To compensate for travel expenses when employees sleep away from home for work purposes, an allowance is often paid by their employer to cover meal, accomodation, and incidental expenses. It is important to distinguish if this allowance constitutes a travel allowance or on the other hand a living away from home allowance(LAFHA), because the tax treatment is vastly different.
– Travel allowances are assessable to the employee (under s 6-5 of the income tax assessment act 1997(ITAA97)) in certain circumstances. By contrast, if an employer pays for the expenses of an employee who is deemed to be “living away from home” for work purposes (rather than travelling) by way of a LAFHA, such payments are dealt with under the FBT provisions (s 30 of the Fringe Benefits Tax Assessment Act 1986) and are not assessable to the employee.
– LAFHAs should not be reported via single touch payroll (STP) (or on the payment summary as the case may be). Travel allowances, however, may be reportable(see later).
– From an employee standpoint, expenditure on accomodation, meals and incidentals is only deductible under s-81 ITAA97 where the employee is travelling while performing their work activities and not living away from home.
LAFHAs are paid where an employee has moved and taken up temporary residence away from their usual place of residence, so as to be able to carry out employment duties for a time at the new (but temporary) workplace. A travel allowance, on the other hand, is paid because the employee is travelling in the course of performing their job and has not relocated. Other distinguishing factors are set out in the table below.
In terms of length of absence, until recently a benchmark of 21 days was widely believed to apply (after which it was more likely that an employee would be living away from home). This was derived from Miscellaneous Tax Ruling MT 2030, which was more than 30 years old when it was withdrawn in July 2017.
This ruling was replaced by draft taxation ruling TR2017/D6 Income tax and fringe benefits tax: when are deductions allowed for employees’ travel expenses? Which was released on 28 June 2017. This draft ruling indicates that the limit is more in the realm of two or three months (after which it is more likely an employee will be deemed to be living away from home). However, despite being released more than 2 years ago, this draft ruling is yet to be finalised – which leaves the time benchmark somewhat unclear. However, as per the table below, the time benchmark is only one factor used to determine whether a worker is living away from home or travelling.
Having established that the amount being paid is a LAFHA, the allowance will attract FBT unless all of the following conditions as set out in s 31(1) and 31(2) of the Fringe Benefits Tax Assessment Act 1986 are met:
1. Employees maintain an “ownership interest” in a unit of accomodation (e.g. home) in Australia from which they live away from. To satisfy this condition, the employee or their spouse must either own or be renting a home/townhouse/apartment etc in Australia and it must be available for their immediate use and enjoyment at all times while the employee is living away from it for work.
2. The LAFHA can only be paid for 12 months per employee, per location.
3. The employee must provide the employer with a LAFHA declaration with information about their accomodation and food or drink expenses. Employees do not need to complete this declaration if they have provided the employer with documentary evidence of their accomodation and food or drink expenses. If required, this declaration must be provided no later than the day on which the FBT return is due to be lodged or, if no return is due, 21 May following the end of the FBT year.
4. Substantiation of accomodation expenses is also required (receipts, etc), and also substantiation of food and drink expenses where the food or drink expenses exceed the specified amounts in the annual ATO tax determination (currently TD 2019/7) (see case study)
Where an employee is – after weighing the above factors – deemed to be travelling overnight for work purposes, the employer may pay them an overnight, reasonable travel allowance as a way of easing the record-keeping burden around travel. This means that an employer has the choice top pay an allowance to an employee who is travelling for work instead of paying the specific costs of travelling. The treatment of the allowance is straightforward from an employer standpoint, whereby if:
– The employer expects the employee to spend all of the travel allowance on accomodation, food, or incidental expenses.
– The employer shows the amount and nature of the allowance separately in their accounting records.
– The allowance is not for overseas accomodation and,
– the amount paid is less than or equal to the reasonable allowance rate set out in the annual ATO tax determination (currently TD2019/11)
then no tax should be withheld from the allowance, it is not reportable for single touch payroll (STP) purposes or shown on payment summaries and it should be recorded on employee pay slips.
On the other hand, where the amount is folded into salary and wages (i.e. it is not shown separately in the payroll/ accounting records), tax must be withheld from the whole amount, and it is reportable for STP purposes.
Alternatively, where the above conditions are met, yet the allowance exceeds the reasonable per day amounts, then tax must be withheld from the excess only, and reporting of the whole allowance is required under STP and on the payment summary.
With some LAFHAs running into the tens of thousand of dollars, to limit their FBT exposure, employers should consider requesting employees sign a declaration to the effect that condition 1 and 4 is complied with throughout the year. In the event of non-compliance (e.g. the employee commences to rent out their residence during the 12-month period), the employees agrees, in the signed declaration, to pay the FBT.
Also, where the earlier-listed conditions cannot be met and the LAFHA is subject to FBT, employers should consider just paying the amount to the employee by way of increased salary (not as separate LAFHA in the payroll). By doing this, the tax burden shifts to the employee (they pay tax on the amount at their marginal tax rates rather than the employer paying FBT at the rate fo 47%). Returning to the earlier case study, by employing this strategy after the 12-month mark, FBT is avoided by Jack’s employer.