Employers are able to compensate their employees, for costs incurred in respect of business travel, in a number of ways. One of the generally accepted methods of compensation is to reimburse the employee based on mileage travelled. The value of the reimbursement is calculated as the actual number of business kilometres travelled, by the employee, multiplied by a rate per kilometre as determined by the employer.

Previously, employers had the option of using this reimbursement mechanism and in instances where an employee was required to travel for business purposes at an aggregate mileage of less than 12 000kms during the year of assessment and the rate was at or below the prescribed rate, this amount was not subject to tax. However, the Income Tax Act (“the Act”) has been amended to reflect a number of important changes in this respect.

These amendments are as follows:

  • The 12 000km threshold reference has been removed with effect from 01 March 2018.
  • In addition, the requirement to allocate either 80% or 20% of the travel reimbursement as remuneration has been removed from the Act.
  • Further, the portion of the travel reimbursement that exceeds the amount determined had the employer used the new prescribed rate (i.e. R3.61 with effect from 01 March 2018) must be reflected as remuneration on the employees’ IRP5 tax certificate.

To the extent that amounts reimbursed in excess of the prescribed rate are deemed to be remuneration, such amounts will be subject to Pay-As-You-Earn (“PAYE”), Unemployment Insurance Fund Contributions (“UIF”) and Skills Development Levy (“SDL”) irrespective of the total business kilometres travelled and reimbursed during the tax year. These amounts will also form part of remuneration for purposes of calculating the allowable tax deduction limit in respect of contributions made towards a retirement fund.

Important payroll considerations

It is essential for payroll teams to understand the effect of the amendments as it relates to the correct use of source codes on the employees’ IRP5 tax certificates. In summary, the following IRP5 source codes must be used to report travel reimbursements:

Reimbursive travel allowance (non-taxable) - Code 3703

  • The rate per kilometre used to calculate the travel reimbursement does not exceed the prescribed rate per kilometre.
  • Codes 3701, 3702 and 3722 cannot be used in conjunction with this code.
  • The amount will not be subject to employee’s tax but must be disclosed on the IRP5 certificate.
  • Code 3703 is not deemed to be remuneration and will not be assessed by SARS.

Reimbursive travel allowance (taxable) - Code 3702 and 3722

  • The rate per kilometre used to calculate the travel reimbursement exceeds the prescribed rate per kilometre.

Or

  • Other compensation is paid to the employee for business travel in the form of a travel allowance.
  • The portion of the reimbursement up to and including the use of the prescribed rate must be coded under 3702. This amount is not deemed to be remuneration but is considered to be income in the hands of the employee and will be assessed, as such, for income tax purposes.
  • The portion of the reimbursement exceeding the prescribed rate must be reflected under code 3722. The amount is deemed to be remuneration and is subject to PAYE.

The use of source codes 3702 and 3722 is illustrated in the following example:

Example

If an employee receives an annual travel allowance of R2 500.00 and a travel reimbursement for 500kms, at a rate of R4.00 per kilometre, then the IRP5 source codes should reflect the following:

3701 – R2 500.00

3702 – R1 805.00 (500kms x R3.61)

3722 – R195.00 [(500kms x (R4.00 – R3.61)]

The total travel amount will be assessed based on the sum of source codes 3701, 3702 and 3722. This amount may be reduced by the business expenses actually incurred by the employee, provided that a detailed logbook was maintained throughout the year of assessment and odometer readings have been recorded. To the extent that no logbook was kept, the travel amount will be subject tax, in full.

In light of these changes, the simplest method of compensating employees for business travel is to reimburse them at a rate equal to the prescribed rate per kilometre. This will assist in limiting the administrative burden as well as the PAYE, UIF and SDL exposure for both the employee and the employer, respectively.

Michelle van Coppenhagen

Associate | Outsourced Accounting and Payroll, Johannesburg