A car allowance can get you moving - until you hit a speedbump at the end of the tax year. Financial Planning Institute members Ian Chambers and Tony Murphy explain the tax ins and outs of car allowances.
A car allowance is intended to compensate you for using your car for business purposes. It's usually an amount similar to the sum your employer would have to spend to provide you with a car.
Half your travel allowance will be taxed during the year and taken directly off your salary cheque, in terms of the PAYE (Pay As You Earn) system. Whether you will have to pay more tax on the rest, or whether, on the contrary, you get a tax refund, depends on how many business kilometres you travelled and how much your travel cost you.
HOW TO CLAIM
There are two elements to take into account when you claim against your travel allowance: the number of kilometres travelled for business purposes and the cost per kilometre of running your car. If you don't keep a log-book of kilometres travelled and a record of costs (fuel, maintenance, and so on), the Receiver of Revenue will "deem" you to have travelled a certain number of kilometres and to have spent a certain sum of money. You can claim in line with these estimates. This, says Chambers, is by far the most popular method, because you don't need to keep any records.
* If you don't keep a log-book and records
The Income Tax Act provides that the first 14 000 kilometres travelled during the tax year are deemed to be private. So you can only start to claim business kilometres from the 14 001st kilometre. Any distance you travelled over 32 000 kilometres is also considered to be private.
So, if you travel less than 14 000 kilometres during the tax year and you don't keep a log-book, your entire travel allowance will be taxed.
If you travel more than 14 000 kilometres, you can claim fixed costs, fuel costs and maintenance costs for each business kilometre according to a formula set down in regulations to the Income Tax Act. The formula takes into account depreciation or lease payments, interest and insurance costs for cars of different prices. (See travel allowance table).
If you are using the deemed cost method, it makes no difference for tax purposes whether you have paid cash for the vehicle or are financing it long term. If you can, it's better to pay cash for the car and save finance charges.
* If you do keep a log-book and records
You can take into account the following costs:
- Depreciation or lease charges;
- Interest;
- Licence fees;
- Insurance;
- Repairs and maintenance; and
- Fuel costs.
The tax deduction is determined by multiplying the total costs by the ratio of business kilometres to total kilometres travelled. If you retain records of either actual costs or business kilometres travelled, these actual kilometres or costs can be multiplied by the deemed costs or kilometres to determine the tax deduction. If you make your claim based on actual costs, you will be entitled to a smaller deduction than if you paid cash for your car, as you can't claim interest expenses for the year.
Travel Allowance or Company Car
If your job involves extensive travel, say more than 60 000 kilometres a year, no amount of travel allowance will compensate you unless you are prepared to maintain a log-book, Chambers warns.
"The problem with high mileage is that the lifespan of the car is severely reduced and a replacement car may have to be purchased within three years. This accelerated depreciation should rightfully be borne by the employer through the mechanism of a company car as opposed to the travel allowance."
Similarly, if you travel rarely and your total kilometres travelled amount to 18 000 or less, it is invariably better to get a company car, Chambers says, unless you keep a log-book showing that much of the 18 000 kilometres were in fact travelled on business.
Here are some differences between a travel allowance and a company car:
In the case of a travel allowance, you get a monthly allowance to operate your own car. You own the car and you can change it whenever you like. Any profit or loss on the sale is yours and you are responsible for all costs associated with the vehicle including fuel. When you change jobs, you keep the car and simply get a travel allowance from your new employer.
In the case of a company car, the car is owned by the employer who is responsible for all the costs associated with it. Any profit or loss on the sale of the vehicle is for your employer's account. You are taxed on the same amount regardless of whether you travel 10 000 kilometres or 100 000 kilometres.
Structuring your salary for a travel allowance
It's important to build tax considerations into your travel allowance as far as you can. Bear in mind that half your travel allowance is subject to employees' tax.
"Consequently, one should determine to what extent the travel allowance is justifiable and then set a travel allowance at double that amount to ensure that there is no under or over-deduction of employees tax during the year. Care should also be exercised that the travel allowance is reasonable in relation to one's total package and job description," Chambers says.
