Travel Allowance Versus Company Car
/Both company cars and car allowances are very valuable perks for employees. We do need to look at the tax treatment for both so that employers can make the best decision for their employees and the company.
The first important thing to determine is what is the company allowance value versus the company car value and which is the most tax efficient for both the employee and employer. Without doing the actual calculation for each employee and employer, I won’t be able to advise on what is the best option for you. But I can highlight things that hopefully kickstarts your thought process.
Because of the effects of COVID-19, employees may have an increased tax liability if they received either a travel allowance or had use of a company car. There is also a link between travel allowances (the same applies to company vehicles) received by employees in the current tax year, and for which business travel was not possible.
In this article we look at the general taxation principles of a travel allowance and reimbursement of travel expenses claims, as well as consider how COVID-19 may increase the tax burden on an employee.
From our experience since the 2019 filing season, we really think that SARS will increase their audit and verifications due to the increasing need to collect more taxes. We have seen that individuals whose taxes we are now filing who have an increased tax liability due to fewer business km. And quite frankly, SARS don’t care. They just want to recover the taxes due to them.
It is now more than ever very important to make sure your travel logbook is maintained and updated as well as look at how many private and business km you do and expect to do, and adjust your benefits accordingly.
What is is
Car Allowance
An allowance is paid to an employee for the use of their own private vehicle and is added onto the employee’s salary. The Gross salary paid to an employee is affected by the travel allowance.
The cash value can be used to either lease a car or refund the usage of wear and tear of an owned car.
It is up to the employee to decide what vehicle they drive.
Private travel is taxable.
Use of Motor Vehicle/Company Car
The company buys a car that is used by the employee for business and private use. The car is an asset to the company and does not belong to the employee.
Fringe benefit tax is paid on the private element of the use of the motor vehicle.
Alternatives
If you travel less than 8000 km per year, it is often simpler to claim reimbursive travel allowance at the approved SARS rate >> PAYE-GEN-01-G03 - Guide for Employers in respect of Allowances - External Guide (sars.gov.za)
1 March 2021 – R3.82
The reimbursement is not taxable in the employees’ hands if less than 8000km is travel and R3.82 per km and lower. The employee must maintain a logbook to prove the business km.
If the car is used by a group of employees and not specifically allocated to one employee, the value of the private use can be R0 if:
The vehicle is available to and is used by other employees of the employer in general and the private use of the vehicle by the employee is infrequent or is merely incidental to the business use and the vehicle is not normally kept at or near the residence of the employee.
The nature of the employee’s duties is such that they are regularly required to use that vehicle for the performance their duties outside their normal hours of work and they are not permitted to use such vehicle for private purposes (other than travelling between their place of residence and place of work) or private use which is infrequent or is incidental to its business use.
These are also known as pool cars.
The company can use a vehicle hiring company like Avis to rent the company cars. This means that the company car is not an asset that needs to be maintained and damage caused by employees ‘is not the company’s problem’.
The company simply leases the vehicles and gives the car to the employees to use and makes sure the employees are taxed on the fringe benefit value.
Requirements to File Tax Return
To keep a logbook
eLogbook Guide published by SARS
Date the date travelled
The Business km Travelled
The business km travelled details
Examples of business travel:
Employee travels from office to conference
Travelling from home office to a client premises
Travelling from home to another branch where you don’t normally work
Private travel examples:
Travel from home to office
Travel from friend’s house to the office
Regularly travelling from home to different places of work
Remember: Private travel is taxable. Business travel not is taxed
See our homepage for a link to the travel logbook template.
Keep a logbook of private and business km.
To determine the original purchase price and if a maintenance plan was included or not.
Tax for Individual
Taxed at 80% in your personal capacity. The rate can be reduced to 20% if the employer is satisfied that a significant amount of business km will apply.
No fuel cost may be claimed if the employee has not borne the full cost of fuel used in the vehicle and no maintenance cost may be claimed if the employee has not borne the full cost of maintaining the vehicle (e.g., if the vehicle is covered by a maintenance plan).
