Government's two-pronged assault on car allowances and company cars, though widely expected, has caught many businesses unprepared, say fleet management consultants. They warn of a potential "administrative nightmare" unless companies quickly come to terms with the implications of the changes.
The SA Revenue Service (Sars) has been investigating company records for the past two years, and identifying allowance holders who are not entitled to benefits. Travel allowances should only be granted to people whose vehicle is a working tool, but in reality have become a general perk for even the most office-bound employee. Avis Fleet Services MD Laurence Savage estimates that up to 25% of SA executives and employees receiving car allowances are not entitled to them.
In his recent budget, finance minister Trevor Manuel tightened the screw by imposing firmer policing of travel allowances and company cars.
The potential impact, both on the tax liabilities of individuals and the possible fleet policy of companies, is considerable. Some business consultants are advising employers that where car allowances have been a standard - and sometimes nonnegotiable - part of the salary package, the company should look for ways to reimburse employees for financial losses as a result of the changes.
Until now, allowance users' claims of business mileage have, to a large extent, been taken on trust. In principle, the taxable portion of an allowance is calculated by multiplying business kilometres by the cost per kilometre. After this total is deducted from the overall allowance, the remainder is open to tax.
In many countries, allowance users must justify their claims by using a logbook to record the level and cost of business travel. The same system is available in SA but most opt for the "deemed" formula. Sars says this is being abused and that many motorists are claiming private expenses as tax deductions.
Until now, the deemed formula has assumed the first 14 000 km of any travel in a tax year, is private travel. The remainder, up to a maximum further 18 000 km, is considered business travel. Under pay-as-you-earn (PAYE), 50% of the monthly allowance is subject to PAYE and 50% is not. The system assumes that half an employee's vehicle allowance will be spent on business.
There are several problems with this theory, says Sars in a background document explaining the changes announced by Manuel.
"The first is that the deemed distance formula treats people who travel extensively for private purposes as having travelled on business," it says.
Commuting to and from work is considered private travel for tax purposes. However, "an employee who has decided to stay in Johannesburg and work in Pretoria will travel 100 km a day to work and back, which will amount to more than 20 000 km/year. Of this, more than 6 000 km is automatically treated as business travel. Any other private travel undertaken after hours or at weekends will also be considered business travel."
The deemed system has also assumed that vehicles have no residual value after five years. In addition, variable cost elements have not been updated for changes in the costs of fuel and maintenance since 2000.
"The net effect is that the tables overstate the cost of ownership of a vehicle for business travel," says Sars.
Officials are also concerned that no limit has been placed on this "working tool". Surely, says Sars, there comes a point at which expenditure on a vehicle exceeds its business value.
The overall result, it says, "is that motor vehicle allowances are granted to employees not for commercial reasons, but for tax reasons. This leads to a loss of revenue for government, which must be made up elsewhere, and to distortions in household choices. In addition, the simple, yet fraudulent, overstatement of odometer readings for purposes of the deemed distance formula has required increased audit intervention by Sars."
The result of these concerns is a revamped system that is expected to earn the exchequer an extra R1,7bn in the 2005/2006 tax year.
With immediate effect, the deemed private distance for the 2005/2006 tax year will increase from 14 000 km to 16 000 km. That leaves only 16 000 km of possible business travel (without a logbook) before hitting the same 32 000 km ceiling as before. From the 2006/2007 tax year, it will be even tighter: the first 18 000 km will be private, leaving only 14 000 km business.
However, Sars issues a warning to people who may try to juggle figures to their advantage: "Audit interventions will continue and changes in behaviour over this period will be monitored."
Exactly what these changes mean in rands and cents, is explained in our Questions & Answers story.
Costs relating to deemed travel have changed. They reflect a residual value of 30% of the original purchase price once a vehicle is five years old. The cost table has also been updated to reflect real fuel and maintenance costs. Estimated increases range from 55%-75%.
The maximum value of a vehicle for determining business travel costs is capped at R360 000. Sars explains: "An individual with a vehicle costing R1m will use the same costs in the deemed cost table as an individual with a vehicle costing R360 000."
It adds: "The effect on an individual using a vehicle costing between R180 000 and R200 000 and travelling 32 000 km/year, is a reduction of 22,7% which equates to an increase in taxable income of about R12 787/year. This increase will be only on assessment and not on the monthly PAYE deductions. On a R360 000 motor vehicle, the reduction in the tax deduction is R21 483. The effect gets worse as the cost of the vehicle exceeds R360 000, due to the capping."
Government recognises that the changes may encourage some companies to allow employees to switch from allowances to company cars. To pre-empt this in the short term, the deemed monthly value of a company car will be increased from 1,8% to 2,5% for the 2006/2007 tax year. The deemed value of second and subsequent company cars remains 4%.
Avis's Savage says the changes - both deemed values and the crackdown on people not entitled to allowances - have definite implications for company fleet policies, "particularly with management and directors being held more accountable for misuse of tax dispensations". Executives responsible for corporate fleet decisions can no longer afford to ignore the distinction between tool-of-trade and business perk.
Is the average car allowance recipient better or worse off as a result? People who keep a logbook and use their vehicle for routine business purposes will be "relatively unaffected", says Savage. For those who use it mainly for commuting and personal travel, there will certainly be pain in the pocket.
A logbook may be time consuming but for those who genuinely use their vehicle as a working tool, it is necessary and cost effective. If users want to exceed this year's deemed 16 000 km business travel, they must record details of every business journey, including date, distance, time and reason. Savage suggests: "It is probably advisable to make a note of private mileage between these trips, though details probably need not be reported."
John Bell, head of vehicle management systems company FleetPro Services, warns that the changes "will hit the bottom line of companies and bring about an administrative nightmare". He says employees who face losing a bigger chunk of their allowances to taxation may ask their employers for assistance, including the option of switching to a company car.
"The past decade has favoured allowances but already this trend is showing signs of changing. Unfortunately, companies have lost in-house fleet and company car management skills, in most instances transferring allowance administration to the human resources department," says Bell. "Moving back to company vehicles will be an extremely costly exercise, including placing depreciating assets back on a balance sheet."
Bell says some companies are looking for solutions, and are approaching fleet specialists for advice. "But many are not preparing for this eventuality and considering the cost of running company cars efficiently - they are one of a company's biggest budgetary items - urgent attention should be directed towards solutions."
