Travel Tax Deductions
Employees’ travel expenses
The Australian Taxation Office (ATO) has issued taxation ruling TR 2021/1 which discusses when deductions may be allowable for employees’ travel expenses.
The ruling states a travel expense is an expense relating to:
- transport (that is, travel by airline, train, car, bus or other vehicle), and
- accommodation, meal and incidental expenses of employees when they travel away from home for work.
An employee can deduct a travel expense under section 8-1 Income Tax Assessment Act 1997 (ITAA 97) to the extent that:
- it is incurred in gaining or producing the assessable income, and
- the expense is not of a capital, private or domestic nature; and
- the substantiation requirements are met.
The ruling states an employee’s purpose or reason for incurring travel expenses is not of itself enough to establish deductibility under section 8-1.
As well, an employee is not entitled to deduct an expense simply because an allowance is received. The nature of the expense and its connection to the income producing activities determines whether it is deductible.
Generally, an employee’s ordinary costs of travelling between home and work are regarded as being of a private or domestic nature and are not deductible. A transport expense is not deductible where the travel is to start work or depart after work is completed. The cost of such travel is not incurred in gaining or producing the employee’s assessable income.
In contrast, a transport expense is deductible where the travel is undertaken in performing the employee’s work activities. The draft states to determine whether travel is undertaken in performing an employee’s work activities (including from home to a work location), 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 of the travel, and
- whether the above factors have been contrived to give a private journey the appearance of work travel.
Overseas travelling expenses
Expenditure incurred in travelling overseas is deductible where the expenses have the necessary connection with the production of the taxpayer’s assessable income.
Many cases concern overseas travelling expenses incurred by professional and academic persons in connection with the acquisition of additional knowledge and information – i.e. self-education expenses. The Commissioner has stated the following concerning the deductibility of these expenses:
- where a taxpayer is away from home overnight in connection with a self-education activity, accommodation and meals expenses incurred are deductible under section 8-1 ITAA 97. (Examples include an overseas study tour or sabbatical, a work-related conference or seminar or attending an educational institution.) They are part of the necessary cost of participating in the tour or attending the conference, the seminar or the educational institution. The ATO does not consider such expenditure to be of a private nature because its occasion is the taxpayer’s travel away from home on income-producing activities
- airfares incurred on overseas study tours or sabbaticals, on work related conferences or seminars or attending an educational institution are deductible. They are part of the necessary cost of participating in the tour or attending the conference or seminar or the educational institution
- however, the ATO considers no deduction is allowable for expenditure on accommodation and meals where a taxpayer has travelled to another location for self-education purposes but is considered to have established a home there (e.g. to do a two-year course)
- if a trip would not have been made but for the taxpayer’s desire to engage in some business activity, and the private activity is merely incidental, then it may be appropriate to allow a deduction in full for the cost of the airfares; in other cases, the cost is to be apportioned.
Substantiation of employees travel expenses
Employees must substantiate their travel expenses unless they can rely on an exception to the substantiation rules (e.g. they have received a bona fide reasonable travel allowance and certain conditions are satisfied: these are discussed later). Substantiation basically involves getting receipts for all expenses.
In relation to domestic and overseas travelling expenses, a travel diary must also be kept if the employee is away for 6 or more nights in a row. The diary is not necessary for domestic travel if a reasonable travel allowance is received (this is explained later).
The purpose of a travel diary is to allow accurate calculation of the employment-related and private elements of a trip. In it should be recorded the dates, places, times and duration of the activities and travel. There is no requirement to lodge the diary with the income tax return.
This table lists common scenarios and whether a travel diary is required.
|Description||Travel Diary required?|
|Away from home in Australia for less than 6 consecutive nights||No|
|Away from home in Australia for 6 or more consecutive nights||Yes, unless receive a reasonable travel allowance and claim does not exceed the reasonable allowance amount|
|Away from home overseas for less than 6 consecutive nights||No|
|Away from home overseas for more than 6 consecutive nights||Yes|
Travel expenses for self employed
Self-employed individuals need to substantiate their travel expenses before they will be deductible. Subdivision 900-D ITAA 97 sets out the requirements. Basically, the Subdivision requires the keeping of receipts for all expenses and the keeping of a travel diary when away from home for 6 or more nights in a row.
There is no exception from the substantiation rules if a travel allowance is received.
Payment of employees’ travel expenses by employer
Where an employer pays travel expenses on behalf of an employee, there will be fringe benefits tax (FBT) issues where there has been some private or non-deductible travel by the employee.
To the extent FBT is applicable, the benefit will be income tax exempt in the hands of the employee.
Types of fringe benefits that can arise where an employer pays the travel expenses of an employee include the following.
- Car fringe benefit – provision of a car by the employer to the employee for private use.
