Edited version of your written advice

Authorisation Number: 1051427645313

Date of advice: 17 September 2018

Ruling

Subject: Travel Allowance

Question 1

Is the allowance for airfares, accommodation, travel and meal expenses you pay to your employee as an allowance subject to withholding tax?

Answer

No.

Question 2

Is the allowance paid to the employee a deductible expense for the company?

Answer

Yes

This ruling applies for the following period

Year ending 30 June 2018

The scheme commenced on

1 July 2017

Relevant facts and circumstances

Your employee works for you as a consultant for Company B in State B.

You pay your employee an allowance for airfares, accommodation, meals and travel expenses.

Your employee travels by air from State A to State B on a regular basis.

They have a yearly lease on an apartment in State B.

The allowance is included as part of their salary.

Relevant legislative provisions

Income Tax Assessment Act 1997 (ITAA) Section 995-1

Taxation Administration Act 1953 (TAA) Section 18-15 Schedule 1

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subsection 124-75(3)

Income Tax Assessment Act 1997 Section 15-2

Income Tax Assessment Act 1997 Section 900-30

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 900-50

Income Tax Assessment Act 1997 Subdivision 900-B

Fringe Benefit Tax Assessment Act 1986

Fringe Benefit Tax Assessment Act 1986 Section 30

Reasons for decision

Detailed Reasoning

The PAYG withholding provisions are contained in Part 2-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA).

Section 18-15 of Schedule 1 to the TAA provides that a person is entitled to a credit equal to the total of the amounts withheld from withholding payments made to a person during an income year if an assessment has been made of the income tax payable, or an assessment has been made that no income tax is payable, by the entity for the income year.

Amount withheld is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997). An amount withheld by an entity from a withholding payment means:

(a) an amount that the entity withheld from a payment under Division 12 in Schedule 1 to the TAA,

Withholding payment is also defined in section 995-1 of the ITAA 1997 to mean:

(a) a payment from which an amount must be withheld under Division 12 in Schedule 1 to the TAA (even if the amount is not withheld).

You can claim most expenses that are incurred in running your business as deductions, including salary, wages and allowances paid to your employees.

Allowances folded into your employee's salary or wages are taxed as salary and wages and tax has to be withheld, you include the amount of the travel allowance in the allowance box on your employee's payment summary.

Section 15-2 of the ITAA 1997 states that your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you.

An allowance is usually paid to a person who is travelling in the course of carrying out their duties to meet additional expenses. The expenses of travelling may be an allowable deduction if the allowance is assessable to the recipient.

An allowance, as stated in Taxation Ruling TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement, is a payment of a predetermined amount to cover an estimated expense. Unless it is a benefit that is subject to Fringe Benefits Tax in accordance to the Fringe Benefits Tax Assessment Act 1986 (FBTAA), an allowance paid by an employer to their employee falls within the definition of salary and wages and is assessable income under section 6-5 of the ITAA 1997.

Whilst allowances paid by employers under relevant Awards are intended to compensate expenses that may be similar meals and accommodation etc., the circumstances in which those allowances are paid are essentially different.

Allowances may be paid as a travel allowance or paid under other names, the most common being the living-away-from-home allowance (LAFHA) and the camping allowance.

Living Away From Home Allowance

A person is regarded as living away from a usual place of residence if, but for having to change residence in order to work temporarily for his employer at another locality the employee would have continued to live at the former place. This would be relevant even if the employee is living in temporary quarters close to a temporary job site.

A LAFHA is paid where the employee has moved and taken up temporary residence away from his or her usual place of residence so as to be able to carry out employment duties for a time at a new (but temporary) work place. Therefore, a LAFHA exists where it is reasonable to conclude from all the surrounding circumstances that some or all of the allowance is in the nature of compensation to the employee for additional expenses incurred because the employee is required to live away from his or her usual place of residence in order to perform the duties of employment.

A LAFHA arises when an employer pays an employee an allowance to compensate for additional expenses which the employee has had to incur as a result of being required to live way from home for employment purposes.

Section 30 of the FBTAA sets out the circumstances where an allowance will qualify as a LAFHA. The requirements for allowance to constitute a benefit where:

● at a particular time, in respect of the employment of an employee of an employer, the employer pays an allowance to the employee; and

● it would be concluded that the whole or a part of the allowance is in the nature of compensation to the employee for

● additional expenses (not being deductible expenses) incurred by the employee during a period; or

● additional expenses (not being deductible expenses) incurred by the employee, and other additional disadvantages to which the employee is subject, during a period, by reason that the employee is required to live away from his or her usual place of residence in order to perform the duties of that employment,

The payment of the whole, or of the part, as the case may be, of the allowance constitutes a benefit provided by the employer to the employee at that time.'

If LAFHA is assessable under section 6-5 of the ITAA 1997, the expense will have to be substantiated in full if an amount exceeding the allowance is claimed.

Distinction between LAFHA and allowances travelling

Taxation Ruling 2017/D6 Income tax and fringe benefits tax: when are deductions allowed for employees’ travel expenses? Points 16 and 18 provide guidance as to what constitutes a LAFHA. This ruling distinguishes a LAFHA from a travel allowance.

A LAFHA is paid where the employee has moved and taken up temporary residence away from his or her usual place of residence so as to be able to carry out employment duties for a time at the new (but temporary) workplace. A travelling allowance, on the other hand, is paid because the employee is travelling in the course of performing his or her job. In the former case, there is a change of job location and an actual change of residence to a place at or near that location. In the latter, the employee does not change job locations but simply travels in order to carry out the requirements of the job'.

As a practical general rule, where the period away does not exceed 21 days the allowance will be treated as a travelling allowance rather than a LAFHA. For longer periods, it will be necessary to determine the nature of the allowance with the guidance provided by this Ruling.

Generally, travelling allowances are for employees who travel in the course of their employment, e.g. drivers, travelling salespersons. Whereas, LAFHA’s are paid to persons who establish a single temporary residence away from their usual residence for a longer time.

Taxation treatment LAFHA

Because they are subject to different taxation treatments, it is important that LAFHA’s are distinguished from travelling allowances paid to employees.

If the payment represents a LAFHA the amount is a 'Fringe Benefit', and is not assessable income of the employee and no expense can be claimed against it.

If the payment represents a bona fide travel allowance under section 900-30 of the ITAA 1997, the employee can claim expenditure incurred against the allowance and is subject to the exception to substantiation requirements in accordance with TD 2018/3 and section 900-50 of the ITAA 1997.

Section 8-1 of the Income Tax Assessment Act 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.

Employee expenditure for accommodation, meal and incidentals is of a private or domestic nature. This includes the ordinary costs of consuming food and drink to go about their daily activities, such as to attend work. These costs are preliminary to the work, and are not incurred in the course of performing those activities.

Accommodation, meal and incidental expenses are only deductible if they are incurred by the employee when performing their work activities.

Any costs your employee incurs when they are not working ie; their shift is finished and they go for a drink and a meal, is of a private or domestic nature and therefore are not deductible as their work activities do not require them to do this.

Application to your circumstances

The allowance paid to your employee is a LAFHA and is therefore deductible to you and subject to Fringe Benefits Tax.

In your circumstances, you cannot pay an allowance to the employee that is not either taxable to them with no deduction or subject to a fringe benefit (FBT) to the employer. This is because the employee is living away from home and not traveling on work.