With COVID-19 travel restrictions within Australia continuing to ease, now is the time to consider how mobility for some of your employees will be handled in the context of these new guidelines. Our team can assist you in re-drafting policies, assessing whether systems are sufficiently robust and providing practical advice and assistance.
Deductibility of travel expenses
The general principles for determining when travelling expenses are deductible (and ‘otherwise deductible’ for FBT purposes) are that the expenses must be incurred in gaining or producing the employee’s assessable income and not be of a capital, private or domestic nature. Where travel costs are not (otherwise) deductible, it is possible the employee should be considered to be ‘living away from home’.
Highlights from the final and draft rulings, regarding making this assessment, are:
- The costs of travelling between home and a regular place of work have long been regarded as non-deductible and there is no change to this position.
- Food and drink costs are usually private, but become deductible where the employee is ‘travelling on work’ overnight.
- The substance of the arrangement is what is critical – not the name of any allowance paid or the particular wording in a contract.
- Business travel fits within, and is a necessary part of, the employment duties. The rulings refer to this as ‘travelling on work’.
- An employer usually requests business travel, often pays the employee for the travel time and the employee is often under the employer’s direction and control during the travel.
- The costs must be incurred in the course of the employee’s income producing activities, rather than being a result of the personal circumstances of where the employee lives, in order to be deductible. For instance, if the employee has chosen to live far away from their work location, that does not make travel to work deductible.
- Relatively short periods of time will be more likely ‘travelling on work’, longer periods tend to indicate the employee is ‘living away from home’.
- A change in the employee’s regular place of work indicates they are ‘living away from home’, as opposed to ‘travelling on business’.
- If the employee can be accompanied, or visited, by family, this tends to indicate they are ‘living away from home’.
- More temporary style accommodation (such as a hotel) is more likely for ‘travel on business’, whereas more permanent accommodation (such as an apartment with kitchen and laundry facilities) is more likely to indicate ‘living away from home’.
- No single factor is decisive. All should be considered.
The safe harbour – 21 day rule is back!
An unofficial 21 day rule from years ago, had fallen out of favour in more recent times, but has now been resurrected in a Draft Practical Compliance Guideline. The Guideline outlines the circumstances in which the ATO will accept that an employee is ‘travelling on work’ and will generally not apply compliance resources. The following criteria must be satisfied in order for the safe harbour to apply:
- provides an allowance to, or pays/reimburses, an employee for accommodation, food and drink expenses;
- the amount is not part of a salary packaging arrangement, and the employee isn’t given the option to elect to receive additional remuneration in lieu;
- withholds tax where appropriate; and
- obtains and retains relevant supporting documentation to support all of this.
- is away from their normal residence for work purposes;
- does not work under a fly-in fly-out or drive-in drive-out basis;
- is away for no more than 21 days continuously at a time;
- is away for less than an overall aggregate 90 days in the same work location in an FBT year; and
- returns to their normal residence when their period away ends.
Of course, employees travelling for greater than 21 days at a time or 89 days in aggregate, may still qualify as travelling on business. In these cases, it will be necessary to consider the factors in the rulings carefully in order to come to a position.
We suggest employers consider the following:
- Will the safe harbour be useful in your business?
- Do you have appropriate travel policies in place?
- Consider reviewing current travel policies to ensure travel expenses are being treated appropriately for tax purposes.
- Have you taken any technical positions or applied any practical rules that may need revisiting? And are these documented appropriately?
- Are there any new projects or plans in the pipeline that may require updated policies that take into account the new guidelines?
- What procedures are in place to ensure your data is captured and supporting documentation is maintained?
- Are there any proposed changes to the way travel is to be managed or undertaken that may trigger different tax outcomes?