The tax treatment of costs and allowances incurred when an employee travels for work, or spends time living away from home for work, can be misunderstood by employees – and also by employers where fringe benefits tax applies. New ATO guidance goes some way to help clarify.
The ATO has released two products – a draft ruling and a practical compliance guideline – that cover the often confusing distinction between travel allowances paid to employees traveling for work and living allowances, which may be Living Away from Home Allowances [LAFHA] under the fringe benefits tax [FBT] rules. Although TSA has identified some minor technical issues with both documents, the overall impact of this material, once identified, should help clarify the operation of the law in this area.
The guidelines apply to all employers, except those providing benefits to employees working on a fly-in fly-out or a drive-in drive-out basis.
Taxation Ruling TR 2021/D1
This draft ruling sets out the general principles around the tax treatment of expenditure incurred on accommodation, food and drink when employees are travelling for work, as well as travel allowances and LAFHA. An earlier draft ruling on the same subject, TR 2017/D6, has been withdrawn. The distinction between travel allowances and LAHFA is important because the travel allowance is assessable to the employee – while the LAFHA is covered by the FBT rules and falls on the employer.
In considering the deductibility of expenditure on accommodation, food and drink, the draft ruling states that these costs must be incurred in the course of gaining or producing the employee’s assessable income. The positive test in s 8-1 is said to be satisfied where the employee is required to sleep away from home while travelling on work. The key issue is whether the employee is temporarily away from home while on a work trip or whether they are in fact living in a different location. The tax treatment is quite different, depending on the answer.
The expenditure will be regarded as a living expense where the employee lives a long distance away from their place of work and for the sake of convenience or logistics, they have relocated away from their usual place of residence.
Whether an employee is living away from their usual place of residence is determined by a number of factors:
Has there been a change in the employee’s regular place of work?
Where there has been a change in the employee’s regular place of work and expenditure is incurred on accommodation, food and drink in order to be closer to the new work location, the employee will generally be regarded as living at that new location and away from their usual place of residence.
Is the length of the overall period away from the employee’s usual palace of residence relatively long?
The longer the employee spends away from their usual place of residence the more likely they are to be taken to be living in another location. However, where the terms of employment required ongoing travel to multiple locations, the employee may not be in any one location long enough to be regarded as living at another location – for example, a performing artist on tour.
Is the nature of the accommodation such that it becomes the employee’s usual palace of residence?
Is the employee staying in long term accommodation, such as a house, unit or apartment, or are they making use of short-term accommodation, such as hotels or motels that are located close to the temporary work location?
Can the employee be accompanied or visited by family & friends?
- It is likely that an employee will be living away from their usual residence where they are or can be [even if they are not] accompanied or visited by family and friends. The draft ruling recognises that where employees regularly travel to the same location they may choose to rent or buy a property rather than stay in a hotel or other commercial accommodation when travelling on work [some federal MPs are known to have acquired a pied-a-terre in Canberra for their use during sitting weeks]. The associated costs will be deductible, provided they are not disproportionate to what would have been paid had the employee elected to use suitable commercial accommodation instead.
- The draft ruling also covers the not uncommon scenario where an employee attending a conference is accompanied by their spouse and stays an extra few days for leisure purposes. Reasonable apportionment is required in such situations. The cost of a hotel room will be generally the same whether or not a person is accompanied by a partner or spouse – hence accommodation costs relating to the conference would need to be apportioned, although the cost relating to the extra leisure days would not be deductible [see Example of 9 of the ruling]
- The draft ruling also touches on the substantiation requirements around claims for accommodation, food and drink when travelling on work. Unless exceptions apply, the employee must maintain written evidence of the relevant expenditure and keep travel records for work-related trips that involve an absence from their usual residence for six or more nights in a row. Even where there is an exception to the substantiations requirements, which happens where the allowance falls within what the Commissioner considers to be a reasonable amount, the employee must still have incurred the expense and demonstrate that it was incurred while travelling for work. While this raised an awkward, “What do you have to prove you don’t have to prove anything?” kind of question, it is understood that the Commissioner’s general practice is not to challenge claims for allowances that fall within his annual reasonable travel allowance expense amounts determination [refer to TD 2020/5 for the 2020-2021 income year].
