At National Press Club of Australia on 5 July 2017 the Commissioner of Taxation, Chris Jordan warned the ATO is moving focus to individuals as $22 billion of illegitimate tax deductions are being claimed. According to Mr Jordan the work-related expenses that are regularly being claimed incorrectly are:
- Car Expenses - $8 billion
- Home Office Expenses - $7 billion
- Travel Expenses - $2 billion
- Uniforms - $1.6 billion
- Self-Education Costs - $1.1 billion.
This address comes days after the ATO released their draft taxation ruling TR2017/D6 on 28 June 2017 which details when deductions are allowed for employees' travel expenses. This tax ruling draws of the arguments in the John Holland FBT ‘otherwise deductible’ case which reached the full federal court in June 2015 as well as principal landmark cases such as Lunney (1958), Collings (1976) and Cooper (1991).
The ‘otherwise deductible’ rule simply states that if the employee would have been able to claim a deduction for the expense it will also be deductible to the employer and attract no FBT liability if the employer pays for the expense of the employee.
The draft ruling is a timely refresher on the requirements for travel expenses to be deductible either for the employee or employer.
Travel expenses in this ruling relate to transport that is travel by plane, train, car, bus or any other vehicle.
TR 2017/D7: Income tax and fringe benefits tax: when are deductions allowed for employees' travel expenses?
Expenses can only be claimed as a tax deduction to the extent that the expense is:
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Incurred in gaining or producing assessable income and
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It does not have a capital, private or domestic nature.
Allowances are not deductible purely because the employee received one, including expenses that the allowance was paid to cover. The nature of the expense needs to be determined and it’s connected to gaining or producing assessable income. To the extent the expenses are private the expense must be apportioned.
Transportation Expenses
Generally, the costs for an employee to travel from home to work and consuming food during the day is of a private and domestic nature. The cost for an employee to relocate for work and living away from home is not deductible as it is preliminary to work.
Travel expenses are deductible where the expense is undertaken in performing the employee's work activities. To determine if the travel is undertaken in the performance of the employees work the following aspects need to be considered:
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Is the employee required to travel for work activities?
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Is the employee receiving pay directly or indirectly for the travel?
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Is the employee subject to the direction and control of their employer for the period of travel?
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Have the above points been contrived to give private travel the appearance of work travel?
Required to Travel
Travel undertaken due to the employee's personal choices, such as where to live, are not deductible, such as where to live. Travel expenses incurred by the employee to perform work activities, regardless of the choice of the employee, will be deductible.
Paid to Undertake Travel
Expenses are required to be income producing in order for them to be deductible.
- Employees receiving a wage – this factor is satisfied when the employee is being paid for the period of the travel. The payment can be expressed as either wages or something else such as travel time.
- Employees receiving a salary - this factor will be satisfied when the terms of the employment contract either expressed or implied that the travel is undertaken in the performance of their duties.
Direction and Control
Employees will be under the direction and control of their employer during the travel period when the employee is required to adhere to employer’s orders or directions.
Contrived
Travel will not be deductible merely because the travel has been manufactured to create the appearance of work related travel. To determine if travel is artificial it is appropriate to consider:
- Whether the work involves special demands
- Whether the travel is derived from the employee having co-existing work locations.
Special Demands
'Special demands' refers to where the employee is being paid under their employment terms for travel between home and a regular work location, and it is reasonable given the demands of their work. Special demands are specific physical or logistical requirements which include the following:
- Remoteness of work location
- Requirement to move constantly between changing work locations
- Requirement to work away from home for an extended period of time
- Other special circumstances of the work activity.
Coexisting Work Locations Travel
Coexisting work locations is attributed to an employee having to work at more than one location as opposed to a choice about where the employee lives. Coexisting work locations is the case where:
- The travel is directly between work locations, or between and alternative work location and home and
- Because of the requirement to work in more than one location, it is reasonable to conclude that the travel is undertaken in performing the employee’s work activities.
- An alternative work location is a work location that is not the employee's regular work location near the employee’s home.
Examples of factors that contribute to the travel being undertaken in the course of the employee's work activities are:
- a significant portion of the day is used to travel
- practical to require an overnight stay from home, including:
o short term travel to a temporary, alternative work location
o longer term travel to a temporary, alternative work location
o ongoing travel to an alternative work location.
Accommodation, Meal and Incidental Expenses
Accommodation, Meal and Incidental Expenses are deductible only where the:
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employee's work activities require them to travel
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employee's work requires them to stay away overnight
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employee has a permanent house somewhere else, and
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employee does not incur the expenses in the course of relocating or living away from home.
Required to Work away from Home
Expenses for accommodation, meal and incidental expenses are not deductible unless the employee is required to work away from home.
Required to Sleep Away from Home
When an employee is required to sleep away from home the accommodation, meal and incidental expenses that would normally be private in nature have an employment- related character. Sleep away from home does not include the following:
- employees who are on duty who sleep at a workplace that is new to their home
- employees who choose to sleep near their workplace instead of going home between their work shifts.
Permanent House Elsewhere
Expenses for accommodation, meal and incidental expenses are only deductible when the employee has a permanent house elsewhere. If an employee has a lifestyle that is transient, these expenses would be of a private and domestic nature.