A disadvantage of too big a car allowance is that employers base their contribution to pension or provident funds on your salary excluding your car allowance. So you should think of increasing your other retirement funding to compensate for this, by contributing to a retirement annuity fund within the tax deduction limits, investing in unit trusts, endowment policies or other options.
Ten things to remember
* Travel from home to work is private, not business, travel;
* If you don't keep a log-book and you travel less than the 18 000 maximum allowed as business travel, you can't claim up to 18 000;
* The deemed costs provide deemed expenditure rates for each kilometre, not deemed kilometres;
If your total travel is less than 14 000 kilometres, or if your business travel is likely to exceed 18 000 kilometres, it would be better to keep a log-book as private travel is subtracted from total travel first;
* If your income is subject only to SITE and you get a travel allowance, you must submit a tax return;
* If your employer pays for your petrol and maintenance costs as well as a travel allowance, you will have to pay tax on that too;
* Don't fudge your mileage - the Receiver of Revenue has ways of checking, including examining licence applications and service records;
* Don't draw up a log-book at the end of the tax year - the Receiver is likely to be suspicious;
* If you get a travel allowance and you use more than one car for business purposes, keep a log-book for each car; if you don't, the 14 000 kilometres deemed private travel will be separately applied to each car;
* It's unwise to over-spend on a car by spending one rand to save 42c in tax, especially if your budget is stretched. A car is generally not a good investment, Murphy says.
Example: How to use the table
Here's an example of how a travel allowance works if you don't keep any records:
Say you get an allowance of R6 000 a month and you drive a car which originally cost R145 000 including VAT. You travelled 29 000 kilometres during the year. Using the table below, your costs are:
Fixed costFuel per kmMaintenance per km62 67729.4026.90Fixed cost element = Fixed cost element divided by Total kilometres
Therefore62 677Divided by29 000EqualsR2.161 per kilometreAdd fuel costR0.294 per kilometreAdd maintenance costsR0.269 per kilometreEqualsTotal cost per kilometreR2.724Total kms travelled29 000Less kms deemed private14000EqualsKms deemed business15 000Deduction permittedagainst allowance15 000 x 2.724 = 40 860Total travelallowance receivedR72 000Taxable Portion (R72 000 - R40 860)R31 140
Half your travel allowance - R36 000 (6 000 x 12 x 50 percent) - would have already been subjected to tax. So when you get your assessment you will receive a refund of tax on R4 860 (R36 000 - R31 140). If your marginal tax rate is 42 percent, this will amount to R2 041.20.
width="468"> TRAVEL ALLOWANCE - TAX
YEAR 2001 VALUE Inc
GST/VATFixedFuelMaintenance
class="celldata3">
FromToCostCostCostR 0R 30 000
class="celldata1">R 16 916R 0.231
class="celldata1">R 0.171 R 30
001R 35 000R 18
984R 0.235R
0.173 R 35 001
class="celldata1">R 40 000R 21 051
class="celldata1">R 0.238R 0.178
R 40 001R 45 000
class="celldata1">R 23 116R 0.243
class="celldata1">R 0.185 R 45
001R 50 000R 25
197R 0.248R
0.192 R 50 001
class="celldata1">R 55 000R 27 690
class="celldata1">R 0.253R 0.199
R 55 001R 60 000
class="celldata1">R 29 778R 0.255
class="celldata1">R 0.206 R 60
001R 70 000R 33
873R 0.259R
0.213 R 70 001
class="celldata1">R 80 000R 38 102
class="celldata1">R 0.261R 0.222
