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  • Substantiation exception for reasonable travel allowance expenses

    This document is to facilitate discussion. It does not provide advice, nor represent the ATO’s general administrative practice.

    Accommodation, meal and incidental expenses (collectively known as travel expenses) may be deductible to an employee when they are incurred while travelling away from their home overnight for work.

    When claiming a deduction, an employee is must substantiate with written evidence. An exception applies to travel expenses claimed if we consider reasonable the total of the losses or outgoings claimed for the travel covered by the allowance.

    Increasingly, we have noticed a disparity between travel allowances paid and deductions claimed for accommodation, meals, and incidentals. This has increased the incidence of checking of these claims, which has highlighted deficiencies and difficulties for employees in showing the amount claimed was incurred, or was incurred in gaining or producing their assessable income.

    For around 30 years, we have provided guidance on the exception to substantiation for travel allowance expenses. More and more, taxpayers and their representatives, are telling us the ATO’s guidance is confusing and, as a consequence, the outcome of compliance action is considered unjust. Cases continue to proceed to the tribunal or court, further demonstrating the complexity and ambiguity in this area.

    We are exploring ways to improve our guidance and administrative practices in this area. This paper is to facilitate discussion and invite feedback on how best to achieve this.

    Request for feedback and comments

    Interested parties are invited to lodge written submissions on the issues raised in this paper. Other ideas, comments and suggestions in relation to the substantiation exception for reasonable travel allowance expenses are also welcome.

    Submissions will be available on the ATO website unless it is clearly indicated the submission is to remain confidential. A request made under the Freedom of Information Act 1982 for access to a submission marked confidential will be determined in accordance with that Act.

    • Please submit responses electronically to ruth.geary@ato.gov.au
    • Enquiries can be directed to Ruth Geary on 02 6058 7788.
    • Closing date for submissions is close of business Tuesday 22 November 2016.

    Background

    Substantiation rules were introduced as part of the September 1985 Tax Reform announcement and with the introduction of a self-assessment tax system. The new rules in the Income Tax Assessment Act 1936 took effect from 1 July 1985 and applied to expenses incurred from the year commencing 1 July 1986. In line with the new self-assessment system, the documentary evidence required under the substantiation rules was not to be attached to the income tax return; but to be made available to the ATO upon request.

    To reduce the cost of compliance in keeping detailed records, certain exclusions from substantiation were included in the Act. Under the initial exclusion rules, taxpayer’s could claim a deduction for travel expenses they incurred without meeting the substantiation rules provided:

    • their claim for deduction did not exceed the amount of the travel allowance received
    • the travel allowance did not exceed an amount that the Commissioner considered to be reasonable.

    Where the travel allowance received by the taxpayer exceeded the amount we considered reasonable, the whole deduction was subject to the substantiation rules in the Act; which require detailed records of the expenses to be obtained and kept.

    In 1995 an amendment was made to the exclusion from substantiation rules referred to above. The amendment, which continues to have application today, allows a taxpayer to claim a deduction for travel expenses they incur without meeting the substantiation rules, provided the claim for deduction does not exceed the amount we consider reasonable.

    Since the law change in 1995, there have been a number of developments:

    • Long distance truck drivers who are owner-drivers have been excluded from the annual taxation determination.
    • Sleeper cabs have become commonplace for trucks used on long distance trips.
    • Fly-in fly-out and drive-in drive-out work has become a feature of many construction projects.
    • Goods and Services Tax has been introduced.
    • Industrial awards have been modernised so that an award travel allowance rate is not a feature of many awards. Most awards with travel rates had the rates set many years ago and have been adjusted annually in line with the consumer price index. The travel allowances paid in the absence of an award rate are usually based on the amount we consider reasonable each year.

    The substantiation rules for work expenses and the exception for domestic travel allowance expenses is now contained in subdivision 900-B of the Income Tax Assessment Act 1997.

    Taxation Ruling TR 2004/6 Income tax: substantiation exception for reasonable travel and overtime meal allowance expenses explains the way in which the substantiation exceptions operate for work expenses of employees that are either reasonable travel allowance expenses or reasonable overtime meal allowance expenses.

    The amounts we consider reasonable for the purpose of the substantiation exceptions have usually been provided in an annual taxation determination issued each year. The most recent is Taxation Determination TD 2016/13 Income tax: what are the reasonable travel and overtime meal allowance expense amounts for the 2016-17 income year?

