Understanding travel allowances is essential for both employers and employees in South Africa. These allowances can significantly impact tax compliance and financial planning. Here’s a comprehensive and updated guide to travel allowances as of the 2024/25 tax year.
What is a Travel Allowance?
A travel allowance refers to any amount paid or advanced to an employee for covering travel expenses. However, this allowance cannot be used for private travel, which includes commutes between an employee’s residence and their place of work.
There are two main types of travel allowances:
- Fixed Travel Allowance – A set amount given to the employee regularly (e.g., monthly) to cover transport costs.
- Reimbursive Travel Allowance – Based on actual business travel distance, calculated at the SARS-prescribed rate per kilometre.
Reimbursive Travel Allowance
A reimbursive travel allowance is calculated using the actual distance travelled for business purposes, multiplied by the prescribed rate per kilometre.
For the 2024/25 tax year, the prescribed rate is R4.84 per kilometre. This rate is set by the Minister of Finance and may change annually.
Scenario: Vehicle Rental by Employee to Employer
If an employee (or their spouse/child) owns or leases a vehicle and rents it to their employer, the following rules apply:
- The total rental paid by the employer, along with any additional vehicle expenses covered by the employer, is treated as a deemed travel allowance.
- This allowance must be declared as such, and the employee is entitled to claim deductions for business-related travel expenses during the tax assessment.
- Importantly, the rental income is not classified as rental income but as a travel allowance.
Combination of Fixed and Reimbursive Allowances
It is possible for an employee to receive both a fixed travel allowance and a reimbursive allowance. While these two allowances are provided under different circumstances, SARS treats them as a single travel allowance when calculating tax obligations. Here’s a closer look at how these combined allowances are managed:
Understanding the Combination
- Fixed Travel Allowance: This is a predetermined amount provided to the employee regularly, regardless of actual business kilometres travelled. It is often based on an estimate of the employee’s expected business travel needs.
- Reimbursive Travel Allowance: This is calculated using actual kilometres travelled for business purposes, multiplied by the SARS-prescribed rate per kilometre (R4.84/km for the 2024/25 tax year).
When both allowances are provided, SARS aggregates them during tax assessment to ensure the employee’s travel-related income and tax deductions are properly aligned with actual business usage.
How SARS Handles Combined Allowances
- PAYE Deduction:
- For the fixed travel allowance, 80% is subject to PAYE unless the employer can demonstrate that at least 80% of the travel is for business purposes (in which case, only 20% is taxed).
- Reimbursive allowances paid at or below the prescribed rate (R4.84/km) for distances up to 8,000 km per annum are not subject to PAYE.
- Tax Assessment:
- During tax assessment, SARS combines the fixed allowance and reimbursive allowance into a single taxable amount.
- The employee can claim actual business travel expenses as deductions using one of the following methods:
- Logbook Method: Submitting detailed records of kilometres travelled for business purposes to substantiate claims.
- Deemed Cost Table: Using SARS-provided tables that account for vehicle costs, including depreciation, maintenance, and fuel, based on the vehicle’s value and distance travelled.
- Reimbursement Exceeding Prescribed Rate:
- If the reimbursive allowance exceeds the prescribed rate or the travel exceeds 8,000 km per annum, the entire reimbursed amount becomes taxable and is combined with the fixed allowance.
Practical Example
Consider an employee who receives:
- A fixed travel allowance of R5,000 per month, and
- A reimbursive allowance of R4.84/km for 6,000 km of business travel in the year.
Step-by-Step Tax Treatment:
- Monthly PAYE:
- 80% of the fixed allowance (R4,000) is subject to PAYE.
- The reimbursive allowance is not taxed since it falls within the prescribed rate and travel limit.
- At Tax Year-End:
- The fixed allowance (R60,000 annually) is added to the reimbursive allowance (R4.84 × 6,000 = R29,040).
- The combined total (R89,040) is assessed as a single travel allowance.
- Deductions:
- The employee can claim deductions based on actual business travel expenses (e.g., fuel, maintenance, and depreciation) or SARS’s deemed cost tables.
- If business travel logs show that 80% of travel was for work, a significant portion of the allowance may be excluded from taxable income.
Employer Best Practices
- Clear Policies: Employers should define clear travel allowance policies to ensure employees understand how fixed and reimbursive allowances are calculated and taxed.
- Record-Keeping: Employers should maintain accurate records of allowances paid and kilometres claimed to comply with SARS regulations.
- Proactive Communication: Educate employees on the importance of maintaining travel logs and understanding how allowances affect their taxable income.
Combining fixed and reimbursive travel allowances can provide employees with flexibility while ensuring fair compensation for business travel. However, it requires careful management by both employers and employees to ensure compliance with SARS requirements and avoid unnecessary tax burdens.
PAYE and IRP5 Disclosure
PAYE Rules for Travel Allowances
Employers are required to deduct PAYE (Pay As You Earn) on travel allowances as follows:
- 80% of the travel allowance is subject to PAYE.
- If the employer can confirm that at least 80% of the vehicle’s use will be for business purposes, only 20% of the allowance is subject to PAYE.
IRP5 Codes
The following IRP5 codes apply to travel allowances:
Scenario | PAYE Deducted | IRP5 Code |
---|---|---|
Fixed travel allowance | Yes | 3701 |
Fuel/expenses paid by the employer (e.g., petrol, maintenance cards) | Yes | 3701 |
Reimbursed at prescribed rate (≤ 8,000 km per annum) – No other allowance received | No | 3703 |
Reimbursed at prescribed rate (≤ 8,000 km per annum) – Additional fixed allowance received | Yes (fixed) | 3701, 3702 |
Reimbursed at prescribed rate (> 8,000 km per annum) – No other allowance received | No | 3702 |
Reimbursed at prescribed rate (> 8,000 km per annum) – Additional fixed allowance received | Yes (fixed) | 3701, 3702 |
Reimbursed at a rate exceeding prescribed rate per kilometre | No | 3702 |
Key Considerations for Employers and Employees
- Accurate Record-Keeping: Employees must maintain detailed logs of business kilometres travelled. Employers should also document payments and ensure compliance with SARS rules.
- Reimbursement vs Fixed Allowance: Carefully determine the appropriate type of travel allowance based on the nature of the employee’s work and travel requirements.
- Annual Updates: The prescribed rate per kilometre is subject to annual changes, so employers must stay updated on SARS regulations.
Conclusion
Travel allowances are a valuable tool for managing business-related travel expenses. However, understanding the associated tax implications is crucial for both employers and employees. By adhering to SARS guidelines and keeping thorough records, you can ensure compliance and optimise your financial planning.