Travel allowances (often referred to as per diems) are a big issue in the entertainment industry with many performers, managers, promoters and crew spending large amounts of time on the road. Even for those not in the entertainment industry, many small business owners also find themselves having to travel during the year for work. Regardless of the industry you work in, having a good understanding of the tax savings to be had in relation to work travel is a good thing!
The ultimate goal of a travel allowance is to be able to give the employee cash to cover costs, claim a deduction in the employer company without needing loads of receipts, and not need to include the income or expenses in the employee’s tax return.
What is a travel allowance?
It is a payment made to an employee to cover costs while travelling away from home, overnight, for work-related purposes. Typically an allowance will cover accommodation or meals and incidentals, or both.
Every year the ATO releases a Tax Determination (TD) listing the ‘reasonable amounts’ that can be paid as a travel allowance. The most current is TD 2016/13. They generally cover accommodation, meals and incidentals. A common misconception with these amounts is that they are an automatic deduction – they are not – rather, they are to be used in relation to the ‘substantiation exemption’.
What is the substantiation exemption?
Normally to claim an expense you’d need written evidence – this is known as substantiation – such as invoices and bank statements proving you paid for the amount shown on the invoice. However, certain types of expense can be claimed without substantiation as they are subject to special rules. 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. Note that you must have ‘incurred’ them, but as long as the claim is no more than the reasonable amount you do not need to provide written evidence – this is the key concept at play. Receiving a ‘bona fide’ travel allowance means the amount must be paid and must honestly be intended to cover work-related travel costs (e.g. $5 a day for a trip to Paris won’t likely be considered ‘bona fide’).
Important to note is that regardless of whether you qualify for the substantiation exemption or not you must always keep a valid travel diary for all work-related travel. Very important to get in this habit. Ensure it shows the relevant dates, the locations, and the reason for each night you are away.
If the travel allowance doesn’t exceed the reasonable amounts then it doesn’t need to go on the employee’s PAYG Payment Summary nor does it need to go into the employee’s tax return (however the employee won’t be able to claim any deductions associated with the allowance either).
Further notes for employees
* If a travel allowance is not shown on your payment summary, and the allowance doesn’t exceed the reasonable amount and was fully spent on deductible expenses, neither the allowance nor the expenses need to go in your tax return.
* If a travel allowance is on your payment summary you must declare it as income in your tax return and you may claim deductions against that income as follows:
– You can only claim a deduction for deductible travel expenses over the reasonable amount limits if you have written evidence for all the expenses (not just the excess),
– If the allowance is less than the reasonable amount you can claim a deduction up to the reasonable amount limits if you have incurred the expenses, but you do not need written evidence for any of it,
– If the allowance is over the reasonable amount you don’t need written evidence if the deduction is only up to the reasonable amount
Further information can be found on this topic here on the ATO website.
Written by Ben Fletcher, managing director at Generate. A version of this article was originally posted on their Better Business blog.
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