Payroll Employee Allowances
Allowances are separately identified payments made to an employee to cover expenses they incur while performing their role. Allowances paid in conjunction with normal salary and wages are not treated separately for PAYG withholding, but can still have special treatment in the eyes of the ATO.
Common allowances include:
- 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.
Travel and living away from home allowances are the most difficult to navigate through. In this blog, we will unpack the differences between the two and how they are taxed.
What is a Travel Allowance?
A travel allowance (often referred to as per diems) is a payment made to an employee to cover costs while traveling away from home, overnight, for work-related purposes. Typically a travel allowance will cover accommodation or meals and incidentals, or both.
What is a Living Away From Home Allowance?
The living away from home allowance (LAFHA) is a payment made to employees who work away from home temporarily. The payment is made directly from an employer to an employee and is intended to cover expenses such as food, rent and other costs associated with having to work somewhere other than where the employee normally resides.
The allowance is generally paid in two components: food and accommodation. Both have restrictions and are covered up to ‘reasonable’ levels.
What are the difference between a Travel Allowance and a Living Away From Home Allowance?
When an employee is living away from home, there will be a change in job location, and a temporary residence will be established near the new work location. Quite often, the employees’ spouse and family will accompany the employee to the new location.
When an employee is just traveling, there will be no change in the usual job location and, therefore, no establishment of an interim residence. The employee may use temporary accommodation such as a hotel, and their spouse and family will not usually accompany them.
The critical factor seems to be the location of the job rather than whether the family accompanies the employee. If the temporary accommodation is located away from the employees’ usual place of residence, the employee will usually be considered living away home. Where the job location does not change, but the employee must travel to undertake duties, they will be considered traveling.
The length of time away from home is not a crucial factor, and the ATO will generally accept that shorter periods away will usually be deemed to be traveling. The ATO has also stated that employees attending short-term staff training courses will generally be considered as traveling in the course of their employment.
There is no minimum or maximum period of absence to qualify as living away from home. However, the application of the FBT rules may be less concessional if an employee lives away from their usual place of residence for more than 12 months. The period an employee is living away from home will end when they return to their usual place of residence or changes their usual place of residence to the new location.
How are the Different Allowances Taxed?
The ATO release an annual Tax Determination (TD) listing the ‘reasonable amounts’ that can be paid as a travel allowance. These amounts are not automatic deductions. They are thresholds for substantiation exemption meaning you don’t need written evidence (bank statements, invoices) to claim these expenses as you would for other tax deductions.
However, in the event of an audit you will be required to prove that you could have reasonably spent up to this amount – which will often require evidence of menu costs or bank statements showing payments for meals. Confusing!
For travel allowances, the substantiation exemption is as follows: if the taxpayer incurs valid deductible travel expenses and receives a bona fide travel allowance, they qualify for the substantiation exemption. You need to have incurred the expense, but provided the claim is lower than the reasonable limit you do not need to provide written evidence.
The concept of a ‘bona fide’ travel allowance means the amount must be paid and intended to cover work-related travel costs.
It is highly advisable to keep a travel diary showing dates, locations and number of nights away whenever an employee engages in work related travel. This is vital in the event of an ATO audit.
Important considerations for employees:
- The travel allowance does not need to be included in your tax return if it is not shown on your payment summary and does not exceed the reasonable amount.
- You must include the travel allowance in your tax return if it is on your payment summary and you may claim the appropriate tax deductions.
- Where travel expenses are over the reasonable limit, you can only claim a deduction if you have written evidence for all the expenses (not just the excess).
- If the allowance is less than the reasonable limit, you can claim a deduction up to the reasonable limit. You must have incurred the expenses, but you do not need written evidence.
- If the travel allowance is over the reasonable limit, you do not need written evidence if the deduction is only up to the reasonable limit.
Living Away From Home Allowance
LAFHA amounts paid within reasonable limits, do not give rise to a taxable LAFHA fringe benefit and are not taxable in the hands of the employee.
The tax-exempt parts of a LAFHA allowance are:
- ‘Reasonable’ accommodation costs and
- ‘Reasonable’ food costs (see schedule below)
Less ‘normal’ statutory food costs deemed to be $42 per week for adults and $21 per week for children (under 12)
For any part of allowances that exceed the exemption levels, a taxable fringe benefit arises. The taxable value is grossed-up before applying the FBT rate to derive the tax payable. Taxpayers whose salary is below the top marginal tax rate should compare the after-tax result of the taxed allowance, with that of an equivalent amount received as salary.
To reduce the taxable value of a LAFHA fringe benefit, the employer must obtain a Living Away From Home Allowance Declaration from the employee.
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.