The introduction of a simplified method to calculate the taxable portion of travel reimbursements is a step in the right direction, but it brings with it some challenges for employers, experts say.

Employers typically compensate their employees for business travel in three ways – by providing a motor vehicle for use by the employee, a structured travel allowance and/or a variable travel reimbursement.

With regard to the travel allowance, employers are required to estimate a value – usually a fixed monthly amount – to compensate the employee for using a privately-owned vehicle for business purposes, Rob Cooper, tax expert and director of legislation at Sage, explains. The estimated value of the travel allowance must be in line with the actual value of the business portion of the travel, but in practice calculating such an amount is quite difficult.

“Travel allowances are certainly the most misunderstood and probably non-compliant aspect of payroll remuneration,” he says.

Due to concern about abuse and non-compliance, the travel allowance is not regarded as a “reimbursement” for tax purposes, as a reimbursement is generally not taxable. Where an employer is satisfied that at least 80% of the travel claimed is for business purposes, only 20% of the amount will be included in the employee’s remuneration. If the employer believes that less than 20% is for business travel, 80% of the amount must be included in remuneration. The remuneration amount would then be subjected to employee’s tax (PAYE).

“That is a very clumsy arrangement. It is open to speculation, manipulation and misunderstanding,” Cooper says.

The beauty of the travel reimbursement is that there is no estimation necessary, Cooper says. The employer can merely compensate the employee at a predetermined rate for every kilometre travelled for business purposes, after the submission of supporting documents.

From March 1, any travel reimbursement in excess of the prescribed rate – currently R3.55 per kilometre – will be included in the employee’s remuneration on a monthly basis and subject to PAYE and the other employment-related taxes regardless of the number of kilometres travelled.

In other words, if an employee travelled 200 kilometres for business purposes and received R5.55 per kilometre, R2 (R5.55 minus R3.55) will be regarded as an “excess portion” and R400 (R2 x 200 kilometres) will be included in the employee’s remuneration. In practice, employee’s tax was generally not withheld where employees were reimbursed for business travel at a rate exceeding the prescribed rate per kilometre prior to March 1 – they were only taxed on assessment at the end of the year (although this was not regarded as best practice).

As a result of the change, employees in this category will likely see their monthly cash flow affected, Jaco la Grange, associate director for tax at Deloitte, says.

Treating a portion of a reimbursement as remuneration has always been a controversial issue, since a reimbursement for actual business expenses is generally not regarded as a taxable expense. Moreover, an employee’s remuneration is not only used for the calculation of employee’s tax, but also for the skills development levy, UIF and potentially pension fund contributions (depending on the company policy). Even though this reduces the employee’s take-home pay, treating reimbursed business expenses partially as interim remuneration to the employee during the year, could be corrected on assessment at the end of the year, but the skills development levy and UIF are calculated on a monthly basis, there is no assessment at the end of the year and the money paid on a semi-fictitious amount of remuneration won’t be changed.

“Including this amount – which is potentially a business expense – into remuneration ripples right through all of the uses of remuneration.”

Cooper says while the new system offers an easier and more logical way of calculating the excess portion that should be included in remuneration, the system will still treat a portion of the reimbursement as remuneration, which is not technically correct. He argues that a travel reimbursement should be treated in the same way as a subsistence allowance, and where the rate per kilometre exceeds a limit which Sars can determine and apply, it must be taxed on assessment as income but not included as remuneration.

There is also concern about some administrative issues that have not been addressed.

Tax certificate codes for the new dispensation have not been finalised. There are also questions about the tax treatment on assessment where the same employee uses several vehicles with various determined values during the year. The determined value affects the rate per kilometre used on assessment.

Shohana Mohan, head of individual and expatriate tax at BDO, says the change will create significant challenges for employers without a proper payroll system, and many employers will have to go back to the drawing board and relook their travel allowance and reimbursement policies. It is therefore critical that payroll systems are aligned and configured sufficiently to accommodate the change in the legislation.

While some employers may want to increase travel allowances to avoid reimbursements, variable monthly taxes and fluctuating net pay, others may peg travel reimbursements at the prescribed rate, she says.