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Is travel compensation still worth the chase?

Employers should review Sars’s new rule to ensure their workers are enjoying the best tax and cost benefits.

If you had to choose, would it be company car or travel allowance? It’s a question that regularly plagues both employers and employees. In light of new Sars requirements for travel reimbursements, it needs to be carefully revisited.

Important changes

The limit of 12 000km that was previously applied to reimbursements has now been removed. If travel exceeded this distance in the past, it was reimbursed at a per kilometer rate higher than that prescribed by Sars and the total amount needed to be reflected under code 3702. However, reimbursement paid at or below the prescribed rate was declared under code 3703. Either way, PAYE was not deducted from the employee’s income.

From March 1, if an employer reimburses staff at a per kilometer rate higher than that prescribed by Sars, they have to split any reimbursement into two components. The portion that falls within Sars’s rate must be declared using code 3702 while the portion above that rate must be reflected under a new code, 3722. If the employer also pays a fixed travel allowance, this is declared separately with code 3701 as usual. 

Under this new system, the excess reimbursed portion is subject to PAYE just like a fixed travel allowance or fuel, garage and maintenance cards. Reimbursement at or below the prescribed rate is reported using code 3702 as before.

More important than the new code and method of calculation, is the removal of the 12 000km limit and the introduction of PAYE on the excess portion. These changes affect the reward dynamics significantly.

Employers should therefore review the new rule to ensure their workers are enjoying the best tax and cost benefits, especially those who reimburse certain segments of personnel well over the prescribed rate. 

It may be that a lower reimbursement rate puts more money into an employee’s pocket, as there is no PAYE thereon and the reimbursement does also not have to be substantiated by a logbook on filing of the employee personal income tax return.  

Either way, the compliance around the new rules makes it important for all employers to enforce compulsory employee logbooks, even where the employee does not claim on a tax return. We know employer PAYE audits is a Sars focus area and employee logbooks is critical for the employer to evidence tax compliance. 

Is it time to offer a company car?

In seeking travel compensation that is fair and rewarding to a worker, it is a good opportunity to decide if they would benefit from a company car. As a rule of thumb, if more than 60% to 65% of an employee’s travel is for business purposes, they are losing out by using their personal vehicle.

Typically, fuel only makes up 50% of the total cost of running a car. Additional expenses, like maintenance and insurance, or depreciation on the vehicle are not covered by travel allowances, reimbursements or fuel cards. A highly mobile employee may also have to bear the early replacement costs of their private car.

The vehicle buying habits of South African employers and employees remain routed in emotion and decisions are not made based on running the numbers. This causes the employer to be burdened with too high fleet costs, while the employee is mostly significantly out of pocket, often only realising the mistake when they want to trade in their vehicle. 

There remains a sweet spot for travel reimbursement, reimbursement with travel allowance and company vehicles. The employers who care about the cost and staff allows all three, as part of their Total Package approach. Especially for employees on high business travel, the employee is severely disadvantaged where not on a company vehicle. If an employer does the calculation correctly, they will see that a company vehicle is the best reward strategy in this case.

I advise that organisations engage their reward specialist to ensure their employees receive the appropriate package for their needs.

Jerry Botha is the master reward specialist and executive committee member of the South African Reward Association.

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Jerry Botha – thanks, very informative and currently applicable article.

I’ve run the numbers for myself, and based on business travel of 13 000kms which is about 66% of my total travel, I save around R15 0000 more tax using the pure reimbursive option than with a travel allowance. This saving increased significantly as the value of the vehicle drops.

As for a fringe benefit. Don’t forget that you can only claim the wear and tear equal to the cost of the vehicle. With a travel allowance you can claim the fixed cost component even if your vehicle is 10 years old. If like me you keep a car for more than 5 years, its a huge cost saving.

Thanks Carmen, for your comment. You’re knowledgeable on this topic 🙂

Unless I got the wrong end of the stick, the removal of the 12,000km p.a restriction is surely BETTER going forward (hence cannot understand the writer, Jerry’s concerns). Surely, now you ONLY pay tax on a “reimbursive travel” allowance IF the rate of reimbursement from the employer EXCEEDS R3,61/km (previously it would’ve been in excess of R3,55/km AND when over 12,000km p.a business).

To generalize, the way I see it, a (fixed) monthly Travel Allowance (for employees like reps or technical people visiting customer sites, etc.) is a better option if you do a sizable portion of your overall kms as ‘business’. And one especially benefits (as you correctly state) using an older vehicle, as per the “deemed cost” method is based on the (historic) purchase price of the car…even when it has depreciated to almost nothing, and the bank is settled. You are allowed to claim the same “deemed cost rate/km” based on the new purchase cost-band.

Travel Allowance earners get essentially refunded (logbook must be kept) on their pro-rata business kms for the benefit of the employer and its clients…using their private vehicle (where it would otherwise be parked in the basement & not depreciate as much).

Versus a “Company Car” which would benefit the (mostly) desk-bound executive employee, who does mostly private travel (i.e. between home to office & other personal). As you know, here the monthly taxable Fringe Benefit is based on the value of vehicle to the employer…as such a person pays essentially tax on the PRIVATE use of a comp car.

Indeed, giving everything being equal on CTC, the Travel Allowance earner will typically have a higher gross cash salary (and take-home pay), but will have higher personal expenses on his/her vehicle. YES…plus there’s a handy annual SARS refund when the business-kms are high / and or car cost is high.

But for the Comp Car person, your cash salary is less, but then again, everything is paid for on your car (installment / insurance / fuel / maint)….plus the main advantage: the COMPANY takes the knock in depreciation when car is traded in for another. (One sometimes see that the CEO or Director’s company car is “passed down” to someone in middle management, as the Comp Car gets recalculated based on a much lower taxable fringe-benefit value, in the new employee’s hands)

Have done the odd comparison for some clients…really a much of a muchness. Yes, purely from a SARS-REFUND perspective, the Travel Allowance earner will win hands down…but bear in mind, it’s to compensate one for the employers’ betterment of their clients you visited, while your desk-bound co-worker’s similar car remains in comparatively pristine condition in the basement for most of day…while the travel allowance person’s car will rack up mileage (= adding to depreciation) & expenses from your own pocket.

The Company Car earner can also claim tax-refund (by way of logbook) especially if a sizable portion of kms are for business/customer trips.)

Much boils down to a personal preference: some like the convenience of the Company Car (…some would say, a Company Car is the best type off-road vehicle that you can find *lol* or racing car) and not having the slog of keeping daily Logbook, as opposed to the Allowance-earner that is required to perform lots of business-trips, and don’t mind driving an older high-miler, look well after it, having it serviced cheaper from non-franchised workshop, and getting annual tax refund seemingly out of proportion what the car is worth in the end.

The “smart” Travel Allowance earner, will use a fairly cheap-to-maintain frugal car to his/her benefit: Example: say a Used vehicle of around R200,000 is owned (say a frugal Suzuki 1,2L Swift or a small TDi car of same value), will get you on the “deemed cost” method per the SARS price band THE SAME tax refund say if you drive a similar cost used (R200K but older) Toyota Landcruiser V8 or Fortuner V6 or a BMW M3 😉

Indeed, not an easy comparison 😉

A third (rather impractical) option, where there is NO tax implication, is to take the company’s “pool car” on business trips (if this rare option exists). Such vehicle is not allocated to any specific employee, and the car is supposed to overnight at the workplace….cannot be taken home, like a comp car.

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