Claiming Car Expenses Based on Actual Costs

Know what you can claim, and the documents you need to substantiate it.

When an individual taxpayer wishes to submit a tax claim for business travel, the tax return form provides the option of basing their claim on ‘deemed costs’ or ‘actual costs’.  Since eFiling has largely automated the process of claiming based on deemed costs, this article deals with claims based on actual costs.

However, it is important to note the following:

• Recipients of travel allowances may use either option, depending on their circumstances, and once they have calculated their claim according to both methods, may even choose the option that provides the best tax advantage. The deemed cost basis tends to be more favourable in the majority of cases.
• However, commission-earners and taxpayers who trade under their own name (i.e. not via a corporate entity such as a company, close corporation, or trust) may not use the deemed option, and are therefore required to calculate their claim based on actual costs.

This article provides information on the type of costs that may be claimed, as well as the supporting documents required to support a taxpayer’s calculations, should these be called for by SARS.

Wear and tear

As any motorist knows to their utter shock and disgust, a new vehicle loses about 20% of its value virtually the moment you drive it out of the showroom, and steadily declines in value over its useful life. For this reason, you are entitled to claim the cost of such de-valuation as a travel expense—this is referred to as ‘wear-and-tear’.

In terms of Section 8(1)(b)(iiiA) of the Income Tax Act, the wear and tear claimed against a travel allowance must be claimed over 7 years, and is furthermore limited to a vehicle value with a maximum cap of R800,000 (2023/24 tax year).

However, this provision conflicts with SARS Binding General Ruling (BGR) 7 (Issue 4) issued on 9 January 2021, which provides for a write-off period of five years and does not stipulate a monetary cap in the value of the vehicle.

It is therefore submitted that if you receive a travel allowance, the seven-year period / R800,000 cap applies, whereas if you are a commission-earner or sole trader claiming wear-and-tear under Section 11(e), the five-year period / no cap provisions apply.

SARS is likely to call for proof of the purchase price should they decide to conduct an audit, especially if the vehicle is of high value. If the vehicle is financed through a bank, your finance agreement will serve as proof of the original cost.

The cost of any accessories fitted to the vehicle may also be taken into account in the wear and tear calculation, and it is a good idea to keep any invoices relating to the cost of such accessories.

However, if the cost of the accessories was financed by your bank, don’t try and take a chance by adding the cost of accessories to the amount financed if the former already includes such cost. SARS is onto this one, and usually calls for a copy of the finance agreement to verify the total cost of the vehicle.

If you are not the owner of the vehicle, you may not claim wear and tear on the vehicle, since it is not you who are incurring the loss in value. The same will apply if the vehicle is leased—however, in this case, you are entitled to claim the full lease instalment as a deduction (see below).

In both cases, you will be entitled to claim the running costs relating to the vehicle, provided that you have incurred these.

Instalment sale vs. lease agreements

There is much confusion between the two, particularly now that private individuals not in receipt of a travel allowance may now lease vehicles, but essentially the difference between the two, from a tax perspective, is as follows:

• Lease: The bank purchases the vehicle on your behalf, and ‘rents’ it to you. It therefore remains the owner of the vehicle throughout the lease period. You are entitled to claim the full monthly lease rental as part of your travel expense, as well as any up-front “balloon” payment.

However, bear in mind that should you decide to take ownership of the vehicle at the end of the lease period, a ‘recoupment’ will take place if the amount paid is less than the market value of the vehicle.  This means that you will be taxed on such amount at the end of the lease period.

• Instalment sale: Although the bank has provided financing for the vehicle, you are the owner thereof. You will be entitled to claim the interest portion of your monthly instalment as part of your travel expense.

There is also no ‘recoupment’ that comes into play at the end of the agreement, since there is no transfer of ownership. Such ownership having been vested in you from the beginning.

Fuel, oil, and tolls

In order to justify your claim for the cost of fuel, oil, and toll fees, you should ideally request a receipt every time you fill up or pass through a toll gate. This can, however, be quite tedious, not only in remembering to request such a voucher (as these are normally only issued upon request), but also in ensuring that a year’s worth of vouchers is kept in a safe place—not to mention adding up the totals at the end of the year.

The best option in this case is to make use of a credit or debit card. If you do extensive business travel, it is suggested that you apply for a separate card on a stand-alone account. Since the statements itemise each purchase, and often provide a useful summary of the amount spent on fuel, oil, or tolls, they would be regarded as acceptable evidence for justifying your annual spend to SARS.

However, bear in mind that if your business is registered as a VAT vendor, it is entitled to claim the input VAT on the oil and tolls. If this is the case, you must obtain tax invoices in order to claim such VAT. The amount claimed as a travel expense would therefore also be exclusive of VAT if such input VAT has been claimed.

Maintenance, services, and tyres

Notwithstanding the fact that you can use your debit or credit card to pay for services, you should retain the invoices and keep them in a safe place. SARS uses these invoices not only to verify the cost of the work done (and claimed for), but also as a means of verifying your declared odometer readings, which the garage normally records on the invoice.

Tax aside, keeping such invoices will enable you to prove that the vehicle was properly maintained, which will come in useful not only when it comes to selling the vehicle (since a full-service history normally enhances its value), but also in the event of any warranty claim, where a condition of the warranty is that the vehicle is serviced in accordance with the manufacturer’s instructions.

The cost of replacing tyres can also be claimed, and you should also keep these vouchers in case SARS wants you to verify the cost. Also, depending on how you drive and the amount of travel that you do each year, SARS’ suspicions are likely to be raised if you are replacing tyres more (or less) frequently than your stated total travel may warrant.

Insurance

Insurance is a necessary part of vehicle ownership and usage, particularly if you have obtained financing for your vehicle. The cost of such insurance is therefore deductible as a travel expense.

Other vehicle-related expenditure

Other direct costs relating to your vehicle are also deductible, such as the annual licence. I’ve not seen a claim where one seeks to deduct the cost of renting a garage, but in theory there is no reason why such costs should not be deducted.

Apportionment of costs

Once the total cost of your travel has been determined, you need to apportion them between your business and private travel, since only the business portion will be claimable.

While SARS has made it compulsory to keep a logbook in order to support a claim against a travel allowance, it is also advisable to keep a logbook if you are a commission-earner or sole trader.

It is also critical that you record your odometer reading on the last day of each tax year. This figure also becomes your opening reading for the following tax year.

WRITTEN BY STEVEN JONES

Steven Jones is a registered SARS tax practitioner.

While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein.  Our material is for informational purposes.

Powered by SucceedGroup