    Purpose

    In light of the developments and present-day experience regarding claiming deductions for travel expenses, we are considering how to improve our approach and guidance in this area. Our strategic intent states we want to ‘Simplify interactions, maximise automation and reduce costs’. Any changes will be developed with this intent in mind.

    This discussion paper provides a basis for consultation and invites feedback and comments on the substantiation exception for reasonable travel allowance expenses. Specific issues have been canvassed in this discussion paper. Other ideas and opinions are welcome.

    By improving our approach and the ATO guidance in this area it is expected:

    • employees will be better placed to correctly claim the amount they are properly entitled to claim as a deduction each year
    • this will lead to a reduced need for the ATO checking these claims
    • in turn there will be less confusion and disputes in this area.

    Identified issues

    Application and scope of the substantiation exception

    The exception from substantiation for reasonable travel allowance expenses only applies where a taxpayer receives a travel allowance for the work related travel to which the claim for deduction relates. This does not seem to be widely understood.

    The exception from substantiation for reasonable travel allowance expenses does not extinguish the requirement for employees to demonstrate that the amount claimed was incurred, or was incurred in gaining or producing their assessable income. This does not seem to be widely understood.

    A practice has developed where the annual rate set by the ATO (for accommodation, meals and incidentals) is claimed as a deduction without regard to the actual expenditure incurred.

    We have identified this practice is prevalent for employees in industries that are paid an allowance that is significantly below our rate (either because of an award or otherwise negotiated). In these cases, we have found the amount actually expended is usually around the amount of the allowance actually paid.

    From the 2000/01 income tax year, we approved a PAYG withholding variation so certain travel allowances and claims for deductions for travel expenses incurred in respect of the work related travel to which the claim for deduction relates, are not required to be shown in the employee’s tax return: Pay As You Go (PAYG) Bulletin No. 1 – Taxing of allowances for the 2000/01 and future years.

    The instruction to vary the rate of withholding to zero, and the exclusion of the allowance from the employee’s payment summary does not appear to always be done jointly and consistently. This causes flow on effects and confusion for the exception from substantiation rules, particularly where:

    • an employee seeks to claim deductions and include an amount of allowance that is not on the employee’s payment summary
    • the allowance is included on the payment summary but a smaller amount is incurred.
    Discussion questions

    Number

    Question

    1

    In what way could the ATO guidance products (TR 2004/6 and TD 2016/13) be improved to reduce or resolve the misunderstandings around the application of the exception from substantiation for reasonable travel allowance expenses?

    2

    Is it broadly accepted that travel expenses are no longer onerous to substantiate, particularly in light of advances in electronic technology and applications such as the ATO’s myDeduction?

    3

    Do the exceptions from substantiation for travel expenses only add complexity or do they simplify and reduce costs for employees and employers?

    4

    Are there any particular industries, professions or circumstances where the employer doesn’t withhold tax when paying an allowance, but includes the amount (as an allowance) on the payment summary, or conversely, does withhold tax but doesn’t include the amount on the payment summary?

    5

    Are there any particular industries, professions or circumstances whereby an employee would prefer to declare an allowance as income and claim deductions for travel allowance expenses incurred, rather than the employer applying our PAYG withholding variation?

    6

    Are there any particular industries, professions or circumstances whereby an employee would frequently spend less than the allowance received, resulting in a tax debt for the employee?

    Accommodation

    The environment has changed in respect of how people pay for accommodation. For example:

    • accommodation is often paid for by electronic means (for example Electronic Fund Transfer)
    • frequently it is paid for directly by the employer as this allows them to claim GST credits
    • payment records are commonly electronic making them easier to store and retrieve.

    The reasonable rates published in the annual taxation determination do not apply where the accommodation is not commercial. This does not seem to be widely understood.

    The rates published in the annual taxation determination are arguably too high where:

    • the person stays in the same accommodation for more than a few days and becomes eligible for reduced rates
    • a group of people travel together, for example, circus performers, actors, production crews and performers
    • rates for accommodation fluctuate in the area where the employee is staying, as the Commissioner’s annual rate is based on the peak season rate.

    The rates published in the annual taxation determination are arguably too low where:

    • the travel is undertaken at a time where an event (such as a significant cultural or sporting event) is on and this temporarily increases the actual rate of short term accommodation to a premium
    • cities have a range of rates and the specific location where the person is staying at is at the higher end of the range.

