Edited version of private advice

Authorisation Number: 1052311052367

Date of advice: 30 September 2024

Ruling

Subject: GST - input tax credits

Question 1

Is the Entity entitled to claim input tax credits for the fuel element of payments made to employees for business travel expenses, calculated using the cents per kilometre method, on the basis that the payments are reimbursements for the purposes of Division 111 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The Entity is not entitled to claim input tax credits for the fuel element of payments made to employees for business travel expenses, calculated using the cents per kilometre method, since the payments are not reimbursements for the purposes of Division 111 of the GST Act.

Question 2

Can an estimate of fuel usage be used so that it is not necessary to identify the actual fuel costs incurred by the employee for the purposes of Division 111 of the GST Act?

Answer

No. Using an estimate of fuel usage does not satisfy the ordinary meaning of reimbursement for the purposes of Division 111 of the GST Act. Refer to the explanation at question 1 in the 'Reasons for Decision' for the meaning of reimbursement for the purposes of Division 111 of the GST Act.

Question 3

What amount would be acceptable as the fuel tax element of the cents per kilometre for the purposes of Division 111 of the GST Act?

Answer

Since the answer to question 1 is 'no', this question is not applicable.

Question 4

For the purposes of Division 111 of the GST Act, will the Entity need to obtain a copy of the employee's tax invoice for the purchase of the fuel if the value of the fuel element of the reimbursement is less than $75?

Answer

Since the answer to question 1 is 'no', this question is not applicable.

This ruling applies for the following period:

Date of issue to four years from date of issue

Relevant facts and circumstances

The Entity is registered for goods and services tax (GST).

From time to time, employees of the Entity are required to use their private motor vehicle for business travel on behalf of the company.

The employee undertakes the travel and makes a claim on the employer. Often this will simply be an email request by the employee after completing the assignment for the allowance rate (now 88 cents per kilometre) multiplied by the kilometres travelled. In the Entity's case, it is based on oral communication and trust. There are no written agreements.

The employee has to make the business trip in order to make a claim. The payment is made immediately after the employee has made the claim. The Entity will pay the employee for the kilometres travelled using the Australian Taxation Office (ATO) cents per kilometre method, currently 88 cents per kilometre (https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/income-and-deductions-for-business/deductions/deductions-for-motor-vehicle-expenses/cents-per-kilometre-method).

The payment to the employee is intended to compensate the employee for the costs they incur because they use their own vehicle for business travel.

This amount is intended to cover the cost of the vehicle including depreciation, finance costs, maintenance and running costs, including the cost of fuel. It is not intended that the fuel element is purchased expressly for the trip. The employee may already have a full tank or they may need to top up in the course of the journey.

Since the payment is made after the employee has made a claim, there is no requirement for employees to repay any unspent monies.

The arrangement is based on trust and the purpose of the arrangement is to obviate the need for employees to provide documentation such as receipts or invoices to the Entity. There is no requirement for the employee to retain the invoice or receipt.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 111

Reasons for decision

Question 1

Is the Entity entitled to claim input tax credits for the fuel element of payments made to employees for business travel expenses, calculated using the cents per kilometre method, on the basis that the payments are reimbursements for the purposes of Division 111 of the GST Act?

Summary

No. As we consider that the payment for the fuel element of the business travel expenses is not a reimbursement, it means that the requirements in Division 111 cannot be satisfied. Therefore, the Entity's payment is not treated as consideration for any acquisition the Entity made from the employee.

Detailed reasoning

In circumstances when an employer reimburses an employee for expenditure incurred, the employer can be considered to have made a creditable acquisition if the requirements in Division 111 of the GST Act are satisfied.

Where section 111-5 of the GST is satisfied, the reimbursement is treated as consideration for an acquisition that you make from the employee. Relevant to the taxpayer's circumstances, section 111-5 of the GST Act will be satisfied when the employer reimburses an employee for an expense he or she incurs that is related directly to his or her activities as the taxpayer's employee.

However, subsection 111-5(3) of the GST Act outlines exclusions from the reimbursement being for a creditable acquisition. These include that the supply to the employee must be a taxable supply and that the employer is not prevented from deducting the expense for income tax purposes.

In this case, the payments made for business travel expenses are paid to employees who are required to travel for business purposes and who use their private motor vehicle to do so. To receive the payment, the employee sends an email to the Entity immediately after the trip is made with details of the number of kilometres travelled.

