Company cars and travelling allowances are attractive perks for some employees. But those who find themselves having to scrape their pockets to pay back the taxman at the end of the tax year often wonder if these allowances are supposed to be a boon or a burden. In this week's article, the second in a five-part series on structuring a salary package, we look at how these fringe benefits are taxed and, if you are not doing a lot of mileage, whether you would be better claiming your travelling allowance from detailed records or the gazetted tables of deemed costs. There is no way to disguise how complex the whole system is.
When it comes to cars, you are usually offered either a company car, owned by your
employer, which you can use, or a travelling allowance (the more common option) where your
employer pays you for the use of your own car.
Jenny Klein, tax manager at Deloitte & Touche, says a company car is one of the few
attractive fringe benefits left, but because it demands quite a lot of administration on
the part of employers, travelling allowances are more frequently offered to employees.
COMPANY CARS
If you receive a company car, it is taxed on the basis of a formula: at 1,8 percent a
month of the determined value of the car for the first company car you have, and four
percent of its value a month if it is a second company car.
So, for example, if your first company car cost R100 000 excluding VAT, its taxable
value added onto your salary is R1 800 a month, which will be taxed at your marginal rate
of tax.
If you have two company cars, both worth R100 000, this is considered to add a total of
R5 800 a month onto your salary.
The taxman assumes you will travel 10 000 km a year on private usage in a company car.
If you do less than that, and can prove it by showing a log book, then the fringe benefit
tax on the company car will be reduced proportionately on assessment though on a
monthly basis it will be taxed in full by your employer. So if you only do 5 000 km of
private travel, the taxable value of your company car fringe benefit drops by half.
If, after a certain number of years of use, your employer allows you to buy the car,
the difference between the market value at that time and the amount you are paying for the
vehicle, if you are not paying the full market value, will be added to your income that
year and taxed at your marginal rate of tax.
If you are given the car at the end of a certain number of years, the market value of
that car will be added onto your income for that year and taxed.
TRAVELLING ALLOWANCE
The travelling allowance is intended (in the taxman's eyes) to compensate you for the
use of your car for business. It is not supposed to be an artificial enhancement of your
salary, which is the way many employers seem to view it.
If the value of your travelling allowance is significantly greater than the number of
kilometres you have to travel for business, you will have to pay back taxes to the
Receiver of Revenue when you are assessed.
You can claim your business travel in two ways mileage and running costs. The way
you claim each of these elements can be done using the actual costs incurred or the
gazetted tables, also called deemed costs.
If you travel less than 14,000 km during the year or your actual kilometres travelled
is more than 18,000 km it would be better for you to keep a log book literally, a
record of every single business trip you take. For a log book, you must have the odometer
readings on March 1 and the following February 28, and record when, how many kilometres,
and for what purpose you made your business trips.
If you don't use the tax tables to claim running expenses, you must also keep all
receipts for petrol, repairs and servicing if you wish to base your deduction on actual
costs. You do not have to submit these receipts with your tax return, although your log
book must be submitted.
At present, 50 percent of travelling allowances are liable for Pay As You Earn (PAYE)
tax at your marginal rate of tax, up from 40 percent in the 1997 tax year and 35 percent
in 1996. Hanneke van Wyk, tax consultant at Arthur Andersen, says this is quite punitive
for taxpayers who are required to do a substantial amount of mileage in their jobs, and
means they will have to apply to the taxman for a refund at the end of the tax year for
the extra tax they paid.
But Deloitte & Touche's Klein points out that only 50 percent of the allowance is
taxed anyway, so you get the use of more cash on a monthly basis than you would without a
travelling allowance. If you think you might have to pay in, you could put aside money
each month into an accessible mortgage bond, and save interest. Employees can adjust their
monthly travelling allowance upwards to take into account the higher tax.
It could be, though, that with SARS's natural reluctance to give refunds, tax assessors
will scrutinise your tax returns if a substantial refund on your travelling allowance does
arise. Suppose you are given a travelling allowance of R2,000 a month, you earn over
R70,000 and less than R120 000 a year so your marginal rate of tax is 44 percent. Your car
cost R100,000 (including VAT). From April 1, 1998, you will have R440 a month in PAYE (44
percent of half of R2000) deducted from the travelling allowance.
At the end of the tax year, if you have not kept a log book and have driven less than
14,000 km in total, unless you apply successfully for other tax credits on your salary,
you will have to pay another R5,280 (R10,560, which is 44 percent of your R2,000 a month
travel allowance, less the R5,280 you have already paid each month on 50 percent of the
allowance) to the taxman.
If you kept a record of your expenditure during the year, you can choose whether to
base your claim on actual expenditure or the rate set out in the tax tables, whichever
provides the greater benefit.
If you intend to use the deemed cost tables or gazetted rates, for every kilometre over
14,000 km that you have travelled during the year, you can claim 23,2c for fuel and 21c
for maintenance as well as a fixed cost of R39 394 divided by the total distance
travelled.
Assume your total mileage for the year was 16,000 km on a car worth R100,000, you can
claim 2,000 km of business travel according to the tax tables on your R2,000 a month
travelling allowance. The calculation, using the tax tables, is as follows:
face="Verdana">Car allowance received
for the year
R24,000
Tax paid
R5,280
Fixed cost
(39 394 / 16 000 km = 246,2c)
Fuel cost @ 23,2c per km
Maintenance @ 21c per km
TOTAL COST per km=314,1c/km
Total deduction
(2000km290,4c)
R5 808
Recalculation
of the tax you should have paid on your car allowance, assuming you are on a marginal tax
rate of 44 percent:
R24,000 - R5 808
R18 192
Tax @ 44%
R8 004
Actual tax paid
R5 280
Amount you still owe
R2 724
REIMBURSIVE TRAVELLING ALLOWANCE
Your employer can repay you an actual amount of 130c a kilometre for actual business
travel without your having any PAYE deducted. This is usually paid for ad hoc travel.
It is possible for you to receive both a reimbursive travelling allowance and a monthly
travelling allowance. If you receive both, they are added together, and taxed at your
marginal rate of tax, in the same way as a travel allowance.
Do not be tempted to lie about the kilometres you have travelled during the last tax
year because this can easily be checked by SA Revenue Service (SARS). For example, they
can ask for a copy of the invoice from your last service - because normally the garage
puts on the invoice the odometer reading. SARS can also ask the local licensing department
for a copy of your last motor vehicle license form, on which you are usually requested to
put the odometer reading, though many people do not. Finally, SARS can even ask to see
your vehicle.