. Make sure the amount on the IRP5 is more than the claim to collect the full benefit. 
  • If you are one that travels plenty of km per year, consider purchasing two vehicles and alternating with these two cars. (One week with one and then another week with the other) The reason for this recommendation is the more km travelled with a single car, the less SARS will allow as a deduction per km travelled under the fixed cost section (Not the fuel and maintenance) Adding a second car allows two fixed costs since two vehicles are being used. This is not valid for a person who travels only a few business km a year.  
  • The fewer km travelled in a year – the more SARS allows as a deduction per km travelled under the fixed cost section. If total of 20 000 km travelled (This is total which includes private and business km) with a car that has a value of R750 000, the fixed cost awarded would be R209 685 / 20 000 = R10.484. The same situation but with a total of 10 000km means a rate of R209 685 / 10 000 = R20.969 per km travelled under the fixed cost section. This will not boost the travel claim (due to limited business km) but would preserve the car while still claiming a decent amount for business km travelled. one would have the car for longer and thus would be able to claim over more tax years supposed to racking up km and exchanging the car. (This would also depend on your personal preferences)  
  • Maintain a proper and detailed logbook to avoid the claim from being disallowed. Ensure that all elements for business travel are present as indicated in SARS interpretation note 14. 

An individual can only claim against a travel allowance once if they have been awarded a travel allowance by their employer or where an individual is involved in a trade. 

If a person is self-employed (Sole proprietor) or is an independent contractor or is in receipt of mostly commission income, the deemed amounts of fixed cost, fuel and cost of maintenance per the tax tables may not be used. Rather, Section 11(a) of the income tax act needs to be applied which states and an amount “actually incurred’ must be deducted. In this regard, wear and tear may be claimed on a new vehicle (7 years for a brand-new car) and amounts actually incurred on fuel, maintenance, insurance, interest, licensing fees, etc. may be claimed. (Wear and tear for a car where ownership is to the taxpayer such as an instalment sale agreement or monthly rental paid in a case where ownership does not pass to the taxpayer) This could quickly become complicated and may warrant assistance from a tax practitioner. 

A company car and company leased car works differentlyTravel allowance

We have spent a lot of time understanding how a travel allowance works and going through various examples. How about the use of a company car?

A company car is disclosed under code 3802 on an IRP5. When an employer provides an employee with a company owned vehicle, a monthly fringe benefit of 3.5% or 3.25% of the value of the car including VAT is added to their income depending on whether a maintenance plan was included or not included. (The cost of fuel should not be included in addition to the above amount) This means that either 39% (3.25*12) or 42% (3.5* 12) of the value of the car is included as income to the employee. (This amount may be reduced by the amount an employee pays towards the vehicle)

The employee may claim against the use of a company car provided that a valid logbook, as discussed above, was maintained to record business km. The percentage the vehicle was used for business may be deducted against to total fringe benefit amount.

Example 6

An employee has the use of a company car, with a maintenance plan, which has a value of R550 000 (Inc VAT) and has travelled 25 000 km of which 14 000 km was for business.

Result

Included under code 3802 (Taxable fringe benefit for use of company provided vehicle)       R214 500
(Calculated as 3.25% *12 months * R550 000)

Reduced by percentage used for business 14000/25000 * R214 500                                             -R120 120

Resolving a problem with a travel allowance

Travel allowanceIn conclusion, most travel cases represent a high claim at a high tax margin and therefore could often fall under audit. Sometimes SARS would engage with an individual and other times an additional assessment would be issued. If an additional assessment was issued and one is not entirely confident with the case, rather appoint a tax practitioner due to the complicated dispute rules as governed under the tax administration act. An objection may be submitted and when doing so, proper legal grounds need to be communicated along with a letter addressing any concerns the auditor may have had. (A call to SARS is often warranted to understand the reason for disallowing the claim) FMJ Financial tax practitioners have extensive experience dealing with cases of this nature. Contact us to see how we could help.

This article is written by a tax practitioner, Jaques Fourie, with extensive experience in the field of individual taxation and brings practicality to this article.

Does a travel allowance always lead to a tax refund?

With taxation being so high in South Africa and with the many economic pressures of late, many are seeking ways to maximize their personal income tax return. Having said this however, the incorrect travel allowance, in the case of this article, could lead to the opposite result where treated incorrectly. Firstly, this allowance comes in different forms such as a taxable travel allowance and a non-taxable travel allowance. SARS allows in certain cases for a small re-imbursement travel allowance not to be taxed.

For example, if an employee travels less than 8000km per year for his/her employer and the employer does not pay more than R3.05 per km travelled (Rate relevant to the 2012 income tax year for individuals however, change from year to year) then the employer should disclose this income on the taxpayer’s IPR under code 3703. In this case, SARS will not tax this allowance as income. (This is a great tool when a taxpayer has his/her own business and travels less than 8000km per year for his/her business) In the event of more than 8000km being travelled by an employee for his/her employer or where more than R3.05 is paid per km travelled is paid, this income must be disclosed under code 3702 if the employer elects the use of a re-imbursement travel allowance instead of a fixed monthly amount. SARS will, therefore, tax this income where the full allowance is not claimed.

(This is usually very hard) Lastly, and my personal favorite, a fixed monthly amount paid as a travel allowance. This is usually disclosed under code 3701 and could be taxed in various ways. (More about this later) As we have identified each class, a fixed travel allowance per month requires more detail. It is important to understand all the details as an item is best used when correctly and fully understood.