The Entity considers that as the ATO cents per kilometre rate is calculated by reference to various expenses, an input tax credit should be available in relation to that part of the payment that represents the fuel element of the business travel expenses.

The Entity submits that the payment you make to employees for the fuel element of the business travel expenses, based on the ATO cents per kilometre method, is a reimbursement with the fuel element estimated using:

•         the Department of Infrastructure and Regional Development fuel economy for a petrol vehicle is 10.6 litres/100 km (https://www.bitre.gov.au/sites/default/files/is_091.pdf); and

•         the average price of fuel at the relevant location on the relevant date.

On this basis, the Entity contends the ATO 88 cents per kilometre rate can be said to be represented by 18.9 cents per kilometre for fuel and 69.1 cents per kilometre for everything else and the GST amount in the 18.9 cents per kilometre is 1.72 cents per kilometre. The Entity does not see the need to obtain a copy of the employee's tax invoice for the purchase of fuel as no input tax credit claim in respect of a business travel expense claim will exceed a value of $75.

The Entity's entitlement to input tax credits for the payments made to employees for the fuel element of business travel expenses depends on whether the payment is a reimbursement to which Division 111 of the GST Act applies.

If the payment is not a reimbursement, then the Entity will not be able to satisfy the requirement that they have provided consideration for an acquisition. The acquisition will not be a creditable acquisition and they will not be entitled to an input tax credit in relation to this expenditure.

The terms "reimburse" and "reimbursement" are not defined in the GST Act. These terms therefore take their ordinary meaning. Reimburse is defined in the Macquarie Dictionary[1] as to make repayment to for expense or loss incurred and to pay back, refund, repay.

The ordinary meaning of the word "reimburse" implies that the recipient is to be compensated exactly for an expense already incurred although not necessarily disbursed. When there is a reimbursement, the payer generally considers the expense to be its own and the recipient incurs the expense on behalf of the provider.

As a result, a requirement that the recipient vouch or substantiate expenses lends weight to a presumption that a payment is a reimbursement rather than an allowance. A further indication of a reimbursement is where the recipient is required to refund unexpended amount to the provider.

The meaning of reimbursement has been considered in numerous cases, generally in the context of considering whether a payment is a reimbursement or an allowance.

The Macquarie Dictionary meaning of 'reimburse' was identified by Hill J in Roads and Traffic Authority of NSW v Federal Commissioner of Taxation (1993) 93 ATC 4508 (RTA) at [4512] as reflecting the ordinary meaning of 'reimburse'.

In Case 153[2] the Taxation Board of Review said:

Our view is that between employer and employee, there is a marked difference between a reimbursement and an allowance. A reimbursement transfers from the employee to the employer the burden of expense actually incurred in the course of employment. An allowance is designed to compensate the employee because the employer does not wish to be under the obligation of meeting such expenses directly or indirectly.

The Canadian case of R v Davis[3] lends further support to this position. In that case, Anderson J held that an allowance included a payment to be made for a particular purpose which does not carry with it any liability to account. He added that it is an amount determined arbitrarily and set as a top limit. Also, it is clearly to be distinguished from a 'reimbursement' which indicates a payment of a carriable sum dependent on a precise account for the actual expenditure.

The meaning of reimbursement, and the difference between an allowance and a reimbursement, has also been discussed in various taxation rulings.

For the purposes of the fringe benefits tax law, Taxation Ruling TR 92/15[4] sets out the meaning of allowance and reimbursement. The Fringe Benefits Tax Assessment Act 1986 does include a definition of 'reimburse' that extends the ordinary meaning; however, to the extent that TR 92/15 discusses the ordinary meaning of the term it is relevant to the meaning of 'reimburse' in the GST Act. The ruling provides the following:

2.    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.

3.    A payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense 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.

The distinction between an allowance and a reimbursement is also expressed in Taxation Ruling TR 98/14[5] which provides, in relation to deductions for employee journalists:

19. If a payment is received by an employee journalist for an estimated expense with no requirement to pay unspent money, the amount received by the employee journalist is considered to be an allowance and not a reimbursement and is fully assessable to the employee journalist (see Allowances, paragraphs 11 to 15).

