Finance Minister Trevor Manuel moved again to stamp out the abuse of travel allowances paid to employees as additional remuneration, rather than as compensation for work-related travel expenses.
The minister announced in his Budget speech that in future those who receive a travel allowance will have to pay tax upfront on 60 percent of the allowance.
Previously, you could receive 50 percent of a travel allowance tax-free, and only settle the balance of any tax you owed, or claim a refund from the South African Revenue Service (SARS), when your tax return was assessed.
The new rate means that if you are not using your travel allowance, or are using only a small part of it, the tax-free money you previously had at your disposal (until SARS demanded it when your tax is assessed) will be reduced.
If, however, you use more than 40 percent of your travel allowance on work-related travel expenses, you are going to have to wait until your return is assessed to claim back the excess tax you have paid.
What's changed
This year's change comes on top of changes that were announced in last year's Budget. Some of those are due to take effect next month, while others will affect you when you fill in your 2005/6 tax return. The changes are:
- The maximum vehicle value you may use when calculating your tax deduction is R360 000. The 2005/6 tables show the same fixed cost, fuel cost and maintenance cost for vehicles priced between R340 000 and R360 000 and for vehicles costing R360 000 and over. This means that if you buy a vehicle that costs more than R340 000, the taxman will not be subsidising your expensive tastes.
- The mileage that you must now deem to be for private use has been increased to 16 000km for the 2005/6 tax year and it will be increased to 18 000km for the 2006/7 tax year.
This means the maximum you can claim for business travel, if you do not keep a log book of your business travel, has been reduced from 18 000km last year, to 16 000km for the 2005/6 tax year and to 14 000km for the 2006/7 tax year.
- The tables containing the deemed costs that many use to calculate deductions against their travel allowances were revised last year, to take account of inflation-related increases in fuel and maintenance costs, but the fixed cost of vehicles were revised downwards.
This was because the deemed fixed costs previously assumed a rate of depreciation which would result in a vehicle that is five years old being worth nothing.
Last year, SARS acknowledged that five-year old vehicles are seldom worth nothing and the fixed costs were adjusted to assume that your vehicle will have a residual value after five years of 30 percent of the purchase price. Previous deemed fixed costs were also based on higher interest rates.
A new cost table, with fixed, fuel and maintenance costs revised for inflation has been published for the 2006/7 tax year.
- To ensure that employers and employees don't just switch to a company car arrangement, last year Manuel announced that the monthly company car fringe benefit tax would be increased from March 1 this year.
Currently, if your employer has given you a company car, you have to add 1.8 percent of the cash-cost of the vehicle excluding VAT per month to your taxable income. From March 1, you will have to add 2.5 percent of the value.
Practical effect of changes
The changes to the fixed cost table and the mileage you can claim could have a big impact on your travel allowance claims.
Professor Jan Venter, the deputy head of the Department of Taxation, and, Lenatha Wentzel, a senior lecturer of the School of Accounting Sciences at the University of South Africa, worked out the examples in the table on the right, showing how your claim against your allowance could reduce in this and the next tax year.
They calculated examples for a taxpayer owning vehicles in the economical, family or luxury vehicle ranges, assuming that the taxpayer did not keep a logbook or record of costs and would therefore be using the deemed methods.
Minister achieves objective
Venter and Wentzel say that the calculations prove that Manuel achieved his objective of reducing the deductions available for travel allowances to eliminate the perceived abuse of the system.
The good times are coming to an end for taxpayers who simply make use of the deemed mileage to claim a deduction against a travel allowance they do not use.
For taxpayers who do have legitimate business mileage claims, Venter and Wentzel say it has become critical to keep accurate records of the cost incurred and the business kilometres travelled. This is despite the above-inflation increases in the amounts allowed as costs in the calculations.
If you own a vehicle which costs less than R340 000 and only travel 20 000 km a year, your deduction will reduce by about 72 percent in this and the following tax year.
If you own a luxury vehicle, you can expect the deduction to be up to 90 percent lower, depending on the value of the vehicle, Venter and Wentzel say.
With most people facing this reduction in the tax benefit of a travel allowance, some employees should consider the alternative.
If you do not receive a travel allowance from your employee, you can be reimbursed tax-free for the first 8 000 km a year that you travel at a rate of R2.46 per kilometre, Venter and Wentzel say.
Any amount paid above these limits will be regarded as a taxable benefit and taxed at your marginal tax rate.
Determining whether or not such an option is tax efficient for you will depend on your circumstances, including your mileage.
How the travel allowance works
If you receive a travel allowance from your employer, your employer will only have been deducting employee's tax from 50 percent of that allowance. The other 50 percent will have been paid to you tax-free. From March 1, your employer will deduct employee's tax from 60 percent of that allowance.
You have the chance at the end of the tax year to claim the cost of travelling for work purposes over the year, as a deduction against the total amount you have been paid as an allowance in that year.
If, in the 2006/7 tax year, your travel costs amount to more than 40 percent of your allowance, you will have paid too much tax during the year and SARS will owe you - as long as you do not owe tax anywhere else, and you should get a refund.
If your travel costs for the 2006/7 year amount to less than 40 percent of your travel allowance - for example, only 30 percent of the travel allowance, you will owe tax on the remaining 10 percent that you received tax-free during the year. As long as you have not overpaid tax elsewhere, you will be expected to pay the outstanding tax to SARS.
There are four ways in which you can calculate the actual costs of travel you have incurred for work purposes:
1. Actual costs, actual distance
If you have records of the actual costs you have incurred for your vehicle and you have recorded the distances you have travelled for work purposes, you can claim an amount equal to actual costs multiplied by the proportion of your total mileage that was for business purposes.
2. Deemed costs, actual distance
If you have not kept a record of your actual costs, but you do know the actual distance you travelled for work purposes, you can claim an amount equal to a deemed cost multiplied by the proportion of your total mileage that was for business purposes.
3. Deemed costs and distance
If you have not kept a record of your actual costs or the distances you have travelled for work purposes, you can claim an amount equal to a deemed cost multiplied by a deemed mileage.
4. Actual costs, deemed distance
If you have kept records of your actual costs, but not the distances you have travelled for work, you can claim an amount equal to the actual cost multiplied by the deemed distance.
Remember, however, that the maximum deemed mileages have been reduced. Click here for a table showing the changes in travel allowance deductions.