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Employee travel allowances: How to award, tax and record them correctly

by , 28 August 2013
Travel expense claims and deductions are one of the most common triggers for a SARS audit. If your business doesn't award, tax and record employee travel allowances correctly, SARS will pick up the errors. You'll be audited and forced to pay penalties for non-compliance. That's a risk you can't afford to take. Read on to find out when to give your employee a travel allowance and how to tax it correctly so you can comply.

It's crucial you get the tax treatment of your employees' travel allowances right.

Get this wrong and you'll be slapped with a 10% penalty for under-deducting PAYE. In addition, SARS could find you guilty of tax evasion and that carries a 200% penalty!

Does your employee receive a travel allowance? Follow this procedure to tax and record it correctly

According to the Practical Tax Loose Leaf Service, a travel allowance is an allowance you give to your employee to cover his business travel costs when he, for instance, uses his own car driving to and from client meetings.

You would give your employee this fixed amount every month regardless of how many business kilometres he travels. A travel allowance is ideal for employees who travel for business on a daily or weekly basis.

How much should you pay the employee?

There's no set figure you must use. SARS leaves it up to you to estimate the number of business kilometres your employee is likely to travel and then award him an allowance that's in line with this.

Just make sure your estimate doesn't get you into trouble.

If your allowance is too small when your employee submits his ITR12 tax return, his business expense claims might be bigger than the allowance he gets. This rings alarm bells for SARS.

If, on the other hand, the allowance you give him is too big, SARS will think you're giving your employee an extra perk. And it could disallow the allowance altogether.

How will you tax this allowance?

You'll deduct PAYE from 80% of the value of the allowance UNLESS your employee can prove 80% or more of his travel is business travel (and not private travel). In this case, you only need to deduct PAYE from 20% of the allowance, says the Practical Tax Loose Leaf Service.

Which IRP5 source code must you use to record your employee's travel allowance?

You must record the full value of the allowance against code 3701 on your employee's IRP5.

Follow this procedure to award, tax and record employee travel allowances correctly to comply with SARS.

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