Travel Allowance

Payroll Employee Allowances

Allowances are distinct payments that are paid to an employee to reimburse expenses that they have accrued while doing their duties as part of their role. Allowances that are paid in addition to regular salary and earnings are not considered to be separate payments for the purposes of PAYG withholding, although the ATO may nevertheless look at these payments in a different light.

Allowances are distinct payments that are paid to an employee to reimburse expenses incurred while working. Allowances for travel and living away from home are the most challenging to understand.

Today, we will discuss the distinctions between the two, as well as how the taxes are calculated for each. When an employee is just going to be gone for a short period, there will be no need to set up an interim dwelling. In most cases, the employee’s spouse and other members of their family will not go with them when they stay in a temporary lodging like a motel.

Typical exemptions consist of the following:

  • car, travel and transport allowances, and reimbursements of car expenses
  • living away from home allowance
  • tool, uniform and laundry allowances
  • dirt, height, site, first aid risk allowances
  • meal and entertainment allowances.

The allowances for travel and living away from home are the ones that are the most challenging to understand. In today’s post, we will discuss the distinctions between the two, as well as how the taxes are calculated for each.

What is a Travel Allowance?

A travel allowance is a payment that is paid to an employee to reimburse costs incurred when the employee is away from home overnight for work-related purposes. Travel allowances are also commonly referred to as per diems. In most cases, a travel allowance will either cover lodging, meals, and miscellaneous expenses, or it will cover both.

What is a Living Away From Home Allowance?

A payment known as the living away from home allowance (LAFHA) is given to workers who are required to perform temporary labour away from their homes. The payment is provided directly from an employer to an employee, and its purpose is to cover expenses such as food, rent, and other costs related to the employee having to work in a location that is not typically where the person resides.

In most cases, the allowance will be handed out in the form of two separate components: food and lodgings. Both are subject to limitations and only provide coverage to a reasonable degree.

What is the difference between a Travel Allowance and a Living Away From Home Allowance?

When an employee is required to live away from home, a change in working location will occur, and a temporary residence will be constructed in the vicinity of the new work location. It is not uncommon for an employee’s spouse and other members of their family to move to the new site with the employee.

When an employee is just going to be gone for a short period of time, there will be no change in the location of the typical workplace, and as a result, there will be no need to set up an interim dwelling. In most cases, the employee’s spouse and other members of their family will not go with them when they stay in a temporary lodging like a motel.

The location of the employment itself seems to be the most important consideration, rather than whether or not the employee’s family goes with them. In most cases, an employee is regarded to be living away from home if the temporary housing is situated in a location that is different from the employee’s customary place of residence. When an employee is deemed to be travelling even when the location of the employment does not move but they are required to travel in order to carry out their tasks.

The amount of time spent away from home is not a decisive consideration, and the ATO will normally accept that absences lasting for shorter amounts of time will typically be considered to be travel. The ATO has also noted that employees who travel as part of their employment to attend short-term staff training courses will normally be considered to be travelling for business purposes.

There is neither a minimum nor a maximum amount of time required to be considered to be living away from home. However, if an employee lives away from their regular place of residence for more than a year and a half, the implementation of the FBT standards may be less lenient. When an employee returns to their normal place of residence or relocates their usual place of residence to the new location, the time period during which they are required to live away from home will come to an end.

How are the Different Allowances Taxed?

Travel Allowance

The Australian Taxation Office (ATO) publishes each year a Tax Determination (TD) that details the “reasonable sums” that can be given to employees as a travel allowance. These sums are not deducted from the account automatically.

When you reach one of these substantiation exemption criteria, you can deduct these expenses without providing any written documentation, such as bank statements or invoices, in the same way that you would for other tax deductions.

However, if you are subjected to an audit, you will be asked to provide evidence that you may have spent up to this amount in a reasonable manner. In most cases, this would involve providing documentation of the prices of menu items or bank statements that show payments for meals. Confusing!

The substantiation exemption for travel allowances is as follows: if the taxpayer incurs valid deductible travel expenses and receives a genuine travel allowance, the taxpayer is eligible for the substantiation exemption. This exemption is only available to taxpayers who meet both of these requirements. You are required to have borne the cost, but if your claim is for an amount that is smaller than the reasonable maximum, you are exempt from providing written evidence of this fact.

The phrase “bona fide” travel allowance refers to an amount that must be provided and is meant to reimburse costs associated with travel for work-related purposes.

When an individual is required to travel for work, it is strongly recommended that they maintain a travel diary that details the dates, places, and a total number of nights spent away from home. In the event that the ATO conducts an audit, this is extremely important.

Important considerations for employees:

  • If your payment summary does not include the travel allowance and it does not exceed the reasonable amount, you do not have to include it in your tax return.
  • If the travel allowance was included on your payment summary, then it is required that you include it in your tax return so that you can claim the necessary tax deductions.
  • Where travel expenses are over the reasonable limit, you can only claim a deduction if you have documented evidence for all the expenses (not just the excess) (not just the excess).
  • In the event that the allowance is lower than the reasonable limit, you have the ability to claim a deduction that is equal to or greater than the reasonable limit. You are required to have paid for the costs, but you do not need to provide any formal evidence for this.
  • You do not need to provide written evidence if the deduction is only up to the reasonable limit; however, if the travel allowance is greater than the reasonable limit, you will need to provide such documentation.

Living Away From Home Allowance

A LAFHA amount that is paid to an employee but does not exceed a reasonable limit does not constitute a taxable LAFHA fringe benefit and is not taxable in the employee’s hands.

The following components of a LAFHA allowance are exempt from taxation:

  • ‘Reasonable’ accommodation costs and
  • ‘Reasonable’ food costs (see schedule below)

A reduction from the “regular” statutory food costs, which are estimated to be $42 per week for adults and $21 per week for children (under 12)

The Fringe Benefits Assessment Act includes provisions for statutory food levels, and TD 2019/7 includes provisions for appropriate food and drink components (per week), both of which are evaluated annually.

Any portion of an allowance that is greater than the exemption limits results in the creation of a taxable fringe benefit. The taxable value is increased by the gross-up amount before the FBT rate is applied in order to calculate the tax that is due. Taxpayers whose salaries are lower than the highest marginal tax rate should compare the after-tax outcome of the taxable allowance with that of an equivalent amount received as salary. This is because the taxed allowance is treated differently than the salary.

To lessen the amount of taxable value that is associated with a LAFHA fringe benefit, the employer is required to have the employee fill out and submit a Living Away From Home Allowance Declaration.

Final Thoughts

The phrase “bona fide” travel allowance refers to an amount that must be provided and is meant to reimburse costs associated with travel for work-related purposes. If your payment summary does not include the travel allowance and it does not exceed the reasonable limit, you do not have to include it in your tax return. A LAFHA amount that is paid to an employee but does not exceed a reasonable limit does not constitute a taxable fringe benefit. The taxable value is increased by the gross-up amount before the FBT rate is applied in order to calculate the tax that is due.

For further information please give us a call on (03) 8568 3606. With over ten years of combined experience working with a diverse range of clients, Bookkept is well equipped to assist your personal tax needs.

If you are an employer, we are able to take over your payroll function completely and remove the stress of compliance, or provide support as needed.

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