Edited version of your written advice

Authorisation Number: 1051451125257

Date of advice: 6 November 2018

Ruling

Subject: Allowance payment to an employee

Issue 1

Question 1

In relation to the allowance that the taxpayer will pay to an employee, would payment of the allowance be subject to PAYG withholding?

Answer

Yes.

Question 2

In relation to the allowance that the taxpayer will pay to the employee, would the amount need to be declared on the annual payment summary?

Answer

Yes.

This ruling applies for the following period:

01 July 20XX to 30 June 20XX

The scheme commences on:

01 July 20XX

Relevant facts and circumstances

The taxpayer has an employee whose work duties are of itinerate nature.

The taxpayer is considering paying an allowance to the employee in recognition of nature of the employee’s job and that the employee may need to stay away from home overnight from time to time.

The allowance will be a fixed single undivided amount that is to be agreed between the taxpayer and the employee.

The allowance is not in the form of a reimbursement for actual expenses incurred by the employee.

The allowance is not for any specific journeys undertaken by the employee.

Based on past years’ experience, the employee generally travels away from home for certain number of overnight stays per week in performing their work duties.

The allowance amount will be determined purely on an estimation basis by utilising the relevant daily reasonable amount for domestic travel expenses to the multiples of certain number of overnights per week for 52 weeks in a year.

The taxpayer will not monitor the extent to which the amount is expended by the employee.

Once the allowance is paid, the employee is not required to refund any amounts.

Relevant legislative provisions

Taxation Administration Act 1953

Issue 1

Unless otherwise stated, all legislative references are to Divisions 12 and 16 of Schedule 1 to the Taxation Administration Act 1953 (TAA).

Question 1

Reasons for decision

Pursuant to section 12-35, an entity that pays salary, wages, commission, bonuses or allowances to an individual as an employee must withhold an amount from the payment.

However, the Commissioner made the Legislative Instrument ID 2015/SBIT/0045 to vary the amount of withholding from a number of allowance payments when certain conditions are met.

Paragraph 6 of the Taxation Administration Act 1953 PAYG Withholding Variation: Allowances - Explanatory Statement explains that, broadly the variation applies in certain cases when the allowance is expected to be fully expended on tax deductible items and the payee would not be required to substantiate expenditure incurred in relation to the allowance because of the provisions contained in Division 900 of the Income Tax Assessment Act 1997 (ITAA 1997).

In Variation 38 Australian Government Taxation Administration Act 1953 PAYG Withholding Variation (Variation 38), there is no requirement to withhold an amount from allowances as described below, provided that:

(1) the payee is expected to incur expenses that may be able to be claimed as a tax deduction at least equal to the amount of the allowance;

(2) the amount and nature of the allowance is shown separately in the accounting records of the payer.

Variation 38 further requires that, for domestic or overseas travel allowance (excluding overseas accommodation allowance) involving an overnight absence from the payee’s ordinary place of residence, it needs to be up to reasonable allowances amount published in the annual ATO ruling.

Variation 38 interacts with paragraph 34 of the Taxation Ruling 2004/6 Income tax: substantiation exception for reasonable travel and overtime meal allowance expenses (TR 2004/6). TR 2004/6 applies to individuals who incur work-related deductions for travel expenses or overtime meal expenses where these expenses are covered by an allowance paid by the person’s employer.

Paragraph 34 of the TR 2004/6 states that, the Ruling also has application to employers for determining whether or not amounts required to be withheld from payments of overtime meal allowances or travel allowances can be varied, where it is reasonable to expect that:

● expenses up to at least the amount of the allowance will be incurred by the employee;

● the expenses will be incurred for the purpose for which the allowance is paid;

● the expenses will be tax deductible to the employee; and

● the amount and nature of the allowance is shown separately in the accounting records of the employer.

In the current case, to determine whether an amount needs to be withheld from payment of the allowance to the employee, questions need to be asked are:

● is the employee expected to incur expenses up to at least the amount of the allowance?

● will the expenses be tax deductible?

● will the expenses be incurred for the purpose for which the allowance is paid?

● is the amount and nature of the payment shown separately in the taxpayer’s accounting records?

● is the domestic travel allowance involving an overnight absence from the payee’s ordinary place of residence (if any) up to reasonable allowances amount published in the annual ATO ruling?

Paragraph 56 of the TR 2004/6 requires that, the travel allowance must be paid for specific journeys undertaken or to be undertaken for work-related travel. A travel allowance that is not paid to cover relevant expenses for specific journeys undertaken or to be undertaken for work-related travel, is not a travel allowance for the purposes of the exception from substantiation.

In the first example in paragraph 57 of the TR 2004/6, a fixed annual travel allowance amount (say $2,000 a year is paid, regardless of how often or even whether travel is actually undertaken) does not qualify for the exception from substantiation, because it is not travel allowance paid to cover deductible expenses for specific journeys.

