The Australian Taxation Office (ATO) has recently released Taxation Ruling 2017/D6, setting out the ATO’s updated guidelines regarding when an employee can claim a tax deduction for their travel expenses and the Fringe Benefits Tax (FBT) implications of these expenses.
According to the ruling, an employee can claim a tax deduction for travel expenses incurred in earning their salary or wage, or if the expense is work-related. However, what exactly constitutes an expense “incurred in earning income”, and what is considered “work-related”?
Normally, the factors looked at when determining if a travel expense is tax deductible include:
- The employee is required by their employer to travel
- The employee is paid in relation to the travel (this excludes a travel allowance)
- The employer has control and direction over the travel
Travel expenses that are typically tax deductible include transport, accommodation, meals and incidentals paid for by the employee during a work-related trip. Travel costs where the employee is travelling to a site or alternative workplace are also included.
Travel expenses that are typically not tax deductible include;
- Home-to-work travel (unless the employee must transport bulky tools/work items etc)
- Expenses in relation to private matters (for example an employee extends their stay in a location for a short holiday after travelling to that location for a work-related matter)
- Travel required to an alternative workplace where the employee has chosen to work there, rather than the employer requiring them to work at the alternative workplace
These principles hold true in the ATO’s current draft ruling. The draft ruling does not provide new ground for tax deductions, but rather provides better and clearer guidance in the context of the modern workplace environment.
In particular, the ruling deals with fly-in-fly-out (FIFO) workers, as well as addressing the more transient nature of modern workplaces, such as where an employee is required to work in two different locations (i.e. two days a week in one location and the rest of the week in a second location).
For FIFO workers, the draft ruling states that in certain circumstances fly-in and fly-out travel may be deductible, and therefore is not subject to FBT if the employee is being paid for that travel time and is under the employer’s direction and control whilst travelling. However, if the employee is not paid for that travel time, and is not subject to the employer’s direction whilst travelling, these expenses will not be tax deductible and if paid by the employer, may be subject to Fringe Benefits Tax. The ruling provides a number of examples that can assist in determining any associated travel expenses of the employee and therefore whether the trip itself would be FBT exempt for the employer.
In certain circumstances employees who are required to work in two different locations (called “co-existing work locations” in the draft ruling), may claim their travel expenses between these locations (including accommodation, meals and incidentals) as tax deductible. Consideration must still of course be given to whether there is a private and therefore non-deductible portion to these travel expenses.
The ruling introduces a term “special needs travel,” which supports the potential for travel expenses to be deductible. These workers are generally FIFO workers, but this term could also extend to others were the demands under their employment include; a requirement for them to work remotely, travel is part of their employment activity, to continuously change work locations or to work away from home.
The draft ruling provides eighteen examples of various travel expenses and working arrangements, the tax deductibility available on those expense and the associated FBT impact. Not all scenarios will be covered by these examples, however when read in context, can provide guidance for assessing one’s unique circumstances.
Importantly, the ruling is still only a draft, but we expect that many of the concepts and examples to remain in the final ruling.
For more information about this draft ruling, or to get advice around Fringe Benefits Tax or travel expenses, contact your financial adviser.
This article was written by Courtney Van Zyl (Manager Tax Advisory) & David Hall (Associate Partner Tax Advisory).