[FAQ] Can a sole proprietor be his employee and have a travel allowance?

[FAQ] Can a sole proprietor be his employee and have a travel allowance?

• 20 January 2023
• Individuals Tax
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 28 February 2022.

Background

A sole proprietor (medical specialists) wants to pay himself a salary and travel allowance and subject it to PAYE, like in the case of a "normal employee." The PAYE credit would be accounted for in calculation of his provisional tax, and at year end and the related IRP5 will prepopulate on his IT12. The salary and travel allowance will then be included with the remainder of the profit from his business in his ITR12. He then wants to claim for travelling expenses against the said allowance (as no actual expenditure relating to his vehicle, which he uses for both private and business will be accounted for in his practice books of account) by applying the SARS deemed travel expense table and his logbook. The reason for this is to save the hassle of retaining supporting documents for his actual travelling expenditure.

Answer

A sole proprietor can be an employer and register for PAYE. As there is no distinction between the induvial and the business, it is not possible for the sole proprietor to be both his employer and employee. Unlike in the case of a legal entity where the company has a legal persona, and the director or shareholder can also be an employee.

Interpretation Note 14 explains:

The allowance is provided by a principle who is defined in the interpretation note.

5.1.1 The terms “principal” and “recipient”

For purposes of section 8(1)(a) the term “principal” includes –

• the employer of the recipient of an allowance; or
• the authority, company, body or other organisation in relation to which any office is held; or
• any “associated institution” as defined in the Seventh Schedule in relation to that employer, authority, company, body, or organisation.

Therefore, the sole proprietor does not meet the definition of a principle and as we argued cannot be an employer of himself. Therefore, he cannot extend a travel allowance to himself as he cannot be a principle.

As sole proprietor does not hold an office, as this arises when a board or committee has been established by law. A sole proprietor is not established by law and therefore cannot be regarded as holding an office.

Any person wishing to claim travel allowance expenses is required to maintain a logbook that records the business km travelled, together with the starting point and finishing point together with details for the trip. If this does not meet SARS minimum requirements the travel allowance expenditure will be disallowed. A sole proprietor does not qualify to a travel allowance but does need a means by which to discharge his obligation to substantiate the business kilometres travelled to claim the motor vehicle expenses. A logbook is not prescribed but is the most acceptable form with which to provide the supporting information to justify the motor vehicle expenses. The commonly used 20% allocation to private use is no longer a provision in the regulations.

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