Travel allowances and when you need to substantiate
Updated: Jun 2, 2018
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.
The Commissioner 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.
It is important to be aware 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. In fact, 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 should be considered, such distinguishing between travelling and living-away-from-home, and the targeting of certain industries. Certain industries are on the ATO radar such as truck drivers or mining company employees.
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 Alice 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. “The Commissioner says this is just simply incorrect.”
While change is in the air, for now, 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)
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.
This article is intended to be a guide only. None of the comments contained in the article are intended to be advice, whether legal, financial or professional. You should not act solely on the basis of the information contained in this article because many aspects of the material have been generalised and the tax laws apply differently to different people in different circumstances. Further, as tax and related laws change frequently, there may have been changes to the law since this article was published. Specific advice should always be obtained from a tax professional.