Edited version of your written advice

Authorisation Number: 1012752718048

Ruling

Subject: Pay as you go withholding

Question

Are payments you make to your employee a 'bona fide' travel allowance for the purposes of Taxation Ruling TR 2004/6 Income tax: substantiation exception for reasonable travel and overtime meal allowance expenses?

Answer

No. Accordingly, tax must be withheld from these payments at the rate set out in the PAYG Withholding Schedules.

This ruling applies for the following period

1 July 2014 to 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts and circumstances

You are an employer based in an Australian capital city.

You have an employee that resides in a regional town and commutes to work in the city on three days.

The employee remains overnight in the city on two days in commercial accommodation. This is the employee's own choice.

You pay the employee a sum of extra money each week as salary and wages to cover the cost of accommodation and food for the two nights away from home. This amount is lower than the reasonable daily travel allowance listed in Taxation Determination TD 2014/19 Income tax: substantiation exception for reasonable travel and overtime meal allowance expenses?

You contend that the amount paid to your employee is not tax free in accordance with TD 2014/19.

Relevant legislative provisions

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)

Reasons for decision

Taxation Ruling TR 2004/6 Income tax: substantiation exception for reasonable travel and overtime meal allowance expenses states that a bona fide travel allowance is an amount paid that could reasonably be expected to cover accommodation, meals or expenses incidental to travel and must be paid for specific journeys undertaken or to be undertaken for work-related travel. An amount paid for travel expenses that has been folded-in as part of normal salary/wages (for example under a workplace agreement), is not considered to be a bona fide travel allowance.

Paragraph 86 of TR 2004/6 states:

A 'bona fide travel allowance is an amount that could reasonably be expected to cover accommodation, or meals or expenses incidental to travel. … A token amount, or a general payment, is not a bona fide travel allowance.

Paragraph 90 of TR 2004/6 states:

A travel allowance is an allowance an employer pays or is to pay to cover losses or outgoings:

• That an employee incurs for travel away from their ordinary residence that is undertaken in the course of their duties as an employee; and

• That are losses, or outgoings for accommodation, food, drink or expenses incidental to the travel. [emphasis added]

The deductibility of an expense covered by an allowance is determined by section 8-1 of the ITAA 1997 together with the substantiation provisions as explained in TR 2004/6.

If an employer pays an allowance to an employee, tax must generally be withheld at the rate set out in the PAYG Withholding Schedules. The amount of the allowance must be reported on the employee's payment summary.

There are two exceptions to this which are:

• employer pays living-away-from-home allowance and

• employer pays meal or travel allowance up to the 'reasonable amount' set in Taxation Determination TD 2014/19 Income tax: what are the reasonable travel and overtime meal allowance expense amounts for the 2014-15 income year?

Allowances received by employees are treated as salary and wages for PAYG purposes and are taxed at marginal rates in the same way as salary and wages.

A distinction is made between an 'allowance' and a 'reimbursement'.

Allowance - an employee is paid a definite predetermined amount to cover an estimated expense even if the employee does not incur that expense. Allowances are amounts paid to cover anticipated costs or as compensation for conditions of employment regardless of the expense incurred. The allowance is generally assessable income to the employee who may be entitled to a deduction for related expenses that are work related and can be substantiated.

Care is required in identifying the nature of each particular allowance payable under an employee's industrial instrument or contract or employment. If the nature of the allowance does not recompense an employee for expenses incurred during the course of employment, it will then form part of an employee's ordinary pay.

Reimbursement - the employee is compensated for the exact amount of the expense incurred or to be incurred. The employer may be liable to fringe benefits tax (FBT) on a reimbursement although the taxable value will be reduced if the reimbursement relates to work or business expenses. If the reimbursement is covered by FBT, then this amount is not assessable income and the employee cannot claim a deduction.

Your employee resides in a regional town and works in the city (a journey of approximately sixty minutes by road) but chooses to stay in overnight accommodation on two nights per week as a convenience rather than travelling to and from home.

As your employee is not required to stay in overnight accommodation as a requirement of the employment, the remunerated amount is not considered to be a 'bona fide travel allowance'.

The additional payment made per week to your employee is neither an allowance nor a reimbursement as it does not cover either the future or actual expense incurred. The amount paid appears to be folded-in as salary and wages. Therefore you will be required to withhold an amount of tax which should appear on the employee's payment summary along with the remunerated amount.