A travel allowance is a payment made to employees to cover accommodation, food, drink or incidental expenses they incur when they travel away from their home overnight or longer in the course of their duties.
In most circumstances, when claiming other deductions, your clients will be expected to be able to substantiate the expense being claimed with documentary evidence, and produce that evidence should the ATO request it. However an exception to substantiate claims applies to travel allowance expenses if the ATO considers the total claimed to be “reasonable” and to be no more than the allowance provided.
“It is not unusual for the Commissioner to issue guidance on travel allowances”, says tax policy specialist Ken Mansell. “He releases an annual update on reasonable travel and meal allowance expenses.” (See below for a link to the latest update of reasonable expenses.)
There are three administrative concessions that relate to travel allowances — for employees there is the substantiation exception as mentioned above (see TD2004/6), but for employers there is also a withholding exception and a payment summary exception.
Recently the ATO has been at pains to emphasise that the first of these travel allowance concessions does not extinguish the requirement for the employee to actually incur an expense. The taxpayer may not be required to substantiate it in written form like other deductible work expenses, but the expense must still have actually been incurred to be able to claim a deduction.
Mansell reminds us that travel allowances are assessable income. “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.”
It will also pay to remember that if your client relies on the exception from substantiation, the ATO may still require that they show the basis for determining the amount claimed, that the expense was actually incurred, and that it was for specific travel costs and for work-related purposes.
And remember, the ATO seems to be at pains to emphasise that this tax time it is targeting work-related expense claims such as travel costs — a point specifically referred to time and again by Tax Commissioner Chris Jordan.
Use it (correctly) or lose it
The ATO has announced that it is aware of an increasing disparity between travel allowances paid and deductions claimed for accommodation, meals, and incidentals. The ATO claims that this trend has led to an increase in the incidence of it checking these claims. These checks have highlighted deficiencies and difficulties for employees in showing the amount claimed was incurred, or was incurred in gaining or producing their assessable income.
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, 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.”
He says that 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. “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.”
The introduction of what has come to be known as “self-assessment” in the mid-1980s meant that while documentary evidence of claims was required, under the substantiation rules at the time this would not have to be attached to an income tax return as a matter of course, but would need to be supplied upon request.
In more modern times, and to reduce the cost of compliance in keeping detailed records, it was decided that certain exclusions from substantiation should be included in the rules — although the ATO has made it clear that should the disparity between allowances paid and deductions claimed continues, the current substantiation exception leeway in regard to travel expenses may be reviewed.
Tax commentators, including Ken Mansell, have indicated that this is a strong signal that the ATO seems to be moving away from the exception to substantiation precedent, especially in light of a huge increase in court cases dealing with this area of tax law over the past couple of years. In fact, in the modern digital transaction world, the case can be made that such exceptions to substantiation are increasingly unnecessary; a point already made by the ATO. This in turn underlines the necessity to make sure your clients get such claims right in the first place.
For now, your clients can claim a deduction for travel expenses incurred without meeting the substantiation rules provided:
- the claim for deduction does not exceed the amount of the travel allowance received
- the travel allowance does not exceed an amount that the ATO considers to be “reasonable” (more below).
What is “reasonable”?
The ATO publishes guidelines each year on what it considers to be reasonable amounts for a travelling employee (here is TD2017/19 for the 2017-18 year). 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)
- specific rates for truck drivers.
Where the travel allowance received by the taxpayer exceeds the amount considered reasonable, the whole deduction will generally be subject to the substantiation rules, which require your client to keep and produce detailed records of the expenses involved.
Hear more about this topic in the Tax Wrap podcast episode 162 (last section, from 28mins onwards).