The fixed cost must be reduced on a pro-rata basis if the vehicle is used for business purposes for less than a full year. The actual distance travelled during a tax year and the distance travelled for business purposes substantiated by a log book are used to determine the costs which may be claimed against a travelling allowance.
Benefits and Negatives:
A negative will be when an employee overestimates their business km so that they get out more monthly. The PAYE is calculated on an estimate of business usage, and most employees use 80% business travel. These days (in the pandemic) people travel less and less for business, and they end up paying more PAYE or having to pay in at the end of the tax year because the business km isn’t enough
Additional expenses, like maintenance and insurance, or depreciation on the vehicle are not covered by travel allowances, reimbursements, or fuel cards. A highly mobile employee may also have to bear the early replacement costs of their private car
The cash equivalent of the benefit accrues monthly, and employees’ tax must be deducted.
Benefits and Negatives:
If more than 60% of an employee’s travel is for business purposes, they are losing tax benefit and ‘wear and tear’ benefit if they use their own car. It is beneficial for employees who travel a lot for work to look at getting a company car
The employee never owns the car and pays tax on only the usage of the car.
The individual can drive a very nice car and does not need to pay for the hefty bills.
Tax for Company
Employee allowance paid is fully tax deductible as a valid business expense.
Benefits and Negatives:
The benefit of using a travel allowance is that it is easier to understand the financial implication in employing an individual because it is a set amount.
The company does not have the worry of making sure the company car is maintained etc
If the employee leaves the employment of the company, the company does not need to sell the car/do something else with the vehicle
There isn’t an expectation from the employees that they will receive a company car as part of their employment.
Company owns the vehicle
There is a monthly depreciation charge that decreases profits i.e., decrease company tax payable
The monthly interest charge or leasing charge is a tax-deductible expense for the company and decreases profits.
Fuel costs are tax deductible
Repairs and maintenance on the vehicle are tax deductible.
Benefits and Negatives:
Negative might be that the company has an asset that needs to be maintained on the books. The alternative is, to lease the vehicles that the employees can use, and this decreases the risk for the company.
There is an expectation from employees that they will receive a car as part of their employment, and if the company is struggling financially it can be difficult to keep to this expectation.
The benefit can also be that the balance sheet has an asset on the accounts and can look financially better off.
If something goes wrong and the vehicles break down the whole time, the company needs to worry about this.
How to Calculate
The place to start for fixed travel allowances and reimbursements for expenses as well as company petrol cards is that 80% is subject to PAYE and should be included in the employee’s remuneration.
This assumes that only 20% of the employee’s use of the vehicle is for business purposes.
But, where the employer is happy that at least 80% of the vehicle’s use will be for business purposes, the employer may take only 20% of the fixed travel allowance, reimbursement for expenses or company petrol card expenditure. This determination must be made on a monthly basis.
If an employee makes use of a company vehicle owned by the employer, the taxable value of the vehicle must be added to the employee’s remuneration each month.
The fringe benefit value is calculated as a percentage of the determined value of the car ( 1 (sars.gov.za)) and the percentage will depend on whether the original purchase price included a maintenance plan. The applicable percentages are as follows:
Maintenance plan: 3.25% per month of the determined value
No maintenance plan: 3.5% per month of the determined value
The fringe benefit value is either 80%, 20% or 100% taxable, depending on the proportion of private use:
If the vehicle is used 80% or more for business purposes, the value of the company car benefit is 20% taxable.
If the vehicle is used less than 80% for business purposes (but there is some business use), the value of the company car benefit is 80% taxable.
If the vehicle is used 0% for business purposes (i.e. it is only used privately), the value of the company car benefit is 100% taxable.
The best thing to do when you are trying to decide which option suits you, is to think from whose point of view you are considering this? Esi and I had made the same assumption, and that is why we don’t do company cars. Believe it or not, we didn’t know the true answer until we worked through it while writing this blog!
We are now busy gathering all the information necessary i.e. what using our cars for business purposes costs us personally, and then we will go through the above table, and weigh up our options.
It might even be a combined approach where we say that one option will work best for her, and another option for me. But at the end of the day, it needs to be the best option for the company, because we are the company directors, and we have a fiduciary duty to all our stakeholders.
Happy researching!