Not Relocating or Living Away from Home
Relocating or Living away from home expenses is not deductible as they are private and domestic in nature. Whether an employee is living away from home depends on the following factors:
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The amount of time spent away from home. The longer the employee is away the more likely they are living away from home.
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If the employee has a usual place of residence. An employee is only living away from home if they have a residence they intend to go back to.
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The nature of the accommodation. Accommodation is more likely to be living away from home when the accommodation equipped with home-like amenities such as a kitchen and employee is settled into that accommodation for a considerable period of time.
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If the employee is able to be accompanied by family or visited by family or friends. If the family moves with the employee for an extended period of time it would indicate the employee has relocated which is a private expense. Any employee may be living away from home with family members accompany then for short periods of the employees stay.
Below are some examples from the draft tax ruling.
EXAMPLE 3: TRAVEL BETWEEN HOME AND REMOTE LOCATION: FLY-IN FLY-OUT EMPLOYEE
- Ordinary home to work travel (non-deductible)
- Work-related accommodation (deductible)
Bill lives in Perth and works for an engineering firm that is overseeing construction at a mine site on a fly-in fly-out basis. The work assignment is for 12 months and Bill's roster is 20 days on, seven days off.
Before the start of his roster, Bill travels at his own cost to Perth Airport. Bill's employer pays for a flight from Perth Airport to the airport nearest to the project location and a bus from that local airport to accommodation near the worksite.
Bill's rostered period starts when he arrives at the work site. Bill's rostered period ends when he leaves the worksite on day 20. Bill is then transported by bus to the local airport and from there is provided a return flight to Perth. Bill is paid travel time for the period he is travelling but is not subject to his employer's direction, control and code of conduct when he undertakes the travel.
Bill's travel between Perth Airport and the project location, including between the accommodation near the project location and the worksite just before the start and just after the end of each of his rostered shifts is not deductible. The travel:
- is to and from work, and
- is not undertaken in performing his duties.
Therefore, these transport costs would not be 'otherwise deductible' to Bill's employer.
Bill's transport costs between his home and Perth Airport are similarly non-deductible private travel.
Bill and other employees are required to stay at accommodation provided by the employer near the mine site. The accommodation is rudimentary in nature and consists of demountable buildings. Single bedroom units are shared between 2 employees, a day shift employee and a night shift employee, with shared laundry, bathroom and recreational facilities. Meals and incidentals are provided by the employer at a canteen adjacent to a common dining area. There is no kitchen for employees to self-cater.
Employees work on a rotating roster and cannot stay at the work location when their work roster ends because their living quarters are required for employees who are arriving to replace them on the work site. Employees are not permitted to have family or friends stay with them or visit them at the site.
Bill has an apartment in Perth where he lives when not at the mine site.
Bill:
- is required by his employer to stay close to the remote work site
- is working away from home for relatively short periods of time (20 days)
- has no choice about the location or kind of accommodation he stays in at or near the work site during his roster
- frequently returns to his permanent residence between rostered shifts
- is not permitted to have family or friends stay with him or visit him at the accommodation
- is required to leave the accommodation at the end of his rostered shifts, and
- is not living away from home at the mine site.
Therefore, Bill's accommodation, meal and incidental expenses are 'otherwise deductible' to his employer under the FBTAA .
EXAMPLE 4: FLY-IN FLY-OUT EMPLOYEE: TRAVEL INT EH PERFORMANCE OF WORK ACTIVITIES FROM POINT OF HIRE
- Special demands travel (deductible)
- Work-related accommodation (deductible)
Brian lives in Mandurah and works at a mine site on a fly-in fly-out basis. Brian's roster is 20 days on, seven days off. On the day Brian's work roster starts, he travels at his own cost to Perth Airport.
Brian is rostered on duty from the time he arrives at Perth airport and from this point is subject to his employer's direction and control. Brian is obliged to respond as required to any work calls or texts he receives while in transit except while he is in the air. His employer provides a charter flight from Perth to the airport nearest to the project location and a bus from that local airport to accommodation near the worksite.
A similar arrangement applies in reverse at the end of Brian's roster. On the day Brian's roster ends, his employer provides bus transportation between the worksite to the local airport and then provides a charter flight to Perth where Brian's roster ends. Brian makes his own way home from Perth Airport.
Brian is paid on a per day basis for each of the 20 days in his roster.
Brian's employer has determined that the demands of the work reasonably require that Brian is paid for the period he spends travelling between Perth airport and the project location. This includes payment for the time he travels between the accommodation near the project location and the worksite at the beginning and end of each of his rostered shifts. Brian is subject to the direction and control of his employer for the period of this travel.
The transport expenses relating to Brian's journey between Perth airport and the project location are 'otherwise deductible' to Brian's employer under the FBTAA. The travel is undertaken by Brian in performing his work activities, and reflects the special demands associated with working at a remote location.
Brian's transport costs between his home and Perth airport are non-deductible 'home to work' travel.
The accommodation provided to Brian by his employer near the mine site is the same as the accommodation provided to Bill in the previous example and the same principles apply in the circumstances. Therefore, Brian's accommodation, meal and incidental expenses are 'otherwise deductible' to his employer under the FBTAA.
If Brian chose not to return to Perth between his rostered shifts but to go elsewhere for his break, the cost of his accommodation, meal and incidental expenses for this period would be of a private nature and would not be deductible.
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