Tax deductions and FBT treatment of employee travel expenses
8 December 2021
The distinction between travelling for business purposes and living away from home is important to ascertain whether employee travel expenses such as accommodation, food and drink expenses are deductible expenses.
To help provide more clarity for taxpayers to ascertain whether employees are travelling or living away from home, the ATO has issued Taxation Ruling TR 2021/4 which provides the Commissioner’s position as to when an employee can deduct travel expenses for income tax and the employer can apply the ‘otherwise deductible’ rule for Fringe Benefit Tax (FBT) purposes.
TR 2021/4 explains the following:
When an employee can deduct accommodation and food and drink expenses under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) when they are travelling on work, including where it is necessary to apportion.
The FBT implications, including the application of the 'otherwise deductible’ rule, where an employee is reimbursed for accommodation, and food and drink expenses, or where the employer provides or pays for these expenses.
The criteria for determining whether an allowance is a travel allowance or a living-away-from-home allowance (LAFHA) benefit and the differences between them.
In addition, the ATO also issued Practical Compliance Guideline PCG 2021/3 which provides the ATO’s compliance approach to determine whether employees are travelling for work purposes or living away from their usual place of residence which should be read in conjunction with TR 2021/4.
Some key takeaways from TR 2021/4 and PCG 2021/3 are:
For an employee to be considered to be travelling for work purposes, they must be required by their employer to stay away from their usual residence overnight, for a relatively short period of time.
The criteria in PCG 2021/3 does not provide a specific test based on the number of days the individual is away. For example, travel for more than 21 days is not regarded as living at the location in all circumstances.
Being accompanied by an employee’s family does not necessarily mean that the employee should be treated as living away from home.
PCG 2021/3 now applies a 90-day threshold test based on an FBT year which can allow employers to apply this threshold test each FBT year.
PCG 2021/3 provides the type of records that should be maintained by employers to support the various criteria if an employer has determined that an employee is travelling for work purposes or living away from home.
TR 2021/4 and PCG 2021/3 apply both before and after the issue date. Where there is conflict with earlier draft rulings, the Commissioner will determine whether compliance resources will be used for income and FBT years to which these draft rulings apply.
Travelling for business purposes generally results in any benefits or allowances being outside the scope of FBT. Conversely, LAFHA and other living away from home benefits form part of the FBT regime.
If you think you may be impacted by this ruling or uncertain how you should classify employee travel, please speak to your adviser or contact the Tax Advisory team so we can conduct a health check of your employment taxes and related benefits.