DON’T LET THESE 3 TRAVEL ALLOWANCE ERRORS TRIGGER A 200% TAX PENALTY FOR YOUR BUSINESS
Here’s how to avoid the errors
Do you know how to structure your travel allowance, so it’s not a risk for your business?
And do you know how to tax and pay the employee, to avoid audits and 10% penalties?Read on to get all the answers from our experts.
What is a travel allowance?
It’s an allowance you give an employee, to cover his business travel costs (e.g. driving to and from client meetings, etc.).
If your business doesn’t award, tax and record employee travel allowances correctly, then you can be sure SARS is going to pick up the errors. You’ll face an audit for sure – not to mention penalties for non-compliance.
Remember, there’s a 10% penalty for under-deducting PAYE. Plus, SARS could find you guilty of tax evasion – and that carries a 200% penalty!
Three common errors you MUST avoid to escape penalties and audits
1. Don’t use a travel allowance to limit the PAYE deduction for an employee
It’s tempting to use a travel allowance to increase the salary pay-out to an employee. But SARS checks your employment contracts if it has any doubts about the allowance. And it’ll question the legality of an allowance that’s been awarded when it shouldn’t have been. It could issue a revised assessment and impose penalties and interest!
Solution: Make sure it states clearly in the employee’s letter of appointment or employment contract that he’s required to use his personal car to carry out his duties.
2. Don’t use HR grading systems, if they’re not justified
An HR grading system is one in which you categorise your staff, according to their seniority in the company. Someone in the most junior category will earn a certain salary bracket and will have certain company perks. And someone in the most senior category will earn a higher salary bracket and will have other perks.
In some cases, this is based on a percentage of total cost to company (etc.). And employees will get a travel allowance, regardless of the fact that this isn’t a requirement of their job.
SARS will question this, especially if the employee never needs to travel for business!
Solution: Avoid falsely using HR grading systems. And if you do have one, make sure whoever gets the travel allowance not only deserves it – his employment contract states clearly that travel will be a job requirement from time to time.
3. Don’t suddenly remove your travel allowances – SARS will notice the change
Say for the last five years, you’ve given everyone in the company a travel allowance, including your secretary, who never travels for work.
But you realise that SARS takes a dim view of travel allowances, so you suddenly stop awarding them to staff.
SARS WILL pick this up on your IRP5s and your PAYE returns! The sudden change on your part is an admission that the travel allowances you awarded in the past weren’t justifiable. SARS will question the previous salary structures you had in place.
Solution: If you’ve just realised a staff member is getting an allowance but shouldn’t, don’t just increase the employees’ basic salary by the value of the previous travel allowance. Record the allowances as fully taxable, but you must get the employee’s consent to voluntarily over-tax. This way, you’ll reduce the risk of SARS assessing your company, when it audits your employees.
Remember to also make changes to the employee’s contract of employment, if needs be.
Watch out! Your employees are also at risk. If SARS discovers that an employee received a travel allowance but didn’t travel for business purposes, it could add back the travel expenditure deduction that he claims in his annual tax return (ITR12).
We’ve told you what not to do, now let’s look at the correct way to structure a travel allowance so you avoid penalties.
How to tax the travel allowance so SARS doesn’t see it as a red flag.
a) Tax your employee’s travel allowance in full after obtaining his consent. This will mitigate the tax risk for you because SARS can’t accuse you of under-deducting tax from the employee.
b) Also, make sure where possible the employee only claims a travel expenditure deduction in his annual tax return (ITR12) if he actually travelled for business and kept a logbook to prove it. Then it can’t be said that he claimed a deduction he wasn’t entitled to.
c) Offer your staff either a fixed travel allowance or a reimbursement
You can give the employee a fixed travel allowance. Or reimburse him for his expenses. Whichever option you choose, make sure you record it and tax it correctly.
A fixed travel allowance is when you give the employee a fixed amount each month, as part of his remuneration package. It’s ideal for employees who travel for business on a daily or weekly basis (e.g. a medical rep).
Remember, 80% of the allowance is subject to employees’ tax (PAYE).
Reduce this to 20% if your employee can prove that he uses the car at least 80% for business purposes.
d) The SARS reimbursement rates are as follows. The employee is:
- Reimbursed at no more than R3.16/km and travels less than 8 000 kilometres per annum. Declare it under IRP 5 code 3703. It’s not taxed.
- Reimbursed at no more than R3.16/km and travels more than 8 000 kilometres per annum. Declare it under IRP5 code 3702. It’s taxable, but isn’t subject to employees’ tax.
- Reimbursed at more than R3.16/km. It must be declared under IRP5 code 3702 and is taxable, even though it isn’t subject to employees’ tax.
But beware, SARS can hold you liable if the deduction is incorrectly reduced to 20%.
e) Reimbursement of travel is when the employee covers the costs, but then reclaims the expense from the company. This is better for employees who only occasionally travel for business reasons.
Your employee won’t be taxed on this reimbursement as long as it’s in line with SARS’ fixed rates (see above) and as long as the employee isn’t getting a fixed travel allowance too.
f) Never use these two source codes together!
On your employees’ IRP5s, make sure you never use codes 3702 and 3701 if you’ve also given the employee a code 3703 too! If you do, you could trigger a SARS audit of the employee!
And finally, remember : No logbook, no claim!