This article will outline the difference between a travel allowance and the right of use of a motor vehicle. There will also be a brief explanation of the travel expense deduction for income tax purposes.
The first distinction to be made between a travel allowance and the right of use of a motor vehicle is that the one is an allowance and the other is a fringe benefit. An allowance is an amount of money granted by the employer, to an employee, where the employer is certain that the employee will incur business-related expenditure on behalf of the employer, but where the employee is not obliged to prove, or account to the employer for the expenditure.
A fringe benefit refers to payments made to employees in a form other than cash. A taxable benefit is deemed to have been granted by the employer to the employee if such benefit is granted as a reward for services rendered or to be rendered.
Both the allowance and the fringe benefit are subject to pay-as-you-earn (PAYE).
A travel allowance is any advance granted or an allowance paid to the employee, by the employer, for the use of his or her private motor vehicle for the employer’s business purposes.
Previously an employee’s tax was based on 80% of the travel allowance and a provision was made where an employee’s tax may have been based on 20% of the allowance if the employer was satisfied that 80% of the time the motor vehicle was used for business purposes by the taxpayer.
As from 1 March 2018, this 80% rule does not apply anymore, and the travel allowance is based on the actual distance travelled.
Right of use of motor vehicle:
The right of use of a motor vehicle is classified as a fringe benefit. A fringe benefit is when an employee is granted the right of use of any motor vehicle that belongs to the employer for private or domestic purposes. This benefit shall be a deemed taxable benefit for the employee and although the benefit is usually not paid in cash it is still included in a taxpayer’s gross income.
The value of the benefit is calculated according to paragraph 7(4) of the Seventh Schedule and can be divided into three parts:
- Employer-owned or leased vehicle with no maintenance plan;
- Employer-owned or leased vehicle with a maintenance plan; and
- Vehicles held by the employer under an “operating lease” with a non-connected lessor.
In the instances of point 1 and 2, the amount of the fringe benefit is 3.5% (no maintenance plan) or 3.25% (maintenance plan) of the determined value of the motor vehicle for each month that the employee is entitled to use the vehicle for private purposes.
In the case of point 3, the fringe benefit is the actual cost incurred by the employer, under the operating lease plus the cost of fuel in respect of the vehicle.
Travel expense deduction for income tax purposes:
A travel expense deduction is granted on a travel allowance for business travel expenditure and can be determined in one of the following two ways:
- Using actual figures, the taxpayer can provide actual business expenditure figures which are acceptable to the Commissioner and to do so, the taxpayer would have to keep a detailed record of all business expenditure; or
- Using actual business kilometres travelled and a deemed cost per kilometre.
In each of the above cases a logbook needs to be kept by the taxpayer for all business travel kilometres and expenditure.
Right of use of motor vehicle
The value of the fringe benefit must be reduced on assessment where accurate records have been kept in respect to distances travelled for business purposes by ratio that the business mileage bears to the total distance travelled during the year of assessment.
The value can further be reduced by costs such as license fees, insurance or maintenance, which the employee paid during the year of assessment. These costs are limited to the ratio that represents the business kilometres.
To conclude, when you drive with your own car, for business purposes, a travel allowance will be applicable and when you have a company-owned vehicle which you use for business and private use, the private use will be seen as a right of use of motor vehicle fringe benefit.
Although both the travel allowance and right of use of motor vehicle may seem like the same thing, it is important to distinguish what the differences are and how it should be treated differently for tax purposes.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)