An area where we see individuals getting it wrong as employees is in relation to claiming work-related travel expenses.
The absence of hard and fast rules can makes claiming travel expenses difficult as often the deductibility of such costs can be dependent on the nature of employment, the amount of time spent away from home and whether an allowance has been received to cover those costs. The required receipts and documentation must be sourced and maintained to make a claim.
Further, the requirements relating to the use of the Commissioner of Taxation’s (the Commissioner) reasonable travel amounts without having to keep written substantiation can be confusing.
Why should I focus on travel expense deductions?
The deductibility of overnight work-related travel expenses, which includes transport, accommodation and meals, is firmly in the sight of the Commissioner recently.
Our experience indicates that the ATO has been particularly active in targeting and in some cases amending prior year assessments for excessive claims in respect of individuals whose professions require them to frequently travel and stay away from home. Agents have had enquiries with respect to the tax affairs of clients who work as academics, fly-in, fly-out (FIFO) workers and medical practitioners.
When are travel costs allowed as a deduction?
As an employee, you are entitled to claim a deduction for travel costs, which can comprise accommodation, meals and transportation to the extent the loss or outgoing is incurred in gaining employment income and that it is not of a capital nature, a domestic nature or relate to the earning of exempt income.
As a general rule, travel costs incurred are deductible to an individual if it can be sufficiently demonstrated that the costs are incurred in the course of performing their employment duties and are not private or domestic in nature.
Accommodation incurred by an employee on short business trips are mostly deductible, however, the tax treatment is less clear where an employee is required to work away from their usual place of residence for an extended duration.
Whether the individual is considered to be “living away from home” (LAFH) or “travelling” (as part of their employment) is a critical consideration in determining the deductibility of travel costs.
What is the distinction between “LAFH” and “travelling”?
When an employee is “travelling” on business on behalf of an employer, travel expenses are incidental to the proper carrying out of the employment function and do not have the character of being private or domestic expenses. Such expenditure is typically deductible.
In some cases, the employee might also receive an allowance from their employer to cover for their LAFH or travelling costs (these are particularly common with FIFO workers and certain itinerant workers).
The ATO offers the following comparisons to help determine the difference:
|This is paid where an employee has taken up temporary residence away from their usual place of residence in order to carry out duties at a new, but temporary, workplace.||This is paid because an employee is travelling in the course of performing their job.|
|There is a change of job location in relation to paying the allowance.||There is no change of job location in relation to paying the allowance.|
|Where an employee is living away from home, it is more common for that employee to be accompanied by their spouse and family.||Where an employee is travelling, they are generally not accompanied by their spouse and family.|
|They are paid for longer periods (more than 21 days).||They are paid for short periods.|
The ATO emphasises that these indicators are guidelines only, and no single indicator should be relied upon to determine the nature of an allowance. For example, a travelling allowance might be paid to a commercial traveller, or travelling entertainer almost continuously, whereas another may receive a LAFHA for only a month.
There may be circumstances when an employee is away from their home base for a brief period in which it may be difficult to determine whether the employee is living away from home or travelling. The ATO says that as a practical general rule, where the period away does not exceed 21 days, the allowance will be treated as a travelling allowance rather than a LAFHA.
How are travelling allowances taxed compared to LAFH allowances?
An allowance which satisfies the meaning of a travelling allowance would be assessed to you and deductions for travel costs incurred may be claimed against that allowance.
In contrast, a LAFH allowance, to the extent that is qualifies as a “LAFH fringe benefit” for FBT purposes, would not be assessable you. Travel expenses incurred would generally not be deductible if you are an employee and you are living away from your usual place of residence.
What records do I need to keep in order to claim a deduction? What’s the “substantiation exception”?
All deductible travel expenses must be substantiated with written evidence and travel records (such as receipts and travel diaries) by you otherwise a claim will be denied.
A “substantiation exception” is however available which allows you to claim travel expenses without the need to keep written records if you are in receipt of a ‘bona fide’ travel allowance.
If eligible, you can claim deductions for travel expenses up to the Commissioner’s prescribed reasonable amounts for the relevant year without having to keep written evidence.
We do however recommend that you keep your receipts regardless to support your claims. It would put you at ease in the event of an ATO audit. This is a tricky area of the law, please contact us if you require assistance.