Employers have been using car allowances to pay you more each month but contribute less towards your retirement benefits. In so doing, you are being done in and the taxman is being made to wait for his due. The Receiver of Revenue has cottoned on and is coming down on employers - and employees are suffering the consequences.
If you receive a car allowance, you may have noticed a change in the way that your employer is paying it to you. If this hasn't yet happened, your employer may ask you to substantiate your business travel at the beginning of this year. This is so that your employer can base your travel allowance on the amount of money that you can prove you spend on business travel. If you can't demonstrate how much of your allowance you spend on work-related business travel, your car allowance could be reduced to bring it into line with what you do spend or it could be taken away from you.
Can your employer do this, particularly if you're entitled to a car allowance in terms of your employment contract? And why is this happening?
Your employer can do this, provided the total remuneration in your cost-to-company package does not reduce. Generally, if the allowance is paid over and above the package, your employment contract will say something to the effect that "you are required to use your own vehicle for business purposes and will be given a travel allowance to cover these costs".
However, if you do not use your car for business purposes, your employer would not need to pay such an allowance. Any amount allocated as an allowance, which would otherwise have been included in your remuneration, would then need to be paid as salary.
The reason this is happening is simple: Your employer has little choice but to comply with the South African Revenue Service (SARS) or face the music.
But why now?
First, let's look at the travel allowance provisions of the Income Tax Act.
In terms of these provisions, you must include in your taxable income any portion of a travel allowance paid to you by your employer that has not been spent on business travel. There are rules regarding how you can determine the amount of your travel costs that relate to business travel.
Before you calculate that amount, your employer must first deduct employees' tax on 50 percent of the allowance that has been paid to you. Any excess tax paid by you will be refunded to you on assessment of your tax return.
Business travel only
The rules relating to a travel allowance only apply when you are required to use your own motor vehicle for the purposes of your employer's business. If you are not required to do this, and your employer has given you a travel allowance, he or she is exposed to the risk that SARS will treat the amount of your travel allowance as salary. In which case, SARS will tax your employer on the balance of the travel allowance that has not so far been subjected to employees' tax.
SARS will also impose a 10 percent late payment penalty and interest. Furthermore, the additional employees' tax that your employer pays may also be treated as a penalty and will not be deductible by him or her for income tax purposes! If SARS suspects fraud, it may also impose additional penalties of up to twice the tax.
Another aspect that is frightening employers is the fact that, if your employing company is not able to pay the employees' tax itself for any reason, the directors or shareholders can be held personally liable for the tax - quite a good incentive to ensure that your employees' tax is treated correctly.
But, you might say, I do have to do some business travel. I have to nip to the post office and the bank for my employer.
The question that then arises from the Receiver of Revenue is: If your total business travel for the year amounts to two trips a week - to the post office and the bank, which are each three kilometres away (or 624 km a year) - how come your travel allowance amounts to, say, R20 000 a year?
The answer would ordinarily be: My employer had the choice of giving me a company car or a travel allowance. For reasons specific to the employer, he or she chose to ask me to buy my own car, and a fixed monthly travel allowance would be paid to me to cover the costs which, with the instalment sale, insurance, petrol and maintenance, amount to about R20 000 a year. I was aware that 50 percent would be subjected to employees' tax and I would have to pay additional tax if I could not substantiate my business travel in my annual tax return.
In my view, this would be a perfectly reasonable argument. However, in 2003, SARS took a different view and, in Interpretation Note 14, indicated that the amount of travel allowance your employer provides to you, which exceeds a reasonable estimate of your business travel costs, will be treated as remuneration.
The reason for SARS's interpretation might have been because it suspects that, in some instances, the travel allowance given to the employee bears little or no resemblance to the cost of the car the employee has purchased, and appears to be simply a method of deferring the payment of tax on remuneration.
SARS's interpretation note, however, seems to go beyond countering this and appears to be dictating to employers what amount of travel allowance may be given to an employee, purely in order to ensure that the tax is paid correctly.
If SARS wanted to ensure that employees' tax was not manipulated through the travel allowance, it could have legislated that the full travel allowance was subject to tax, leaving the employer the freedom to pay whatever travel allowance he or she wishes, without detriment to the fisc, thereby giving you, the employee, the freedom to claim your business travel against this allowance, and to receive a refund on assessment, if applicable.
However, this was not what SARS did, so if your employer gets the allowance amount wrong, any under-deduction of employees' tax will be recovered from the employer, plus interest and penalties. In this instance, your employer may try to recover the employees' tax from you. If he or she does, you will have paid twice: tax on the amount of the travel allowance you could not substantiate as being for business purposes when you submitted your tax return and were assessed; and also the amount recovered by your employer as employees' tax.
You will then be faced with the prospect of having to ask SARS for a refund of the tax you paid on assessment. You may wait a long time.
If your employer can't recover the tax from you and your colleagues, and can't pay the tax, again the directors and shareholders involved in managing the business can be made personally liable. (They may also be subjected to criminal charges.)
Employer's dilemma
Although few tax advisers agree with the principles SARS set down in the interpretation note, SARS is now auditing employers and enforcing its interpretation.
So your employer is faced with a dilemma, does he or she continue on the old basis, with all the repercussions this could have? Or does your employer ask you to substantiate your business travel at the beginning of each year, and base your travel allowance on the amount you can prove will relate to business travel?
You can't really blame your employer for adhering to the rules set down by SARS. After all, who really wants to go through all the hassle, cost and embarrassment of not doing so?
- Deborah Tickle is the director of international corporate tax for KPMG.
This article was first published in Personal Finance magazine, 1st Quarter 2006. See what's in our latest issue