R 80 001R 90 000
class="celldata1">R 40 538R 0.263
class="celldata1">R 0.227 R 90
001R 100 000R 44
535R 0.265R
0.234 R 100 001
class="celldata1">R 110 000R 48 535
class="celldata1">R 0.268R 0.241
R 110 001R 120 000
class="celldata1">R 51 110R 0.275
class="celldata1">R 0.248 R 120
001R 130 000R 54
990R 0.281R
0.255 R 130 001
class="celldata1">R 140 000R 58 803
class="celldata1">R 0.289R 0.262
class="cellhead2"> VALUE Inc
GST/VATFixedFuelMaintenance
class="celldata3">
FromToCostCostCost
R 140 001R 150 000
class="celldata1">R 62 677R 0.294
class="celldata1">R 0.269 R 150
001R 160 000R 66
551R 0.294R
0.269 R 160 001
class="celldata1">R 170 000R 70 425
class="celldata1">R 0.294R 0.269
R 170 001R 180 000
class="celldata1">R 74 299R 0.294
class="celldata1">R 0.269 R 180
001R 190 000R 78
173R 0.294R
0.269 R 190 001
class="celldata1">R 200 000R 82 047
class="celldata1">R 0.294R 0.269
R 200 001R 210 000
class="celldata1">R 85 921R 0.294
class="celldata1">R 0.269 R 210
001R 220 000R 89
795R 0.294R
0.269 R 220 001
class="celldata1">R 230 000R 93 669
class="celldata1">R 0.294R 0.269
R 230 001R 240 000
class="celldata1">R 97 543R 0.294
class="celldata1">R 0.269 R 240
001R 250 000R 101
417R 0.294R
0.269 R 250 001
class="celldata1">R 260 000R 105 291
class="celldata1">R 0.294R 0.269
R 260 001R 270 000
class="celldata1">R 109 165R 0.294
class="celldata1">R 0.269 R 270
001R 280 000R 113
039R 0.294R
0.269 R 280 001
class="celldata1">R 290 000R 116 913
class="celldata1">R 0.294R 0.269
class="cellhead2"> VALUE Inc
GST/VATFixedFuelMaintenance
class="celldata3">FromToCostCostCost
> R 290 001R 300
000R 120 787R
0.294R 0.269
class="celldata1">R 300 001R 310 000
class="celldata1">R 124 661R 0.294
class="celldata1">R 0.269 R 310
001R 320 000R 128
535R 0.294R
0.269 R 320 001
class="celldata1">R 330 000R 132 409
class="celldata1">R 0.294R 0.269
R 330 001R 340 000
class="celldata1">R 136 283R 0.294
class="celldata1">R 0.269 R 340
001R 350 000R 140
157R 0.294R
0.269 R 350 001
class="celldata1">R 360 000R 144 031
class="celldata1">R 0.294R 0.269
R 360 001R 370 000
class="celldata1">R 147 905R 0.294
class="celldata1">R 0.269 R 370
001R 380 000R 151
779R 0.294R
0.269 R 380 001
class="celldata1">R 390 000R 155 653
class="celldata1">R 0.294R 0.269
R 390 001R 400 000
class="celldata1">R 159 527R 0.294
class="celldata1">R 0.269 R 400
001R 410 000R 163
401R 0.294R
0.269 R 410 001
class="celldata1">R 420 000R 167 275
class="celldata1">R 0.294R 0.269
R 420 001R 430 000
class="celldata1">R 171 149R 0.294
class="celldata1">R 0.269 R 430
001R 440 000R 175
023R 0.294R
0.269 VALUE Inc
GST/VATFixedFuelMaintenance
class="celldata3">
FromToCostCostCost
R 440 001R 450 000
class="celldata1">R 178 897R 0.294
class="celldata1">R 0.269 R 450
001R 460 000R 182
771R 0.294R
0.269 R 460 001
class="celldata1">R 470 000R 186 645
class="celldata1">R 0.294R 0.269
R 470 001R 480 000
class="celldata1">R 190 519R 0.294
class="celldata1">R 0.269 R 480
001R 490 000R 194
393R 0.294R
0.269 R 490 001
class="celldata1">R 500 000R 198 267
class="celldata1">R 0.294R 0.269
R 500 001R 510 000
class="celldata1">R 202 141R 0.294
class="celldata1">R 0.269 R 510
001R 520 000R 206
015R 0.294R
0.269 R 520 001
class="celldata1">R 530 000R 209 889
class="celldata1">R 0.294R 0.269
R 530 001R 540 000
class="celldata1">R 213 763R 0.294
class="celldata1">R 0.269 R 540
001R 550 000R 217
637R 0.294R
0.269 R 550 001
class="celldata1">R 560 000R 221 511
class="celldata1">R 0.294R 0.269
R 560 001R 570 000
class='celldata1'>R 225 385R 0.294
class="celldata1">R 0.269 R 570
001 R 229
259R 0.294R