If you are receiving a travel allowance from your employer, you will be enjoying some measure of tax relief. SARS permit this tax relief in recognition of the fact that you are using your private vehicle for work purposes. The amount of tax relief you are benefitting from is dependent on:
- The purchase value of the vehicle;
- The total expected travel in the tax year;
- The expected business travel for the tax year.
As a reminder, business travel typically covers you traveling to your clients or suppliers but does not include your journey to your principal place of work and back.
Typically, SARS would recommend that your employer taxes 80% of this allowance during the year and then you would be able to claim what is due to you during tax assessment. This mechanism has been designed to prevent you having to pay in on assessment if you overestimated your business travel. In some cases, you can ask payroll to tax only 20% of the monthly allowance, which allows you to enjoy the tax relief sooner.
HERE LIES THE RISK.
There is a good chance that you would have provided the estimate of your travel for the tax year before the economy was locked down and you have not advised your new travel estimates. There is an equally good chance that you are not travelling nearly as much as you thought you were and yet you are still receiving that tax relief.
If this is the case, you may be in for a nasty surprise.
As an example,
You buy a car for R500,000.00.
You believe that you will travel 10,000km for the tax year in total, and 8,000km of that travel will be for business (not including driving between your home and the office).
Based on the above, you could reduce your annual taxable income by just over R124,500 for the year and reduce your annual tax bill by as much as R51,000 for the year.
However, with Covid-19, things have now changed, and you may now only end up travelling 2,000km for work and 5,000km for personal travel. With this change, your taxable income should have only been reduced by a total amount of R42,538.00 for the year.
What does this mean?
Without going into detailed calculations, the impact of the change can be severe. Some additional information is obtainable on the SARS website – https://www.sars.gov.za/Tax-Rates/Employers/Pages/Rates-per-kilometer.aspx
It is likely that that 80% of your travel allowance would have been taxed on the payroll during the year. Pre-Covid, this would mean that you would have received up to R40,640 back from SARS on assessment.
Now with your reduced travel, you may only receive R7,280.00 back from SARS, a R33,360 shortfall!!
Worse still, if your employer allowed only 20% of the amount be taxed on payroll monthly, then in fact you may be required to pay SARS an amount of just over R23,000!
These actual amounts will be different depending on your own circumstances, but it is critical that you are aware of the implications of any reduced business travel.
What can you do?
If you do receive a travel allowance, we would recommend that check in with payroll and HR to confirm how your allowance is being determined and taxed. They should review or reduce the amount depending on your circumstance. If you do not, you may be in for a surprise at the end of the year.
Alternatively, if you work in payroll/HR, it would be worthwhile to see how your entire employee population is being treated and consider a strategy for the remainder of the tax year. Or at the very least, furnish employees with advance warning.