The idea of making allowances to cover the cost of necessary travel by employees is not a new area of tax, but it is becoming increasingly significant, especially with today’s fast-moving and ever more global economy. Businesses are increasingly moving staff around to achieve expansion and build greater ties across greater distances.
It can however be an area of tax law that is still misunderstood by many. First because of recent legislative changes to the LAFHA (living away from home allowance, which we looked at in the previous newsletter) and secondly because so many employees rely heavily on these types of allowances. As travelling for work purposes can affect employees both financially and emotionally, there is plenty of interest in ensuring that employers get it right.
The purpose of both types of allowances is to compensate employees for the additional costs they incur due to being required to travel and/or live away from home as a part of their employment duties. However the fact that there are two types of allowances is a legitimate situation as there are relevant issues, for both employer and employee, that will determine which allowance better suits an employee. Having more than one option means tax outcomes can be tailored to match the circumstances, as opposed to a “blanket” policy or allowance to cover all travelling employees.
Although they are both referred to as “allowances,” they are dealt with by different taxation regimes. LAFHA is dealt with under the fringe benefits tax (FBT) regime and travel allowances are dealt with under the income tax regime. As we have covered LAFHA recently, we will focus on the travel allowance options available (although ask this office if you require more information on the LAFHA).
Travel allowances are paid to employees who are travelling on business but are not considered to be living away from their home. As a general rule of thumb, the Tax Office considers being on the road for 21 days or less to be travelling. Also there is no change of employment location, and generally an employee travelling for business is not accompanied by spouse and children. A travel allowance provided by an employer is not taxed under the FBT regime but may be taxed under the PAYG withholding regime as a supplement to salary and wages.
The Tax Office publishes guidelines each year on what it considers to be reasonable amounts for a travelling employee. These guidelines give a reasonable daily travel allowance amount and take the following factors into consideration:
- destination of travel (broken down into metropolitan cities, country centres within Australia and international countries)
- other incidentals
- employee annual salary (in ranges), and
- specific rates for truck drivers.
Countries other than Australia are split into “cost groups”, with each determining the reasonable amount of the daily allowance. These are determined based on the cost of living in that country and then numbered between cost groups one to six. Cost group one has the lowest daily allowance and cost group six the highest.
The reasonable amounts are intended to apply to each full day of travel covered by the travel allowance, with no apportionment required for the first and last day of travel (ask this office if you are interested in what the reasonable amounts are for 2014-15).