    The ATO has observed cases where employees claim the reasonable rate, as published in the annual taxation determination, as a deduction but this is not a reflection of the actual expense incurred. This could be where the employee has been:

    • sharing accommodation
    • staying in low cost accommodation, such as the local caravan park or at the construction site in their caravan
    • staying with relatives or friends.
    Discussion questions

    Number

    Question

    7

    Given accommodation allowance rates are set out in many awards, or have otherwise been determined by the employer as reasonable and appropriate based on enquiries made, would it be accepted that we cease publishing accommodation rates in the annual taxation determination, and instead accept the amount of the allowance paid as being the reasonable amount for the purpose of the exception from substantiation for accommodation expenses?

    8

    If we were to accept the amount of the allowance paid as being the reasonable amount for the substantiation exception, how would we maintain integrity so allowances paid were not excessive?

    9

    If we were to cease publishing a specific accommodation rate, should the employer be required to keep information to demonstrate how they determined the amount of the allowance (where the rate is not prescribed by an award)?

    10

    Does the current environment for paying for accommodation (particularly the ease to obtain, store and retrieve receipts electronically) reduce the benefits previously gained from the exception from substantiation in respect of reasonable travel allowance expenses on accommodation?

    Meals

    We accept meal expenses may be somewhat onerous to substantiate, but contemporary payment methods and the ability to store receipts electronically have made this less of a burden.

    There is often a discrepancy between the reasonable rate in the annual taxation determination and the meal allowance actually paid to employees. Our rate for a meal allowance is based on meals being consumed in restaurants, whereas information available to us shows the meal allowance actually paid is usually an amount that will realistically cover the cost of meals based on the circumstances of the employee. Consequently, the allowance paid is commonly lower than our rate; however in some instances the allowance paid is significantly higher.

    we have observed an increase in the incidence of taxpayers claiming a deduction for an amount that is more than they have actually spent (incurred) on meals. Examples include:

    • using the accommodation cooking facilities to cook meals
    • eating takeaway meals
    • international airline crew when provided cash for meals in the local currency (regardless of whether or not it is fully expended in the foreign currency).

    It is often the case that meal expenses decrease as the time away increases or where the accommodation has cooking facilities.

    Some awards now pay meal allowances at an hourly rate, or in the case of employed truck drivers, at a distance travelled rate, to simplify payment. We understand the daily amount in these cases often reflects existing allowances for breakfast, lunch or dinner, however there may be situations where this is not the case.

    In some circumstances we have observed employees, in receipt of an overtime meal allowance and a travel allowance for the same day, claiming a deduction at the reasonable rate in respect of both allowances even though the travel allowance actually covered all meals and no additional expenditure was incurred.

    If subject to review or audit, it is difficult to determine an amount that can be claimed as a deduction in situations where no receipts or basis for calculating a claim have been retained.

    Discussion questions

    Number

    Question

    11

    Given our reasonable rates for meals is based on eating at restaurants, would it help or only add complexity if we were to publish other threshold rates in respect of meal allowance expenses that are currently not provided in the annual taxation determination? For example, reasonable rates where meals are cooked in the accommodation rather than eating out or for specific industries such as for employed truck drivers and performers?

    12

    If we were to provide other threshold rates in respect of meal allowance expenses that are currently not provided in the annual taxation determination, what would be an appropriate method for determining the rate? Would a rate of 70% of the Table 1 ‘Other country centres’ be appropriate for employed truck drivers, and a rate of 65% of the Table 1 ‘Capital cities’ be appropriate for performers?

    13

    In the interest of simplification, should our reasonable rates for meals be streamlined so that singular rates apply regardless of annual salary level and location of travel?

    14

    Should our reasonable rates for meals be streamlined so that a singular ‘daily’ rate applies, and would be apportioned for the meals that the employee is traveling?

    15

    Which industries use a method of paying meal allowances that is not based on the traditional breakfast, lunch and dinner concept as provided for in the annual taxation determination? What method is used in these industries?

    16

    Should meal allowances paid at an hourly rate or kilometre rate be treated as a meal allowance for purposes of the substantiation exception? If so, how would this work?

    17

    Where a travel allowance and overtime meal allowance are both paid, should the PAYG withholding rules be adjusted to say that the overtime meal allowance is subject to PAYG withholding and has to be included in the gross pay on the payment summary?

    18

    Should we introduce an approach where another rate is established to provide a minimum that might be claimed as a deduction for meals when travelling overnight for work without any evidence? That is, in the event that an employee has not retained receipts or a reasonable basis for the amount they have claimed (to demonstrate the amount actually incurred), they would be permitted to claim an amount up to the minimum amount and this would be accepted.

