Employees’ tax – travel allowances and reimbursements

SARS 100Author: Hanneke Farrand and Jenny Klein

Author page » Most employers are aware that a travel allowance may be granted to an employee where it is anticipated that the employee will be required to undertake business travel by virtue of the duties of his/her employment and that a travel allowance should not be merely used as a mechanism to reduce an employee’s employees’ tax (“PAYE”) liability.

However, the South African Revenue Service (“SARS”) has in some instances issued employees’ tax assessments in respect of travel allowances granted to employees on the basis that, in order to qualify for a travel allowance, an employee must in fact have travelled on business. SARS is further of the view that where employees who received travel allowances were also able to claim a reimbursement for business mileage (typically on a rate per kilometre basis) and he/she did not do so, it may be concluded that an employee did not in fact travel on business. In these circumstances, it is then reasoned that the employee’s travel allowance does not fall within the ambit of section 8(1) of the Income Tax Act, 1962 (“Act”) and that consequently the full amount of the travel allowance should have been subject to PAYE.

There are two aspects to the above argument. Firstly, is it a requirement when granting a travel allowance to an employee that the employer must ensure that that employee does in fact travel for business purposes? The second aspect is whether it is reasonable to conclude that an employee who received a travel allowance but did not submit a claim for business mileage, did not travel for business purposes and that such employee’s travel allowance accordingly does not fall within the ambit of section 8(1) of the Act.

Currently, 80% of a travel allowance is subject to PAYE. However, in earlier tax years which may still be under review by SARS, this percentage was as low as 50% or 60%. Should it be found that the allowance did in fact not qualify as a travel allowance as envisaged in the Act, the potential exposure to the underpayment of PAYE could be significant.

Requirement to travel for business purposes

Section 8(1)(a)(i) of the Act provides for an inclusion in the taxable income of the recipient of any amount which has been paid or granted as an allowance or advance by his/her principal, excluding any portion actually expended by that recipient, inter alia, on travelling on business. Section 8(1)(a)(i) therefore deals with an individual taxpayer‘s final tax liability in respect of an allowance or advance granted by a principal (employer).

Section 8(1)(b) of the Act provides that any allowance or advance “in respect of transport expenses” shall, to the extent to which such allowance or advance has been expended by the recipient on private travelling (including travelling between his place of residence and his place of employment or business or any other travelling done for his private or domestic purposes), be deemed not to have been actually expended on travelling on business.

Section 8(1)(a)(i) does, in our view, not require that an employee must have travelled for business purposes or account to his or her employer for actual business travel undertaken in order for the allowance granted to him to qualify as a travel allowance. There is furthermore no requirement imposed by legislation on an employer who grants an employee a travel allowance to monitor the use of this allowance by the employee.

This is confirmed in SARS Interpretation Note No.14 (Issue 2) which states that an allowance is an amount of money granted by an employer to an employee in circumstances where the employer is certain that the employee will incur business-related expenditure but where the employee is not obliged to prove or account for the business expenditure to the employer.

We maintain that a travel allowance may be given to an employee on a prospective basis having regard to the reasonably anticipated business travel requirements of the employee’s position, without the employer being required to confirm whether or not the employee actually travels for business.

Reimbursive fuel claims

Where an employer’s travel allowance policy also allows those employees who receive travel allowances to submit reimbursive fuel claims at a rate per kilometre for business travel, submission of these claims by the employee is typically optional.

The fact that an employee may not have claimed a per kilometre reimbursement in respect of his or her business travel does not imply either that such an employee was not required by the nature of his duties of employment to travel on business, or that he/she did not in fact travel on business.

In practice, it is often the case that employees who travel for business purposes choose not to submit a claim for a fuel reimbursement in addition to their fixed monthly travel allowance because it is not worth their time and effort to do so. Also, the requirement to keep a log book was only introduced in the 2010 tax year. Prior to this, most employees used the gazetted tables to calculate their allowable travel allowance deductions in their annual tax returns. It was therefore not necessary to keep a record of actual business travel.

It therefore cannot be said that employees who received travel allowances but who choose not to submit reimbursive fuel claims, did not in fact travel for business purposes.

In addition, whether or not a reimbursive fuel claim was submitted by an employee should, in our view, not be regarded as a criterion to be applied with hindsight as to whether the employee qualified for a travel allowance.

Provided that the employer duly applied its mind whether to grant a particular employee a travel allowance based on the business travel requirements of his/her job and not, for example, as an automatic benefit by virtue of his/her position within the organisation, a travel allowance granted on this basis should be regarded as an allowance in respect of transport expenses as envisaged in section 8(1)(b) of the Act.