Tax Season: What you need to know when claiming a car allowance
August 26, 2021
A travel allowance, or commonly known as a car allowance, is the amount a registered taxpayer can claim from the South African Revenue Services (SARS). The allowance, as an income, is defined clearly by the Income Tax Act, and this can get somewhat confusing for consumers, says Wilri Engelbrecht, a Financial Planner at Fiscal Private Client Services. Adding to that there are compounding effects of getting it wrong according, says Engelbrecht.
Engelbrecht explains that taxpayers wanting to claim expenses against a personal motor vehicle used for business purposes need to strictly adhere to the SARS specifications.
Top three things to note before claiming a travel allowance
The vehicle is usually owned by the recipient of the travel allowance, but this is not a requirement. In some instances recipients use a vehicle belonging to a parent or relative, and this does not preclude them from claiming against the SARS travel allowance. What is necessary, is that it is used for business purposes for all – or part of the tax year.
Travelling between home and work
Taxpayers need to be aware that travel between their homes and place of work, is excluded. “This is seen as private travel and should be classified as such in their logbooks. This is excluded from the deduction against the travel allowance,” explains Engelbrecht.
Keeping an accurate and detailed logbook
“To determine the amount of your business expenditure that you can deduct against the allowance, you have two options. Either you need to provide actual figures and a detailed record of them. Your logbook should include maintenance on the vehicle, fuel, insurance, and other costs related to the vehicle.
“The other option is to include actual business kilometres and applying the deemed cost per kilometre. The cost per kilometre is gazetted each year and fixes the current rate per kilometre to a corresponding vehicle and the ’value’ of the vehicle. The ‘cost scale’ below is relevant for the 2022 tax year, from 01 March 2021.”
The Cost Scale below is extracted from the SARS eLogbook:
Furthermore, Engelbrecht says that many taxpayers are faced with the option of selecting a car allowance to come off their salary or cost to company. She offers a
examples to best explain the method to calculate an appropriate travel allowance.
|Cost to company||R 600,000.00|
|Vehicle||VW Polo 1.6 Sedan|
|Business expenditure selection||Deemed cost method|
|Total travel (per annum)||25 000km|
|Business related travel||18 000km|
|Detailed logbook kept||Yes|
Employee 1 wants to know what the most beneficial value for travel allowance portion of his remuneration would be. The method used to calculate the business expenditure:
|1. Determine the fixed cost of the vehicle (per attached ‘cost scale’) – vehicle value < R285 000 but > R380 000||R94 871|
|2. Divide fixed cost by total km travelled for the year||R94 871 ÷ 25 000 = 379,48 cents|
|(Vehicle used for a portion of the year e.g.)
R94 871 ÷ 25 000 x (120 ÷365) x 100 = 124,76 cents
|3. Add fuel and maintenance costs – vehicle value < R285 000 but > R380 000||135,80 + 58,10 = 193,90 cents|
|Total costs (converted to Rand)||(379,48 + 193,90) ÷ 100 = R5,73|
|4. Multiply total deemed cost with business kilometres||R5,73 x 18 000km = R103 208,40|
This means that Employee1 will be able to deduct R103 208, as a business expense, against his travel allowance. A travel allowance of R110 000 would be advisable, which could absorb another 1,185 km of business travel.
The monthly employee’s tax (PAYE) consequence of a travel allowance should be considered just as carefully as the value attributed to the travel allowance.
Usually, employee’s tax is based on 80% of the travel allowance and applied monthly, however an employee’s tax may be based on 20% of the travel allowance if the employer is satisfied that at least 80% of the use of the vehicle, for the year of assessment, will be for business purposes.
A trap many employees fall into, is allocating an unjustifiable amount as a car allowance in their remuneration package and then opting for 20% of the allowance to be taxed monthly. This result of this is that the payment of the income tax, on the portion of the car allowance not utilised, is deferred and payable upon assessment of the tax return.
What would happen to the calculated travel allowance had Employee1 purchased a Toyota Fortuner 2.4 GD for R566 000?
|1. Determine the fixed cost, per attached ‘cost scale’||R135 746|
|2. Divide fixed cost by total km travelled for the year||R135 746 ÷ 25 000 x (365 ÷ 365) x 100 = 542,98 cents|
|3. Add fuel and maintenance costs||166,70 + 80,20 = 246,90 cents|
|Total costs (converted to Rand)||(542,98 + 246,90) ÷ 100 = R7,8988|
|4. Multiply total deemed cost with business kilometres||R7,8988 x 18 000km = R142 178,40|
If he drives the Toyota Fortuner, he will qualify for a deduction of R142 178 against a travel allowance of e.g. R250 000. If the employee’s tax is paid on R50 000 (R250 000 x 20%), during the year, it leaves R57 822 being taxed on assessment.
For this scenario, an annual travel allowance of R150 000 would be advised, which could absorb another 990km of business travel.
Concluding, Engelbrecht advises that consumers consult a tax professional if they require guidance on which option to select. “It can be tricky to determine the appropriate value and percentage of your travel allowance for employee tax purposes. At the end of the day, we all want to be able to submit an honest tax return, while maximising the amount we can claim.”
Wilri Engelbrecht, a Financial Planner at Fiscal Private Client Services