- Car parking fringe benefit – where the employer provides car parking facilities for an employee and certain other conditions are met.
- Expense payment fringe benefit – where the employer pays or reimburses the expenses incurred by the employee (e.g. car registration).
Car expenses – reimbursed cents per kilometre
Note that the reimbursement of car expenses on a rate per kilometre basis by the employer is not a fringe benefit, except in relation to remote area holiday transport and overseas employment holiday transport.
This is an exception to the general rule that reimbursement for expenses incurred by an employee gives rise to an expense payment fringe benefit.
Employees will need to show this reimbursement as assessable income in their tax return. They may be able to claim a deduction for any work-related car expenses.
Provision of travel allowances by employer
The provision of a travel allowance by an employer to an employee is not subject to FBT. The allowance will be assessable income of the employee and deductible to the employer.
A deduction is available for the expenditure associated with the receipt of the travel allowance but only where the requirements of section 8-1 ITAA 97 have been satisfied. This means:
- the expenditure must be work related; and
- must be a deductible expense; and
- must be incurred; and
- the substantiation rules must be satisfied unless an exception applies.
As mentioned earlier, the receipt of a genuine travel allowance will not make an expense deductible if it was otherwise non-deductible. However, if it is otherwise deductible, there may be special exceptions from the substantiation rules that the employee needs to be aware of and these are discussed below.
Exceptions from the substantiation rules for travel expenses
Exceptions from the substantiation requirements for travel expenses apply in a number of scenarios. These exceptions are only available to employees. They include company directors, office holders and religious practitioners. They are not available for those who are self-employed.
- Part day travel allowances – A travel allowance paid for travel that does not involve an overnight stay is a part-day travel allowance. The ordinary substantiation rules apply to such allowances.
- Award transport payments – An award transport payment is a transport payment covering particular travel that was paid under an industrial instrument that was in force on 29 October 1986. Section 900-215 ITAA 97 provides that substantiation is not required for deductible expenses incurred that are covered by reasonable award transport payments.
- Domestic Travel Allowances – These are travel allowances paid for travel that involves an overnight stay. Where the allowance is returned as assessable income, section 900-50 ITAA 97 states that an employee can claim a deduction for travel allowance expenses for travel within Australia without the need for substantiation if the Commissioner considers reasonable the total of the amounts claimed for travel covered by the allowance. If an amount is claimed that is more than the Commissioner’s reasonable travel amount, the whole amount must be substantiated.
The Commissioner determines the rates for travel allowance expenses he considers reasonable for each year of income. They are published in a taxation determination issued each year.
For the travel allowance expenses to be considered for exception from substantiation, the relevant allowance must be paid for specific travel. A travel allowance that is paid to an employee irrespective of whether and how often work-related travel is undertaken, and/or whether an employee is required to sleep away from home or to incur expenditure on food and drink would not qualify.
Further, the travel allowance must be paid or payable to cover expenses for accommodation or food or drink or expenses incidental to the travel incurred by the employee in connection with specific work-related travel, which requires the employee to sleep away from home.
Note however that despite the exception from the substantiation rules, the Commissioner maintains that employees may still be required to show the basis for determining the amount of their claim, that the expense was actually incurred, and that it was for work-related purposes.
- Overseas Travel Allowances – Section 900-55 ITAA 97 provides that an employee can deduct the amount of a travel allowance expense received for travel outside Australia without getting written evidence under the same conditions as for domestic travel allowances except that it is still necessary to get written evidence for losses or outgoings for accommodation. However, for overseas travel covered by a travel allowance, it is necessary to keep a travel diary if the travel involves the employee being away from his/her ordinary residence for 6 or more nights in a row.
Choice not to return allowance as assessable income
Generally, travel allowances are taxed as salary and wages and tax must be withheld by the employer. However, where the following conditions are satisfied:
- the employer expects the employee to spend all the travel allowance on accommodation, food, drink or incidental expenses;
- the employer shows the amount and nature of the travel allowance separately in the accounting records;
- the travel allowance is not for overseas accommodation; and
- the amount of travel allowance paid to the employee is less than, or equal to the reasonable travel allowance rate;
then the employer:
- doesn’t need to withhold tax from the travel allowance paid to the employee;
- doesn’t need to include the amount of the travel allowance in the allowance box on the employee’s payment summary; and
- need only include the allowance on the payslip.
If an employee receives a travel allowance, it doesn’t have to be included on the tax return if:
- it was not shown on the payment summary
- it does not exceed the Commissioner’s reasonable allowance amount, and
- the whole amount was spent on deductible expenses.
Where the allowance is not required to be shown as assessable income in the employee’s tax return, and is not shown, a deduction for the expense cannot be claimed in the tax return.
Note that this exception does not apply for a travel allowance for overseas accommodation.
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