A fixed monthly allowance each month   (SARS code 3701)

Under this system, a taxpayer does not have to report to his employer on the amount of business km travelled however; the employee must keep a detailed logbook. (No logbook leads to no claim and usually an amount to be paid in by the taxpayer) The reason I like this type of allowance is: employers usually tax most of this allowance. (Usually 80%) When an income tax return is filed and a travel claim is allowed, this usually leads to a tax refund. (And usually a good refund) Let’s use an example to illustrate. If a taxpayer receives a fixed salary of R30 000 per month and a fixed travel allowance of R5000 per month, the employee will be taxed as follows,

Total Income Included for tax purposes 
      
Annual salary income360000  360000 
      
Travel allowance60000  48000 (80%) 
      
      
Total420000  408000 

In the above case, the employee who has used his personal car for business purposes has received total income of R420 000 but only pays tax on R408 000 before the income tax return is filed.

This means that the employee pays less tax each month and can still claim against his/her travel allowance. Say the logbook allows for the entire travel allowance to be deducted from this tax payer’s income, taxable income will be reduced by a further R48 000 which triggers a tax refund. Then the refund will be between 30% – 30% of the R48 000 as this is the amount of tax a person will pay less for each rand deducted from his/her income. Please remember that this refund is as result of a taxpayer using his own car for business purposes and therefore loses value and incurs cost each month.

How the travel allowance could go wrong (SARS code 3701)

A fixed travel allowance could go wrong when the fixed amount received by an employee is either too high or too low. In my experience I have seen cases where people have travel allowances of R100 000 but the value of their car is lower than R40 000. In this case, there is a huge risk that the taxpayer, despite using his own car for business purposes, will have to pay in on their tax return. This is as SARS allows a certain rate per km based on the value of the car and the total number of km travelled.

(On the deemed cost method) If you do not claim at least 20% of your travel allowance (which means R20 000 on a R100 000 travel allowance) a taxpayer will have to pay in on their tax return. This is of course; worse if a taxpayer does not have a logbook or where an employer decided to tax only 20% of the travel allowance instead of 80%. In this case the taxpayer will have to claim a travel allowance of R80 000 when a car has a low value. A huge amount will have to be paid to SARS.

On the other hand, it is possible to have a small travel allowance, say R3000, per month and have a very expense vehicle. In this case, SARS will only allow a deduction from a taxpayer’s income to the amount of R36 000 in the tax year as this represents the full travel allowance. This will result in a taxpayer getting only a small amount deducted against his/her income while a much larger amount could have been allowed.

It might be advisable to consult with a tax practitioner and confirm each year whether the allowance is at the correct level or if adjustments are required. This is especially the case when a new car is purchased or when an employer discusses a salary structure.

Deemed cost simply means that we are to calculate the travel claim based on a SARS table which changes year on year. We will identify the value of the car and make use of the SARS table to calculate the allowable based on total km travelled and business km travelled for the tax year. This is not to be confused with deemed km which was done away with on 1 March 2010. (Under this system, SARS deemed the first 18 000km as private travel and the following 14 000km as business travel)

The best is to make contact with a tax practitioner who could verify whether the income tax return has been filed correctly and could make recommendations on the travel allowance. Should an error be identified, an objection could be raised however; this should be done quickly and correctly and SARS has become strict with regards to when an objection against an income tax is return is done. If too much time elapses, they will no longer allow an objection due to the prescription rule. (Legal concept)

Again, in my experience, many people ask this question as they are frustrated with the problems they had in the past and money they had to pay in as result of this travel allowance. If this type of allowance is correctly treated and a proper logbook kept, why use your personal car for work and stand to gain nothing? Rather use a tax consultant which could provide guidance and assistance where necessary. Sure, this may cost a bit but if this saves you his/her fee 100 times, will it not be well worth it? Make sure the allowance is not over or understated as this is many times the biggest problem.

Again, this type of allowance must be fully understood in order to collect the benefit. This is the concept, say your car has a value of R35 000 and you travel 15 000km for your employer and you receive R3 per km travelled. This means that your employer has paid a taxpayer an amount of R45 000 to use his/her car for business purposes. In this case it will be hard to argue that the employee did not make a profit on his/her travel. SARS wants tax to be paid on this profit. In fact, ask yourself, how much did it really cost me to travel these 15 000km? Could it cost more than the value of your car? In this case, SARS simply wants to tax the profit that was made on the business travel. Personally, I would rather accept the profit on business travel (As I will receive more money than when not travelling for business) and keep in mind that a certain portion of this profit must be paid to SARS later. (When filing your personal income tax return) If on the other hand, the car has a much larger value of say R450 000, it is quite possible that no amount would be paid in on the income tax return as SARS will allow a higher rate per km. Again, guidance is required from your tax consultant as the rate depends on the total km travelled in a year.

If you are not happy with the outcome of your personal income tax return or you would like to get your return done correctly the first time, speak to a tax consultant as they could confirm whether the return was correctly) completed (or complete your return correctly the first time and avoid an audit) and if not, raise an objection. FMJ Financial specializes in income tax returns for individuals in South Africa. We do a preliminary assessment free of charge and propose a solution along with a quote (if possible) which each individual  tax payer can decide to accept or reject. Contact us via email or our landline number to find out how we assist with travel allowance cases.