Travel allowances — and some common mistakes

The idea of making allowances to cover the cost of necessary travel by employees is not a new area of tax, but it had become significant — before the restrictions imposed by the pandemic. Businesses had been increasingly moving staff around to achieve expansion and build greater ties across greater distances, and one assumes (after the pandemic is under control) that the trend will pick up where it left off.

It can however be an area of tax law that is still misunderstood by many, and with the extended COVID-19 enforced break in dealing with such matters, perhaps a refresher scan over the issues is warranted — first because of legislative changes to the LAFHA (living away from home allowance) and secondly because so many employees had been relying 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.

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 ATO 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 ATO publishes guidelines each year on what it considers to be reasonable amounts for a travelling employee (see the 2021-22 guidelines here). 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)
accommodation
meals
other incidentals
employee annual salary (in ranges)
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 has 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.

Where the employer has paid the employee less than the ATO-determined reasonable amount, then the employer is not obligated to withhold from the allowance nor does the employer have to include the allowance on the employee’s PAYG income statement for that relevant taxation period.

Where a travel or overtime meal allowance is not shown on the employee’s PAYG income statement, it does not exceed the reasonable amounts, and has been fully expended on deductible expenses, neither the allowance nor the expenses should be included in the employee’s income tax return. If the employee has not expended the entire travel allowance amount, then both the allowance amount and the deductible expenses should be included in their income tax return.

The employee can claim in their personal income tax return the costs of meals, accommodation and other incidentals they incurred as part of their business travel. Expenses claimed however must have been incurred and must be an allowable deduction. The mere fact that they received a travel allowance does not in itself allow a deduction to be claimed.

Where the employee is claiming no more than the reasonable amounts as per ATO guidelines, substantiation of the claim with written evidence is not required. If however, the employee claims more than the reasonable amounts, then substantiation is required for the entire amount of the claim and not just the excess above the reasonable amounts.

Main areas of confusion
Some taxpayers get confused by the interaction between the LAFHA and travel allowances, and in some cases people have tried to claim against the LAFHA where no deduction is available. In fact, if an employee tries to make a claim for travel expenses where a LAFHA has been provided by the employer, they are essentially taking “two bites of the cherry” as they would not have had income tax withheld from the amount, nor have they included the allowance received in their income tax return as assessable income. This is because the employer would have dealt with any tax (FBT) liability on the LAFHA, if there was any FBT payable after available concessions.

Another incorrect assumption is that the substantiation exemption means having no records at all. In addition, where there has been reliance on the substantiation exemption for travel claims, there may still be a requirement in appropriate cases that an employee should be able to produce the following:

how they worked out their claim
that the expense was actually incurred
an entitlement to a deduction (that is, that work related travel was undertaken)
a bona fide travel allowance was paid; and
if accommodation is claimed, that commercial accommodation was used.

It is also crucial that an employer is aware of the differences between the two forms of travel allowance, and which one suits the circumstances at hand. Other important factors an employer should consider when determining the correct allowance to give to their employees include:

enterprise bargaining agreement (EBA) or employment contract
policies and governance for the business
any industry awards
industry standard practices
the experience and level of the employee
the employee’s personal situation (that is, with family, house etc)
any exceptions to the general rules (for example, fly in-fly out employees).

Not only is it essential to ensure the correct classification, but employers and the tax professionals helping them also need to apply the appropriate tax treatment for each allowance.