Edited version of your written advice

Authorisation Number: 1051403584219

Date of advice: 23 July 2018

Ruling

Subject: Income – allowances - reimbursement

Question

Does the use of the ATO rate for business use kilometres make a payment to an employee a reimbursement or an allowance?

Answer

The payment is an allowance.

This ruling applies for the following periods:

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

Year ended 30 June 2021

Year ended 30 June 2022

The scheme commences on:

1 July 2017

Relevant facts and circumstances

Your employees’ duties require them to use their own car to travel for business purposes in line with the ATO definition (i.e. doesn’t include home to work travel).

Your employees are expected to keep records of the kilometres they have travelled for work and provide you, their employer, details of their recorded business use kilometres travelled.

The employees are required to keep a logbook provided by you, the employer, to record the business use kilometres travelled.

You then pay your employees an amount based on their recorded number of kilometres they have travelled applying the ATO published rate.

If the payment made to the employee is found to be in excess of the business kilometres travelled the employee is required to refund the excess payment amount.

Relevant legislative provisions

Section 28-12 of the Income Tax Assessment Act 1997

Reasons for decision

Summary

Your cents per kilometre payments to your employees are regarded as an allowance.

Detailed reasoning

Taxation Ruling TR 92/15 discusses the difference between an allowance and a reimbursement.

Paragraph 2 of TR 92/15 states:

A payment is an allowance when a person is paid a definite predetermined amount to cover an estimated expense. It is paid regardless of whether the recipient incurs the expected expense. The recipient has the discretion whether or not to expend the allowance.

Paragraph 3 of TR 92/15 states:

A payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed. In general, the provider considers the expense to be its own and the recipient incurs the expenditure on behalf of the provider. A requirement that the recipient vouch expenses lends weight to a presumption that a payment is a reimbursement rather than an allowance. A requirement that the recipient refunds unexpended amounts to the employer adds further weight to that presumption.

In your case, you pay your employees an amount when they use their vehicle for business travel. The cents per kilometre payment is paid at the ATO published rates.

The ATO cents per kilometre rate is based on an estimate of car expenses (for example, petrol, depreciation and registration) incurred per kilometre. This rate is not varied during the year when petrol prices change. The cents per kilometre payment is not an exact reimbursement of the employees’ actual car expenses.

Although the amount you pay to your employees is dependent on the number of kilometres they travel, you pay a predetermined amount per kilometre. The amount is paid to cover the estimated expenses your employee will incur in using their own car such as petrol and wear and tear. You are not compensating exactly for these expenses.

Accordingly, the amount you pay as an employer to your employees is an allowance and it is required to be included in your employees’ assessable income.

Taxation Ruling TR 2004/6 states at paragraph 12 that all allowances must be shown as assessable income in the employees’ tax return unless the following exception applies:

● the allowance is not shown on the employees’ payment summary;

● the allowance received is a bona fide overtime meal allowance or a bona fide travel allowance;

● the allowance received does not exceed the reasonable amount; and

● the allowance has been fully expended on deductible expenses.

There is no similar exception for cents per kilometre payments. As your payment does not satisfy the above requirements, it is not excluded from your employees’ tax return.

However, please note that your employees may be entitled to a deduction for their work related car expenses.

Car expenses

Section 28-12 of the Income Tax Assessment Act 1997 provides that a deduction for deductible car expenses can be made using one of four methods if you owned a car.

The four methods of calculating deductions are:

● 'cents per kilometre' method

● '12% of original value' method

● 'one-third of actual expenses' method, and

● 'log book' method.

Each method requires the employee to know or estimate their business kilometres. Business kilometres are the kilometres you travelled in the car in the course of earning assessable income (includes work-related activities).

Examples of how to calculate a deduction under each of these methods are available on our website, www.ato.gov.au.