When it comes to your employee's travel allowances, you have to be careful about working out the tax. The reason for this is SARS watches these very carefully as employers often use them to give employees extra tax-free income.
There are two types of travel allowance, a reimbursive and an advanced one. For this article, we're looking at how to tax an advanced one so you don't run into trouble with SARS.
Keep reading to find out exactly how to do this correctly...
Here's how to correctly tax your employee's advanced travel allowance
If you grant your employee an allowance he can't hope to cover on his tax return, he'll end up paying a very large amount of tax on assessment because his travel deduction won't cover the portion of the allowance that wasn't subject to PAYE during the year.
That's why you must use SARS' formula and apply it to the estimated business kilometres your employee will travel. Ensure the amount of the allowance is reasonable.
These are the various rates in the formula:
Not sure how to use this to workout your employee's allowance? These three steps will make it easier…
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Use these three steps to easily workout your employee's travel allowance tax
1. Start with the car's original purchase price, including Vat but excluding finance charges and interest. You can now see what the corresponding fixed cost of the car is. Divide this by the total km travelled during the tax year to get a rand value per km.
2. If your employee pays for fuel, add the corresponding cost to the amount you calculated in point 1.
3. If your employee pays for maintenance, add that to the amount you calculated in point 1 as well. The formula for this method is: Actual business km multiplied by (prescribed rate per km/100). The prescribed rate is the fixed cost in the table above.
Let's look at the example of Tim Jones to help explain this further.
Tim Jones earns a gross salary of R700 000 per year. Structured into this is a travel allowance of R80 000 for the 2014 tax year. His car originally cost him R200 000. He travelled 21 000 km during the year. Of this, 16 000 were business kilometres based on his accurate logbook. Tim hasn't kept any records of actual costs – only of his business km. Using the three steps above and SARS prescribed rates, he calculates how much he spent on his business kilometers for the year:
Fixed cost = (R66 440/21 000) x 100 = 316.38 cents
Fuel cost = 89.6 cents
Maintenance = R36.9 cents
TOTAL = 442.88 cents/km (or R4.4288).
Since he travelled 16 000 km for business, the total amount he can deduct for business travel for the 2014 tax year is 442.88 x 16 000 km / 100 = R70 860.
By using these three steps with the correct rates you can accurately workout the tax on your employees travel allowance.