Similar views are expressed in other Taxation Rulings dealing with different occupations. See for example:

•         Taxation Ruling TR 98/6 Income tax: real estate industry employees - allowances, reimbursements and work-related deductions

•         Taxation Ruling TR 95/22 Income tax: employee building workers - allowances, reimbursements, long service payments, redundancy trust payments and work-related deductions

•         Taxation Ruling TR 95/34 Income tax: employees carrying out itinerant work - deductions, allowances and reimbursements for transport expenses

Goods and Services Taxation Ruling GSTR 2001/3 Goods and Services Tax: GST and how it applies to supplies of fringe benefits confirms the ATO view that Division 111 of the GST Act requires reimbursement of a particular expense and that an allowance is not a reimbursement:

89. Division 111 also requires that the reimbursement be made for a particular expense. Employers need to have some understanding or agreement with their employees about the types of expenses they will reimburse so that a particular acquisition is involved. Types of requirements that indicate such agreements include:

•         the employer requiring the employee's invoices to demonstrate that relevant purchases have been made; or

•         the employer requiring the employee's credit card statement to evidence particular purchases (or all of the particular purchases) that are itemised on the statement.

...

95. The payment of an allowance is not a reimbursement. Input tax credits can not be claimed on payment of an allowance to an employee. There can be no input tax credit entitlement under Division 111.

GST-specific web guidance as to the GST treatment of allowances and reimbursements on the ATO website[6] provides, in part:

You make a reimbursement when you pay your employee the amount, or part of the amount, of a particular work-related purchase they make.

...

The definition of a reimbursement for GST purposes excludes some situations.

You are not entitled to a GST credit if you:

...

•         pay your employee an allowance or a payment based on a notional expense.

...

You are paying your employee an allowance when you pay them an amount for an estimated expense without requiring them to repay any excess. An allowance is not included in the definition of a reimbursement and you are not entitled to any GST credits.

...

A payment made to an employee based on a notional (rather than an actual) expense, such as a cents-per-kilometre payment to cover work-related use of an employee's private car, is an allowance, not a reimbursement. As it is not a reimbursement you are not entitled to a GST credit for this type of payment.

We take the view that the payment made to employees by the Entity for the fuel element of the business travel expenses is an allowance rather than a reimbursement. The reasons for this are:

•         The amount paid is calculated using the cents per kilometre method and does not relate to amounts actually expended by the employee.

•         The payment is made without regard to the actual amount expended by the employee in running their vehicle. It is not paid to compensate the employee precisely for expenditure incurred.

•         The employee is not required to provide receipts or other documents to provide evidence of the cost of using their vehicle for business purposes.

•         The employee is not required to repay any unspent money.

As we consider that the payment for the fuel element of the business travel expenses is not a reimbursement, it means that the requirements in Division 111 that the employee is reimbursed cannot be satisfied. Therefore, the Entity's payment is not treated as consideration for any acquisition the Entity made from the employee. As the Entity has not made any acquisition, you are not entitled to any input tax credits in relation to your payments to employees for the fuel element of the business travel expenses.

Question 2

Can an estimate of fuel usage be used so that it is not necessary to identify the actual fuel costs incurred by the employee for the purposes of Division 111 of the GST Act?

Summary

No. Using an estimate of fuel usage does not satisfy the ordinary meaning of reimbursement for the purposes of Division 111 of the GST Act. Refer to the explanation at question 1 above for the meaning of reimbursement for the purposes of Division 111 of the GST Act.

Question 3

What amount would be acceptable as the fuel tax element of the cents per kilometre for the purposes of Division 111 of the GST Act?

Summary

Since the answer to question 1 is 'no', this question is not applicable.

Question 4

For the purposes of Division 111 of the GST Act, will the Entity need to obtain a copy of the employee's tax invoice for the purchase of the fuel if the value of the fuel element of the reimbursement is less than $75?

Summary

Since the answer to question 1 is 'no', this question is not applicable.

[1] Pan Macmillan Australia Publishers, 2024, The Macquarie Dictionary online, www.macquariedictionary.com.au, accessed September 2024.

[2] 10 TBRD 480 at 484. A similar position was adopted in Case B55 (1951) 2 TBRD (NS) 227.

[3] (1978) DLR (3d) 233 at 235, 237.

[4] TR 92/15: Income tax and fringe benefits tax: the difference between an allowance and a reimbursement.

[5] TR 98/14 - Income tax: employee journalists - allowances, reimbursements and work-related deductions.

[6] GST and employee reimbursements | Australian Taxations Office (ato.gov.au) | QC 16704.