[FAQ] What is the correct tax treatment of employee travel allowances?

[FAQ] What is the correct tax treatment of employee travel allowances?

• 28 August 2023
• Case study: Travel allowances
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 29 February 2024.

Question:

In the 2021 tax year, my client received a non-taxable reimbursed travel allowance under code 3703, resulting in a nice refund. However, for the 2022 tax year, the payroll person changed the code to 3702, making it a taxable allowance, which has impacted the client negatively. Can a company change these codes without informing the recipient, giving them a chance to adjust and avoid owing money to SARS? Furthermore, the allowance for 2022 was unusually high at R 459,000.00 over six months, with a monthly amount of 3 times my client's basic salary of R 3601. I am concerned about my client's situation as they were not made aware of the code change and are now facing a significant amount owed to SARS. Is there any recourse available in this situation?

Answer:

In the tax context, two specific codes are used to determine the nature of reimbursed travel allowances: code 3703 signifies a non-taxable reimbursed travel allowance, while code 3702 denotes a taxable reimbursed travel allowance. Allow me to elaborate on their distinctions:

1. Code 3703 - Reimbursable Travel Allowance (Non-taxable):

This code is applicable when the allowance or advance is calculated based on the actual distance travelled for business purposes, excluding personal use. This code is used when the actual business kilometres travelled remain below 12,000 kilometres and the prescribed rate per kilometre is R4.64. It is important to note that no other forms of compensation are provided to the employee in this context.

2. Code 3702 - Reimbursable Travel Allowance (Taxable):

Code 3702 comes into play when the employer's reimbursement rate surpasses the prescribed rate of R4.64, the business kilometres travelled exceed 12,000 kilometres, or the employee receives additional compensation for travel. This code is relevant only for the portion of the reimbursement that exceeds the amount calculated by multiplying the prescribed rate by the actual business kilometres travelled.

The company will select the appropriate code based on the conditions mentioned above for the reimbursed travel allowance. In your mentioned case, the value of R459,000.00 triggers an evaluation of the business kilometres travelled.

For the year 2021, where the prescribed rate was R3.82, it can be deduced that approximately 120,157 kilometres were travelled during that tax year. Considering the application of code 3703, the maximum kilometres must remain at 12,000, and the reimbursement must not exceed R45,840.00.

In 2022, code 3702 was used as the criteria for code 3703 were apparently no longer met. The value of R459,000.00 suggests either an exceptionally high distance travelled or an elevated rate per kilometre.

Payroll utilizes the following codes:

• Code 3702 = R amount (R4.64 x total business kilometres travelled) (not subject to employees’ tax)
• Code 3722 = R amount (Excess over prescribed rate x 1000 km) (subject to employees’ tax)

Please note that this explanation reflects the applicable codes and calculations for reimbursed travel allowances. If you require further assistance or clarification, feel free to ask.

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