- There is also a helpful discussion about the difference between a travel allowance and a LAFHA. Unlike a travel allowance, which covers deductible expenditure on accommodation, food and drink incurred by an employee travelling for work, a LAFHA is an amount paid to an employee for the additional living expenses incurred because the duties of their employment require them to live at a location away from their usual residence. However, if the allowance is only paid can compensation for the disadvantages associated with the work location [eg, lack of amenities, isolation], then it is not a LAFHA but simply assessable income in the employee’s hands. In that regard, the documentation covering the payment of the living allowance and the applicable industrial award may have a bearing on the tax outcome.
- There are 12 examples which between them provide a useful guide as to when something is regarded as a travel allowance or a LAFHA, and in what circumstances expenditure on accommodation, food and drink will be determined. The examples given seem for the most part to reflect the correct application of the law.
- The main exception is the commentary and example involving expenditure on food and drink in a same day travel scenario – eg, an employee leaves home in the morning, travels to attend an interstate business meeting and returns home on the same day. Where such an employee incurs expenditure on lunch, for eg, that expenditure in our view involves an unavoidable element of additionality, since the travelling employee would not generally have the option of preparing a sandwich or some other meal and taking it along on the business trip. It is not feasible to keep prepared food refrigerated while travelling and where air travel is involved, drinks are not permitted and many foods have to be declared and discarded on arrival. The expenditure on food and drink in such circumstances is incurred by the employee carrying out their employment duties. These expenses should therefore be deductible under s8-1 whether or not the travel involves sleeping at a location away from their usual place of residence.
- It may seem the ATO’s insistence on an overnight stay wrongly relies on the Federal Court’s decision in Roads and Traffic Authority of NSW v FC of T [1993] FCA 314, which did not separately consider travel days for road construction and maintenance workers arriving at the work camp provided by the Authority.
Practical Compliance Guideline PCG 2021/D1
This product outlines the ATO’s approach to working out when an allowance or reimbursement made to an employee relates to travelling for work or living at a location. The guideline is a companion piece to TR 2021/d1, but because it clarifies how the Commissioner will allocate compliance resources it has been issued as a separate product. Rulings explain how the ATO considers the law works, while PCG’S are often used to set down some flags that taxpayers can safely swim between. Taxpayers and advisers would probably prefer to have a single integrated guidance product, but the ATO has its own way of doing things.
The guideline sets up a decision grid which, if satisfied, entitles employers to treat an allowance as being paid for travelling for work. While none of these ‘rule’ are supported by any legislation, it can be helpful for the ATO as an administrator to fill in some of the gaps in the law in appropriate cases [and after consultation] by seeing up bright line tests that give taxpayers certainty about where they stand.
The allowance must be paid [or reimbursement made] to cover the empower’s accommodation, food and drink expenses, and should not be part of a salary packaging arrangement. The allowance must be included in the employee’s payment summary and tax withheld where appropriate. The employer should also obtain and retain documentation establishing that all the circumstances have been met.
The guideline then declares an arbitrary [but not unreasonable] set of boundaries that the commissioner wants employers and employees to stay within for the employee to be regarded as traveling for work. The boundaries include that:
- None of the individual absences from the employee’s usual place of residence should exceed 21 days
- The employee is not present in the same work location for 90 days or longer in an FBT year and
- The employee returns to their normal residence once their period away ends.
This article has been written by Frank Drenth of the Tax & Super Australia Tax Team from their professional publication, Outlook May/June 2021.
If this article raises any questions for you or your business, please contact the TSP team on 49264155 or email admin@tspaccountants.com.au for assistance.