Further to removing the deductibility of travel expenses in relation to rental properties in the 2017-18 Federal Budget, the Commissioner has issued Draft Tax Ruling TR 2017/D6 which sets out the general principles for determining whether an employee can deduct travel expenses.
This draft ruling provides the ATO’s interpretation of when an employee’s travel expenses, including transport and accommodation, are, or would otherwise be, deductible for income tax and fringe benefits tax (FBT) purposes. Where an employer provides or reimburses an employee for travel expenses, including transport and accommodation, meal and incidental expenses, FBT may arise. However, FBT can be reduced where the ‘otherwise deductible’ rule can be applied. That is, the employer can reduce the taxable value of the benefit by the amount that the employee would have been entitled to claim as an income tax deduction, had the employee incurred the benefit themselves.
Deductibility of travel Expenses
The general rule remains that an employee’s ordinary costs incurred in travelling between their home and regular work location are not deductible. Similarly, an employee’s costs of relocating for work and living away from home are not deductible.
Generally, transport expenses are deductible where the travel is undertaken in performing an employee’s work activities, the Draft Ruling states that the following factors need to be considered:
- whether the work activities require the employee to undertake the travel;
- whether the employee is paid, directly or indirectly, to undertake the travel;
- whether the employee is subject to the direction and control of their employer for the period for the travel; and
- whether the above factors have been contrived to give a private journey the appearance of work travel.
Some examples are used in TR 2017/D6 to illustrate when travel expenses of an employee may or may not be deductible.
Travel between home and place of work
Generally speaking, employee will not be able to claim a deduction for costs incurred travelling between home and regular work location. Travel to and from work is considered private and domestic in nature. With the above in mind, there are certain scenarios where home to work travel may be deductible. For instance, in circumstances where it is a necessity to carry bulky equipment in your car for work purposes, and there is no secure storage space at the work location.
If the employer requires an employee to work in an alternative work location temporarily without the need to remain away from home, and pays him a travel allowance to cover the extra costs and inconvenience, employee will not be able to claim a travel deduction as the cost will be regarded as private or domestic in nature. The fact that a travel allowance is paid to the employee does not make the travel deductible, and the allowance will still need to be included in employee’s assessable income regardless of deductibility.
Special demands travel
Special demands travel includes: travelling to remote work locations, moving continuously between changing work locations, and living away from home in the course of performing work for a short period of time.
If the nature of the travel falls under ‘special demands’ travel, the travel expenses will generally be deductible to the extent that employee is subject to the direction and control of employer. Such costs would typically be incurred from the point the staff commence his shift until finish the shift.
Additionally, if an employee is a fly-in fly-out worker and employer provides him with accommodation in close proximity of the work site, meals and incidentals for the short period employees are working away from home will also be deductible provided that:
- the work being performed requires employee to sleep away from home overnight;
- the employee has to leave the work location between rostered work shifts;
- the employee has a permanent home elsewhere; and
- the cost being claimed is not related to relocating or living away from home for an extended period of time.
Changes to LAFHA
TR 2017/D6, when finalised, will also replace Miscellaneous Taxation Ruling MT 2030 – Fringe benefits tax: Living away from home allowance benefits in providing guidance on LAFHA. The new ruling continues to treat accommodation, meals and incidental expenses of employees that are living away from home to be private or domestic in nature and non-deductible.
The Commissioner takes into consideration the following factors when determining if an employee is ‘living away from home’:
- the time spent working away from home;
- whether the employee has a permanent home at a previous location;
- the nature of the accommodation, whether the accommodation provided by the employer has the characteristics of a home; and
- whether the employee is, or can be, accompanied by family or visited by family or friends.
More Importantly, the ATO guidance of 21 days being the practical threshold between travelling and living away from home (set out in MT 2030) has been removed due to the over-reliance being placed on it by both taxpayers and the ATO. The FBT exemption for LAFHA benefits will remain limited to a 12-month period for employees maintaining an Australian home, or employees working on a fly-in fly-out or drive-in drive-out basis.
An allowance paid to you by your employer for costs incurred whilst genuinely living away from home within the bounds of the ATO’s guidance will generally be considered a living-away-from-home allowance, which means that it is exempt from income tax and you will not need to include it in your assessable income.
Need help in understanding the above, please contact one of our tax accountants at The Quinn Group on (02) 9223 9166 or submit an online enquiry.