Edited version of your private ruling

Authorisation Number: 1012446901775

Ruling

Subject: Taxation of Equipment, Special Clothing and Extreme Cold Weather Allowances

Question 1

Are the following allowances provided by the employer to employees taxable to employees?

· Equipment Allowance

· Special Clothing Allowance

· Extreme Cold Weather Clothing Allowance

Answer

Yes

Question 2

If yes to Question 1, is the employer required to withhold tax from employees who receive the allowances outlined in Question 1?

Answer

Yes

Question 3

If no to Question 1, what are the taxation implications of the allowances outlined in Question 1 for the employer?

Answer

Not applicable

This ruling applies for the following periods:

· Year ending 30 June 2013

· Year ending 30 June 2014

· Year ending 30 June 2015

· Year ending 30 June 2016

· Year ending 30 June 2017

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The employer provides several allowances to eligible employees. The allowances and eligibility conditions are described below.

Equipment Allowance: An Equipment Allowance assists with the cost of travel equipment and other items purchased for a short term overseas mission and extra wear and tear on an employee's possessions resulting from overseas travel. This allowance is not applicable to employees on long-term posting overseas as this provision is incorporated in other taxable allowances.

The current payment is $x. The allowance is not paid:

· More than once in any Y-year period

· If you have been on a long term posting up to Y years prior to the short term mission;

· If you are on a long term posting while undertaking a short term mission (STM);

· If you are accompanying your spouse on a long term posting and are recalled to duty to undertake an STM

Special Clothing Allowance: $y is paid if the delegate is satisfied the equipment allowance you receive is insufficient to meet your reasonable needs for clothing to undertake the travel to a tropical or cold region you receive a special clothing allowance. Not paid more than once in a Y year period.

Extreme Cold Weather Clothing Allowance: If the Equipment and Special Clothing Allowances are not enough to meet your needs an allowance is payable for extreme cold weather, $z per Y year period.

Currently the employer does not usually require employees who have received allowances to verify their expenditure by providing receipts. Currently the employer does not require employees who have received these allowances to repay any surplus amounts. The employer does not have a fixed policy in place, and is seeking clarification through this private ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 10-2

Income Tax Assessment Act 1997, section 15-2

Income Tax Assessment Act 1997, subsection 15-2(1)

Tax Administration Act 1953, Schedule 1, section 12-35

Fringe Benefits Tax Assessment Act 1986

Reasons for decision

Question 1

Summary

The Equipment Allowance, Special Clothing Allowance, and Extreme Cold Weather Clothing Allowance are all assessable income in the hands of employees, under section 15-2 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

The taxation of cash payments made by employers to employees in respect of employment related expenditure depends on whether the payments are regarded as allowances or reimbursements.

Section 15-2 of the ITAA 1997 specifies that allowances are regarded as assessable income in the hands of employees. Allowances would therefore be included in assessable income as statutory income under section 6-10(2) of the ITAA 1997. Reimbursements are not assessable income in the hands of employees. However, reimbursements may be taxable as a fringe benefit to the employer under the Fringe Benefits Tax Assessment Act 1986.

Since the terms 'allowance' and 'reimbursement' are not defined in legislation, the word takes its meaning from ordinary usage and common law cases.

The distinction between an allowance and a reimbursement is discussed in Taxation Ruling TR 92/15 (TR 92/15).

TR 92/15 explains that the following characteristics tend to indicate that an amount is an allowance:

· Definite predetermined amounts to cover an estimated expense

· Paid regardless of whether or not the recipient incurs the expected expense

· The provider regards the expense as an expense incurred by the employee, rather than its own expense

· The recipient has a discretion whether or not to expend the allowance

· The recipient is not required to account or vouch for their expenditure, for example, by providing receipts to their employer

· The recipient is not required to reimburse the employer for any excess money remaining after the expenditure has been met

Reimbursements, on the other hand, have the following alternate characteristics:

· An exact compensation (either full or in part) for an expense already incurred by the employee

· The expenses are considered by the provider to be its own expense, rather than the recipient's expense. The recipient is considered to incur the expenditure on behalf of the provider.

· The recipient may be required to vouch for expenses, for example, by providing receipts to the provider to account for the expenditure

· The recipient may be required to reimburse the provider for unexpended amounts

In this case, the allowances involve payments of a definite sum on certain conditions.

For the equipment allowance, a payment of $x is made to employees on short-term overseas missions under specified conditions.

The special clothing allowance of $y will be paid if the delegate is satisfied that the equipment allowance is insufficient to meet the reasonable needs of an employee to undertake travel to a tropical or cold region. The extreme cold weather clothing allowance is paid if the equipment allowance and special clothing allowance are similarly insufficient. Each allowance will only be paid once in any Y year period.

All allowances are clearly regarded as 'allowances' for taxation purposes, because they meet many of the characteristics of 'allowances' identified in TR 95/15 above. These monetary payments are not reimbursements. First, they constitute definite sums of money provided under certain circumstances. Second, they are paid to eligible employees regardless of the employee's actual expenditure on travel equipment and related expenses. Third, employees are not currently required to provide receipts to prove that they have spent the money on the intended equipment, or to repay any unexpended amounts to the employer. Finally, the payments are regarded by the employer as assistance to help employees meet anticipated costs incurred on their own behalf, rather than an accounting for expenses paid by employees on behalf of the employer.

Conclusion

These allowances are assessable income to employees. Since all payments discussed in this ruling are allowances, the equipment allowance, special clothing allowance, and extreme cold weather clothing allowance will all be assessable income in the hands of the employee, under sections 6-10 and 15-2 of the ITAA 1997.

Question 2

Summary

The employer is required to withhold tax from the allowances according to section 12-35 of Schedule 1 of the Tax Assessment Act 1953 (TAA).

Detailed Reasoning

Withholding entities are required to withhold amounts from payments made to individuals as employees according to section 12-35 of Schedule 1 of the TAA. This section covers payments in the form of salary, wages, commissions, bonuses or allowances.

As discussed in Question 1 above, the payments the employer provides to eligible employees are regarded as 'allowances' for taxation purposes. Therefore, the employer is required to withhold tax from these payments.

Question 3

Summary

Not applicable

Detailed Reasoning

As discussed in Question 1, the payments discussed in this ruling are treated as allowances rather than 'reimbursements' for fringe benefits tax purposes. Therefore, the allowances are not fringe benefits as they are included in the assessable income of employees.