ATO shakes up claiming of employee travel expenses
The 2018 FBT year is coming to a close on 31 March 2018 and an area which will require closer consideration this year is the treatment of travel-related benefits. Last year, the ATO issued Draft Tax Ruling TR 2017/D6 Income tax and fringe benefits tax: when are deductions allowed for employees’ travel expenses? The Draft Ruling changes the landscape for the treatment of travel related benefits and brings some positive developments in the ATO’s views on when an employee is considered to be travelling on work.
The Draft Ruling details the ATO’s interpretation of when travel expenses would be deductible to an employee or ‘otherwise deductible’ for FBT purposes to an employer, in light of the 2014 John Holland case. In John Holland, the critical question was whether airfares paid for on behalf of fly-in, fly-out (FIFO) employees travelling to and from a site in Geraldton were subject to FBT or were ‘otherwise deductible’.
The ATO has withdrawn various rulings including Miscellaneous Taxation Ruling MT 2030 Fringe benefits tax: living-away-from-home allowance benefits, which previously provided a 21-day rule of thumb to determine the nature of an employee’s travel and whether an employee was travelling for work or may be seen to be temporarily living away from home.
This new Draft Ruling does not replace the 21-day rule of thumb. Instead, it provides a number of further factors which must be considered to determine whether a travel expense would be deductible to the employee or subject to FBT to an employer. In the Draft Ruling, the ATO introduces two new concepts which have not arisen out of law or any previous ATO guidance – ‘special demands travel’ and ‘co-existing work locations travel’. Both concepts are now highly relevant in determining whether a travel expense is deductible or subject to FBT and it is important that both employers and employees are across these new terms. These concepts are discussed below.
While the Draft Ruling was initially welcomed by both employers and employees as there was little guidance on this issue, now that the dust has settled, there are a number of key scenarios where travel expenses are often incurred which remain unaddressed in the Draft Ruling. This means that both employers and employees will need to consider the different circumstances in which travel expenses arise and whether in each scenario the expenses are deductible.
The Draft Ruling distinctly separates the treatment of travel expenses relating to transport (e.g. flights and car running costs) and travel expenses relating to accommodation, meals and incidentals.
Transport expenses – general principles
Under the Draft Ruling, the deductibility of a transport expense (such as airfares and car running costs) will depend on the type of travel undertaken by the employee. The ATO outlines four categories of travel, being ordinary home to work travel, special demands travel, co-existing work locations travel and relocation travel (these terms are explained further below).
Importantly, the ATO notes that an employee is not entitled to deduct a travelling expense simply because they receive a travel allowance to cover the expense.
The following factors are relevant in ascertaining which category a transport expense will fall into.
- Whether the employer and the work activities require the employee to undertake the travel;
- Whether the employee is directly or indirectly ‘paid to travel’. The Draft Ruling states that for employees on a wage, this factor is satisfied where the employee is paid for the period of travel (either as wages or ‘something else’ such as travel time). However, for salary earners, the employment contract will need to be considered to determine if the employee is being paid to travel to fulfil their employment duties. Where the employee is not being paid to travel, the ATO considers the transport expenses are non-deductible and/or subject to FBT;
- Whether the employee is under the direction and control (i.e. subject to the employer’s orders or directions) of the employer. The Draft Ruling provides several examples of direction or control such as whether the employee must take phone calls during the travel and whether the employee is required to complete work tasks while travelling;
- The travel arrangement must not be contrived.
Transport expenses – relevant factors
Broadly, transport expenses are deductible to an employee (or ‘otherwise deductible’ and not subject to FBT to an employer) where the travel is undertaken in the performing of the employee’s work activities and is not private in nature. Deductible transport will typically include trips between work locations and between a work location and another place (that is neither home nor a work location). In contrast, trips between the employee’s home and work are private in nature and non-deductible/subject to FBT.
The four categories of travel outlined in the Draft Ruling have different tax outcomes for each category.
Accommodation, meal and incidental expenses
The ATO’s view as outlined in the Draft Ruling is that accommodation, meal and incidental expenses are only deductible to an employee (and ‘otherwise deductible’ to an employer) where:
- The employee’s work activities require the employee 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 expenses in the course of relocating or living away from home.
In determining whether an employee is living away from home, regard should be had to various key factors.
- The time spent working away from home. The longer an employee spends working away from home, the more likely the employee is living away from home and not travelling for work;
- Whether the employee has a usual place of residence at a previous location, or whether the employee has in fact left their previous location and has now relocated;
- The nature of the accommodation. Fully equipped accommodation, exclusive use of the accommodation (i.e. it is not shared between different employees) and the ability to have family or friends visiting, may all indicate that the employee is living away from home; and
- Whether the employee is or can be accompanied by family or visited by family or friends. An employee who has travelled to a work location with their family and transferred personal belongings is more likely to have relocated for work and not merely living away from home.
Key takeaways – the good and the bad
On one hand, the Draft Ruling provides some common examples which are useful to both employees and employers, particularly in relation to FIFO arrangements. The ruling also confirms the ATO’s view of the John Holland case and expands the situations in which an employee is travelling for work based on the new ‘special demands travel’ and ‘co-existing work locations’ criteria.
However there are a number of shortfalls which we hope will be addressed in the final ruling. These have been raised in submissions to the ATO by industry representatives.
- A large focus in the Draft Ruling is that the employee must be under the direction and control of the employer and getting paid to travel to determine whether the cost is deductible and/or not subject to FBT. However there is no requirement that the employee must be ‘paid to travel’ under the law. The law only requires that the employees be required to travel as part of their employment – which is a broader concept to that described in the Draft Ruling.
- As there is a focus on direction and control, it is unclear whether an employee on a salary who is travelling outside of work hours (e.g. during the weekend) would be subject to the direction and control of the employer and considered to be travelling for work.
- There are several examples in the Draft Ruling where transport expenses of the employee were not deductible, however accommodation, meals and other incidental costs were deductible. This suggests that the rules in determining whether transport expenses are deductible are separate and distinguishable to the deductibility of other travel expenses. Previously, it was commonly understood that the entire travel arrangement would be subject to the same tax treatment for transport and other expenses (e.g. accommodation and meals).
- The ATO has removed the 21-day rule of thumb without replacing this with another practical guideline or safe harbour period of time. There is however, an example in the Draft Ruling where the ATO considers that an employee travelling on a three month work placement to an alternative place of work is living away from home, although guidance in what constitutes travelling for work versus living away from home is generally lacking in the Draft Ruling. Taxpayers need clear safe harbour guidance from the ATO as to what period of time would be considered to be travelling versus living away from home.
Once issued as final, the Ruling will apply to taxpayers both before and after its date of issue and therefore applies for the 2017/18 FBT year. Accordingly, taxpayers should review their position taken in previous years and consider whether this complies with the Ruling guidelines. In light of this Draft Ruling, we anticipate that the ATO will be monitoring both employer’s FBT returns and employee’s individual tax returns in respect of work-related travel expenses.
- Review the current travel expense and reimbursement arrangements with employees to ensure that all travel expenses are otherwise deductible under the new Draft Ruling, as a further FBT burden could arise.
- Review employment contracts, and in particular, the role and responsibilities of employees who travel for extended periods of time. Whether the employer is subject to the direction and control of the employer is an important factor.
- Review arrangements with employees who are travelling between home and alternative work locations.
- Review arrangements with employees who were previously considered to be living away from home but may now be considered to be travelling.