This article is relevant for you if you are an employee (including a company director) and have to travel for work overnight. A fairly simple and commonplace activity you would think. However, the tax implications attached to this can trap the unwary.
What happened?
The ATO is focusing on tax deductions claimed by employees (this includes company directors but not labour hire workers) for work-related travel expenses (ie accommodation, meal and incidental expenses) incurred while travelling away from home overnight for work. Subject to the exceptions below, employees receiving travel allowances should declare those allowances as assessable income in their income tax returns.
A travel allowance is broadly a payment for work related travel expenses that may either be claimable (e.g. travel between work sites) or not claimable (e.g. normal travel between home and work) in respect of a specific journey.
Since it can sometimes be tricky to know how, when and if an employee may deduct such work related travel expenses – as well as when to include allowances in assessable income - what follows are some tax tips to keep in mind when dealing with travel allowances.
What does this mean for you?
Do the substantiation rules apply?
Generally, an employee can only claim a tax deduction for such expenses it he/she maintained detailed written records of such expenses (i.e. substantiated the expenses). However, such written records do not need to be attached to the income tax return – but must be available to the ATO upon request (e.g. if there is a review/audit of the employee’s tax affairs).
Substantiation of expenses is not required if:
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the employee receives a travel allowance and the claim for a deduction does not exceed this travel allowance; or
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the amount incurred on travel expenses is less than what the ATO considers reasonable - for 2016- 2017 the reasonable amounts for accommodation at daily rates, meals (e.g. breakfast, lunch and dinner) and expenses incidental to travel are set out in TD 2016/13.
Practically, this means that if the amount claimed is less than the ATO’s reasonable amount, substantiation is not required – however, if the amount claimed is more than the reasonable amount, the whole claim must be substantiated (not just the excess). Note that the expense must nevertheless be actually incurred by the employee.
PAYG withholding (employer) and payment summary (employee)
The pay as you go (PAYG) withholding system requires employers to withhold tax from payments made to employees. If the employer fails to withhold tax, the employer may be subject to penalties and the employee may receive a tax bill upon lodgement of their annual tax return.
However, travel allowances paid up to the ATO’s reasonable allowances amount will not be subject to PAYG withholding (for the employer) and will not have to be shown on a payment summary (for the employee). In such a case, the employee does not need to include the amount of the allowance in his/ her assessable income and may not claim a deduction for the expense in his/her tax return.
Conversely, if the amount of travel allowances exceeds the ATO’s reasonable travel amount, the excess above the reasonable allowances amount will be subject to PAYG withholding (for the employer) – however, the whole amount (ie. not just the excess over the ATO’s reasonable amount) must be shown on a payment summary (for the employee).
When the allowance is included on the payment summary but a smaller amount is incurred (ie. because employee may only claim a deduction for the actual expenses), the employee will pay tax on the difference.
Some tips to assist with claims for work related travel expenses
When claiming work related travel expenses, the following is critical:
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expenses claimed must have been incurred (eg the deduction is limited to the amount actually incurred – in low-cost housing where meals are cooked at home, the deduction will be limited to the actual expense incurred – and not the reasonable rate for accommodation or meals);
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expenses claimed must be an allowable deduction (eg the expense must have been incurred in the production of assessable income);
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the exception from substantiation only applies if the employee receives an allowance for a work- related travel expense – ie there is no exception from substantiation if a deduction is claimed for an expense for which there is no reasonable allowance;
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the employee must sleep away from home to be eligible for a travel allowance that is exempt from the substantiation and assessability rules;
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employees can only claim the ATO’s reasonable rate for accommodation in respect of commercial accommodation (ie not if the employee stays with friends/family).
How can Nexia help you?
To ensure you do not fall foul of the rules, we can assist you to claim the correct amount of tax deduction, whether it falls within the ATO’s reasonable rates or exceeds the rates. Furthermore, we can also help you to determine when you need to substantiate (i.e. keep detailed records of such expenditure) as well as how your entitlement to travel allowances may affect your tax position.
Please contact your Nexia Advisor if you are an employee (including a company director) that undertakes frequent travel for work purposes would like to know more about how you can legitimately maximise your claim for work related travel expenses.
Our team of tax specialists at Nexia Australia can assist you in undertaking such an analysis so that you can obtain the best outcome possible.
