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 separate payments that are made to an employee in order to reimburse the employee for expenses spent while working. The most difficult aspect to grasp is how much money is set aside for expenses related to travel and living away from home.
Today, we are going to go over the differences between the two, as well as the methods that are used to compute the taxes for each one. When an employee is only going to be gone for a short time, there is no need to put up a temporary dwelling for them because they will only be gone for a short amount of time. When an employee must remain in a temporary accommodation establishment like a hotel, it is quite unlikely that their spouse or other members of their family will accompany them on their trip.
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?
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!
This is how the substantiation exemption for travel allowances works: if a taxpayer has genuine travel costs that are deductible and also receives a genuine travel allowance, then the taxpayer is entitled for the substantiation exemption for travel allowances. Taxpayers who fulfil both of these prerequisites are the only ones who are eligible to claim this exemption. You are obligated to have incurred the cost, but if your claim is for an amount that is less than the reasonable maximum, you are not obliged to provide written evidence of this fact. This exemption applies only if your claim is for an amount that is less than the reasonable maximum.
The phrase “bona fide” travel allowance refers to a sum that is required to be provided and is intended to compensate costs associated with travel for the purposes of work-related activities.
When a person’s job requires them to travel, it is highly advised that they keep a travel diary in which they record the dates, locations, and the total number of nights spent away from home. This will help them keep track of their time away from home. This is of the utmost significance in the event that an investigation is carried out by the ATO.
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.
- You are only eligible for a deduction for travel costs that are in excess of the reasonable limit if you can provide proof that each and every one of those costs was paid for (not just the excess).
- If the allowance is less than the reasonable limit, you have the option of claiming a deduction that is either equal to or larger than the reasonable limit in the event that it applies to your situation. You are needed to have paid for the costs; but, you are not obliged to give any official evidence that you have done so.
- If the deduction is only up to the reasonable limit, you are not required to provide written evidence; however, if the travel allowance is more than the reasonable limit, you will be required to provide such documentation. If the deduction is only up to the reasonable limit, you are not required to provide written evidence.
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.
A taxable fringe benefit is deemed to have been created whenever there is a percentage of an allowance that is allocated to an employee that is more than the exemption limitations. Before applying the FBT rate to the taxable value in order to compute the amount of tax that must be paid, the gross-up amount is added to the taxable value. Taxpayers whose salaries are lower than the maximum marginal tax rate should compare the after-tax result of the taxable allowance with that of an equivalent amount received as salary. This is because the taxable allowance is treated differently by the IRS. This is due to the fact that the taxable allowance receives a different treatment than the wage.
An employer is required to have an employee fill out and submit a Living Away From Home Allowance Declaration in order to reduce the amount of taxable value that is associated with a LAFHA fringe benefit. This is done in order to lessen the amount of taxable value that is associated with a LAFHA fringe benefit.
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.
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