On 28 June 2017, the Australian Tax Office (ATO) released Draft Tax Ruling 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.
The Draft Ruling looks at the deductibility of two categories of ‘travel expenses’ separately
Transport expenses (travel by airline, train, car, bus or other vehicle)
Accommodation, meal and incidental expenses of an employee when they travel away from home
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.
The release of TR 2017/D6 provides further guidance to taxpayers on when travel expenses of an employee is, or would otherwise be, deductible.
Deductibility of Transport 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 to work are not deductible.
Broadly, transport expenses (including airfares, train, car or bus costs) are deductible where the travel is undertaken in performing an employee’s work activities.
When determining whether travel has been undertaken in performing an employee’s work activities, and therefore whether the transport expenses incurred are deductible, 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.
TR 2017/D6 examines how the stated principles apply to four separate categories of travel and uses worked examples to illustrate when travel expenses of an employee may or may not be deductible.
Ordinary home-to-work travel (Not Deductible)
Special demands travel (i.e. travel to remote work locations) (Deductible)
Co-existing work locations travel (Deductible)
Relocation travel (Non-deductible)
Deductibility of Accommodation, Meals and Incidentals
Ordinary expenses incurred by, or for, an employee in respect of accommodation, meals and incidentals are of a private nature and non-deductible. However, where these expenses are incurred by, or for, an employee in performing the employee’s work activities, these will be deductible.
According to the draft ruling, accommodation, meal and incidental expenses are incurred in performing work activities in the following cases:
an employee’s work activities require them to undertake the travel;
the work requires the employee to sleep away from home overnight;
the employee has a permanent home elsewhere; and
the employee does not incur the expense in the course of relocating or living away from home.
In some cases, an apportionment may be required if accommodation, meal or incidental expenses are used to an extent for private or domestic purpose, for instance, where family may stay in the accommodation of an employee for recreational purposes.
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.
TR 2017/D6 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.
However, updates have been made to the criteria the ATO will consider when determining if an employee is living away from home. TR 2017/D6 provides the following factors to determine whether an employee is living away from home:
the time spent working away from home;
whether the employee has a usual place of residence at a previous location;
the nature of the accommodation; and
whether the employee is, or can be, accompanied by family or visited by family or friends.
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.
Employers should consider if TR 2017/D6 will impact the FBT treatment of any travel and LAFHA benefits that will be provided in the current 2018 FBT year. Employers may need to reassess if employees are travelling for work or are living away from home.
Employers should also consider if the view in TR 2017/D6 impacts how travel and LAFHA benefits historically have been treated for FBT purposes, to work out any voluntary disclosure or refund implications.
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