However, paragraph 58 of the TR 2004/6 states that, a fixed annual entitlement for travel expenses may be a travel allowance where the allowance is based on a specified number of overnight stays and there is a requirement for recipients to repay that part of the entitlement referrable to trips not undertaken.

The current case is identical to the first example in paragraph 57 of the TR 2004/6. The allowance that the taxpayer is to pay to the employee is a fixed single undivided annual amount that is not tied to any specific work-related journeys. Once the payment is made, the taxpayer will not monitor how and/or the extent to which the amount is and/or will be expended by the employee, there is no requirement for the employee to refund or repay no matter how often and/or how many travels are actually undertaken.

Accordingly, the payment is not considered as travel allowance to cover deductible expenses for specific journeys, nor could it be reasonably expected whether the allowance amount would be fully expended by the employee on tax deductible work-related travel items.

In addition, as the allowance amount is estimation only, there is no requirement for any amount to be actually expended and/or how the amount is and/or will be expended, and the employee does not need to refund even if he does not undertake that many of travels or overnight stays from his ordinary place of residence, there is no sufficient ground to reasonably expect how and for what purpose the expenses would be incurred.

Taxation Determination 2018/11 Income tax: what are the reasonable travel and overtime meal allowance expense amounts for the 2018-19 income year? (TD 2018/11) states clearly that:

● the approach outlined in the Determination can only be used where you receive an allowance to cover the particular expenses you are claiming: paragraph 2 of the TD 2018/11;

● reasonable amounts are given for accommodation at daily rates (for domestic travel only), meals (showing breakfast, lunch and dinner) and expenses incidental to travel: paragraph 12 of the TD 2018/11;

● the reasonable amount for accommodation applies only for short stays in commercial establishments; it cannot be used if a different type of accommodation is used: paragraph 14 of the TD 2018/11;

● the reasonable amount for meals only applies to meals (that is, breakfast, lunch and dinner) that fall within the time of day from the commencement of your travel to the end of your travel that is covered by the allowance: paragraph 15 of the TD 2018/11.

On the facts, the taxpayer calculates the allowance amount based on estimated number of overnight stays per week from past-year experience; it is not to cover any particular work-related travels or journeys. There is no requirement to repay, no matter how often and/or what the actual number of work-related travels is. Therefore, the allowance is not for any particular work-related travel expenses that are incurred and/or to be incurred by the employee, TD 2018/11 would not be applicable to the current case.

The allowance that the taxpayer will pay to the employee is not travel allowance to cover deductible expenses for specific journeys, nor could it be reasonably expected whether the allowance amount would be fully expended by the employee on tax deductible work-related travel items or how and for what purpose the expenses would be incurred. Therefore, the taxpayer must withhold an amount from payment of the allowance to the employee under section 12-35.

Question 2

Reasons for decision

Under PAYG withholding, a payer must give a payment summary to an entity (the recipient) if during the year the payer made one or more withholding payments to the recipient: paragraph 16-155(1)(a).

The payment summary must cover each of the withholding payments, except one covered by a previous payment summary (and a copy of it) given by the payer to the recipient under section 16-160: paragraph 16-155(2)(a).

Pursuant to subsection 16-170(1), a payment summary is a written statement that:

(a) names the payer and the recipient; and

(b) if the recipient has given the recipient ' s tax file number or ABN to the payer - states the tax file number or ABN; and

(c) states the total of the withholding payments (if any) that it covers, and the total of the amounts withheld by the payer from those withholding payments; and

(d) specifies the financial year in which the withholding payments were made; and

(e) specifies the reportable fringe benefits amount (if any) that it covers and the income year to which that amount relates; and

(f) specifies the reportable employer superannuation contributions (if any) that it covers and the income year to which those contributions relate; and

(g) is in the approved form.

In the current case, the taxpayer must give a payment summary to the employee under paragraph 16-155(1)(a), in the year the taxpayer makes one or more withholding payments to the employee, including payment of the allowance.

The payment summary that the taxpayer give to the employee must cover each of the withholding payments, and amongst other things, the payment summary must state total of the withholding payments that it covers and total of the amounts withheld by the taxpayer from those withholding payments: subsection 16-170(1).

Therefore, the allowance amount that the taxpayer will pay to the employee must be included in the total of the withholding payments in the payment summary, and the corresponding amount withheld by the taxpayer from payment of the allowance must be included in the total of the amounts withheld.

An entity that withholds an amount under Division 12 must pay the amount to the Commissioner: subsection 16-70(1).

Section 16-150 requires an entity that pays an amount to the Commissioner (as an amount withheld) to notify the Commissioner of the amount. The notification must be in the approved form and lodged with the Commissioner on or before the day on which the amount is due to be paid (regardless of when it is paid).

In the current case, the taxpayer is required to withhold an amount from payment of the allowance to the employee under section 12-35. Accordingly, the taxpayer must pay the amount to the Commissioner and must lodge a notification to the Commissioner of the amount in the approved form under section 16-150.