Company car vs travel allowance – here’s what wins out with South Africa’s new tax changes

The question of whether or not you should use a company car or get a travel allowance is one that has continued to plague both employers and employees in South Africa.

However, new requirements published by SARS means its important for all local businesses to revisit the issue, according to Jerry Botha of the South African Reward Association (SARA).

Under the previous system a 12,000 km limit was applied to reimbursements.

If travel that exceeded this distance was reimbursed at a per kilometer rate higher than that prescribed by SARS,kor other travel allowance was paid, the total amount needed to be reflected under code 3702. However, reimbursement paid at or below the prescribed rate was declared under code 3703.

In both cases PAYE was not deducted from the employee’s income.

New system

From 1 March 2018, 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’ 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 12,000 km limit and the introduction of PAYE on the excess portion. These changes affect the reward dynamics significantly,” said Botha.

He noted that 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,” said Botha.

“We know employer PAYE audits is a SARS focus area and employee logbooks is critical for the employer to evidence tax compliance.”

Company car

Under the new changes introduced by SARS, a number of employers may now be seriously considering the use of a company car in place of travel allowances.

“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,” said Botha.

“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,” he said.

However, Botha said the best option is a combination of all three, and 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,” he said.

“If an employer does the calculation correctly they will see that a company vehicle is the best reward strategy in this case.

Botha advised organisations to engage their reward specialist to ensure their employees receive the appropriate package for their needs.

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