Travelling on work and LAFHA: ATO guidance material

By John Jeffreys

After a period of highly restricted travel of any kind due to the pandemic, it seems at least slightly ironic that the ATO is now clarifying the operation of the tax laws in relation to employment related travel.

Be that as it may, the ATO has released two products covering what can sometimes be the confusing distinction between travelling allowances paid to employees and living allowances that can sometimes be Living Away from Home Allowances (LAFHA) under the FBT rules. Although Tax & Super Australia has identified some technical issues with both documents, the overall impact of this material, once finalised, should help clarify the operation of the tax laws in this area. The guidelines apply to all employers, except those providing benefits to employees working on a fly-in fly-out or a drive-in drive-out basis.

Taxation Ruling TR 2021/D1
This draft ruling sets out the general principles around the tax treatment of expenditure incurred on accommodation, food, and drink when employees are travelling on work, travel allowances and Living Away from Home Allowances. An earlier draft ruling on the same subject, TR 2017/D6 has been withdrawn. The distinction between travel allowances and LAFHA is important as the travel allowance as assessable to the employee while the LAFHA is covered by the FBT rules, which fall on the employer.

In considering the deductibility of expenditure on accommodation, food, and drink, the draft ruling states that these costs must be incurred in the course of gaining or producing the employee’s assessable income. The positive test in sec 8-1 will generally be satisfied where the employee is required to sleep away from home while travelling on work.

The expenditure will be regarded as living expenses where the employee chooses to live a long distance away from their place of work, because they are living at a location away from their usual residence or they have relocated from their usual residence.

Whether an employee is living away from their usual place of residence is determined by a number of factors:

  • Has there been a change in the employee’s regular place of work?
  • Is the length of the overall period away from the employee’s usual place of residence relatively long?
  • Is the nature of the accommodation such that it becomes the employee’s usual place of residence?
  • Can the employee be accompanied or visited by family and friends?

The draft ruling also covers the not unusual circumstance where an employee attending a conference is accompanied by a spouse and stays a few extra days for leisure purposes. Reasonable apportionment is required in such cases. 

The draft ruling recognises that some employees may choose to rent or buy a property rather than stay in a hotel or other commercial accommodation when travelling on work (some Federal MPs are known to have acquired a pied-a-terre in Canberra to stay in during sitting weeks). The associated costs will be deductible, provided they are not disproportionate to what would have been paid had the employee elected to use suitable commercial accommodation instead. 

The draft ruling also touches on the substantiation requirements around claims for accommodation, foodand drink when travelling on work. Unless exceptions apply, the employee must maintain written evidenceof the relevant expenditure and keep travel records for work-related trips that involve an absence from their usual residence for six or more nights in a row.

Even where there is an exception to the substantiation requirements (mainly where the allowance is within what the Commissioner considers to be a reasonable amount), the employee must still have incurred the expense and demonstrate they incurred the expense while travelling on work.

This raises an awkward kind of “what do you have to prove that you don’t have to prove anything?” question, but it is understood that the Commissioner’s general practice is not to challenge claims for allowances that are within his annual reasonable travel allowance expense amounts determination.

There is also a discussion about the difference between a travel allowance and a LAFHA. Unlike a travel allowance, which covers deductible expenditure on accommodation, food, and drink incurred by an employee travelling on work, a LAFHA is an amount paid to an employee for the additional living expenses incurred because the duties of their employment require them to live at a location away from their usual residence.

However, if the allowance is only paid as compensation for the disadvantages associated with the work location (such as lack of amenities, isolation), then it is not a LAFHA but simply assessable income in the employee’s hands.

There are 12 examples that between them provide a useful guide as to when something is regarded as a travel allowance or a LAFHA and in what circumstances expenditure on accommodation, food, and drink will be deductible. The examples used seem, for the most part, to reflect the correct application of the law.

The only exception is the commentary and example involving expenditure on food and drink in a same day travel scenario. Tax & Super Australia considers the ATO’s insistence that the work travel has to include sleeping away from the employee’s usual place of residence is not supported by case law and we have lodged a brief submission to that effect.

Practical Compliance Guideline PCG 2021/D1
This product outlines the ATO’s approach to sorting out when an allowance or reimbursement made to an employee relates to travelling on work or living at a location. The guideline is a companion piece to TR 2021/ D1, but because it clarifies how the Commissioner will or will not allocate compliance resources it probably needed to be a separate product. Taxpayers and advisers would probably have preferred to have a single product, but the ATO has its own way of doing things.

The guideline sets up a decision grid which, if satisfied, entitles employers to treat an allowance as being paid for travelling on work. None of these “rules” are supported by any legislation – they describe how the Commissioner will interpret and administer the law when the arrangements satisfy the requirements.

The allowance must be paid (or reimbursement made) to cover the employee’s accommodation, food, and drink expenses, and should not be part of a salary packaging arrangement. The allowance must be included in the employee’s payment summary and tax withheld where appropriate. The employer should also obtain and retain documentation establishing that all the circumstances are met.

The guideline then declares an arbitrary (but not unreasonable) set of boundaries which the Commissioner wants employers and employees to stay within for the employee to be regarded as travelling on work:

  • none of the individual absences from the employee’s usual place of residence should exceed 21 days; and
  • the employee is present in the same work location for less than 90 days in an FBT year; and
  • the employee returns to their normal residence when their period away ends.

Tax & Super Australia has made a brief submission to the ATO, asking that the third dot point (the requirement to return home after the period away on work travel) be relaxed slightly to allow for the employee to take a holiday break at the end of a period of travelling on work. Provided the employee returns to their usual place of residence at the end of the holiday they should still be regarded as having travelled on work.

Sometimes these time limits cannot be adhered to because the employee is away for more than 21 days on at least one trip, or they spend 90 days or more in a particular work location. In such circumstances all is not necessarily lost, but the employer cannot rely on the guideline and will have to work through the FBT rules to determine whether the LAFHA rules apply.

The guideline includes three examples which help to illustrate the operation of the safe harbour, including one where the requirements under the guideline are not met because of the 90-day rule. In that case the guideline explains that: “… without more information, the Commissioner does not accept that Jeremy is travelling on work.”

The guideline does not explain exactly how or when employers are supposed to provide this additional information to the Commissioner. One way under self-assessment would be obtain and retain relevant information about the employee’s employment related travel, including the matters canvassed in TR 2021/D1 about when an employee is living at a particular location. Another way would be to request a ruling, but one wonders whether the ATO would really welcome the workload such an approach would generate.


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