At the end of September last year, the Taxation Commissioner Chris Jordan issued a consultation document on the substantiation exception for reasonable travel allowance expenses.
“It is not unusual for the Commissioner to issue guidance on travel allowances”, say tax policy specialist Ken Mansell. “He releases an annual update on reasonable travel and meal allowance expenses.”
However what was totally unexpected, according to Mansell, was that the consultation document stated that the workings of the travel allowance substantiation exception was widely misunderstood by taxpayers and tax practitioners, and this misunderstanding meant that in many cases taxpayers are overclaiming travel deductions, sometimes on the advice of their advisers. “In this document the Commissioner plainly states that a lot of tax practitioners are simply giving out incorrect advice regarding travel allowances and deductions for expenses incurred while travelling,” Mansell says.
The Commissioner in his consultation document (read it here) says: “For around 30 years, we have provided guidance on the exception to substantiation for travel allowance expenses. More and more, taxpayers and their representatives, are telling us the ATO’s guidance is confusing and, as a consequence, the outcome of compliance action is considered unjust. Cases continue to proceed to the tribunal or court, further demonstrating the complexity and ambiguity in this area.”
Mansell’s warning for travel allowance claims is that it could very well be that the tax practitioner community may be forced to disappoint their clients in the foreseeable future. “Tax agents need to realise that they really need to get to understand how these substantiation exceptions operate, or be prepared to face a future where your clients will have no access to them,” he says.
“Many of the incorrect deduction claims by tax agents and their clients is a result of ‘pub talk’ about how travel deductions can be claimed”, says Mansell. “They may hear talk about how someone had to travel overnight for work, had their employer give them a reasonable travel allowance in lieu of salary based on the Commissioner’s published rate, spent none of the money while travelling as they stayed with Aunty Gladys for free, and either did not declare the travel allowance as income, or claimed a deduction for the entire amount of the allowance even though they did not spend it,” he says. “The Commissioner says this is just simply incorrect.”
Mansell reminds us that travel allowances are assessable income and that to claim a deduction for travel expenses the general rules in section 8-1 apply – that the expenditure must be incurred in gaining assessable income. Simply, there is no standard deduction that can be claimed by those who have a travel allowance.
But there are three administrative concessions that relate to travel allowances — for employers that pay reasonable travel allowances there is a withholding exception and a payment summary exception, and for employees there is a substantiation exception if the allowance paid is reasonable. “But remember, the latter does not extinguish the requirement for the employee to incur an expense. The taxpayer may not be required to substantiate it in a written form like other deductible work expenses, but the expense must still happen to be able to claim a deduction.”
There are other issues surrounding such allowances that Mansell says should be considered, such distinguishing between travelling and living-away-from-home, and the targeting of certain industries. “There are certain industries getting particular focus from the ATO, such as truck drivers or mining company employees,” he says.
“In fact, recently the ATO found that many of the employees of a large employer in regional Queensland were all making incorrect claims for travel deductions due to this misunderstanding,” he says. “The ATO wrote letters to each taxpayer employed at this organisation to notify them that they may have had incorrectly claimed these deductions and to amend their returns if this was the case. And many of these taxpayers had used tax agents to lodge their return.”