    19

    If the ATO were to introduce this approach, what would be an appropriate amount or method of calculating the minimum rate? Options might be to use:

    • the allowance rates stated in the 2010 modern awards (where applicable), and adjusting those rates using the consumer price index (being the process in [2010] FWA 3857)
    • the amount of the allowance received (where the allowance is itemised on the payment summary)
    • a proportion basis for calculating the minimum amount. For example, would one third of the allowance rate in the 2010 awards, or one third of the amount of the allowance received, or one third of the Commissioner’s reasonable rate as published each year be appropriate.
     

    20

    If we were to introduce this approach, and the amount (or proportion) of the allowance received was used as the minimum amount (so receipts or other written evidence would not be required up to the amount (or proportion) of the allowance received), should the employer be required to keep information to demonstrate how they determined the amount of the allowance (where the rate is not prescribed by an award)?

    21

    Are there any modern awards that acknowledge travel as a likely consequence of the job and have domestic accommodation, meal, or incidental rates that are not listed below?

    • Air Pilots Award 2010
    • Aircraft Cabin Crew Award 2010
    • Building and Construction General On-site Award 2010
    • Live Performance Award 2010
    • Road Transport (Long Distance Operations) Award 2010
    • Travelling Shows Award 2010?
     

    22

    Should we allow those claiming an amount less than the reasonable rate (and satisfying the substantiation exception) but more than the minimum amount (if introduced) to keep a diary of the actual expense incurred for meals a representative four week period during the year for the purpose of establishing the average daily expense (that is, receipts are not required - the diary would need to show the date, approximate time, where purchased (name of place and suburb/town) and description of the meal and the cost)?

    Incidentals

    What the ‘incidentals’ component of an allowance is expected to cover has become increasingly unclear. In the 1960s, it is known to have included fares between the accommodation and place of work, tips to hotel porters for carrying the bags and for making phone calls. Many employers now reimburse fares and supply a mobile phone or reimburse the cost of calls. Hotel porters are rare.

    The incidental amount in the annual taxation determination (and awards) has been uplifted annually (in line with the consumer price index) without reviewing if it is still appropriate.

    Only a few of the modern awards provide a separate amount for incidentals.

    We stated in TR 2004/6 that the reasonable amount for incidental expenses applies in full to each day of travel covered by the allowance, without the need to apportion for any part-day travel on the first and last day. This assumes a day commences and finishes at midnight, which may no longer be a true reflection of contemporary work practices.

    Discussion questions

    Number

    Question

    23

    Is it accepted that in current times it is unlikely that expenditure on incidentals would qualify as a deduction?

    24

    Where an incidental allowance is paid, what expenses is it expected to cover? Why do these expenses qualify as a deduction under the Act (and are not private in nature)? Are these expenses unique to particular industries or employment circumstances?

    25

    What industries or in which circumstances might an incidental allowance be paid for a day that is not based on a traditional 24 hour day commencing and ending at midnight as provided for in the annual taxation determination? What period might be more appropriate in these industries or circumstances?

    26

    If it is accepted that expenditure on incidentals is unlikely to qualify as a deduction, in the interest of simplification should we cease publishing a specific incidental rate in the annual taxation determination, or streamline it such that it was always nil regardless of annual salary level and location of travel?

    Transport industry

    Long distance owner-drivers have higher compliance costs for claiming meals than employee long distance truck drivers even though they both have the same expenses. This is because the owner-drivers are required to substantiate accommodation, meal and incidental travel expenses.

    The travel allowance paid under the Road Transport (Long Distance Operations) Award 2010 may not be a bona fide allowance.

    Discussion questions

    Number

    Question

    27

    Should all long-distance truck drivers (including owner-drivers) who incur deductible travel expenses be eligible for the exception from substantiation in respect of deductible meal expenses?

    28

    Should the travel allowance paid to truck drivers under the Road Transport (Long Distance Operations) Award 2010 be treated as the daily meal component of an overnight meal and accommodation allowance?

    29

    Apart from truck drivers who are long distance owner-drivers, are there any other non-employee individual occupations that frequently incur deductible travel?

    Publication of the our reasonable rates

    The exception from substantiation for travel allowance expenses applies where the amounts incurred and deducted are considered reasonable. We publish the amounts considered reasonable in an annual taxation determination.

    Discussion question

    Number

    Question

    30

    Is there any value in publishing the amounts considered reasonable each year on the ATO Legal Database rather than within website guidance explaining these rates to taxpayers?

    Last modified: 30 Sep 2016QC 50217