More and more employers have to send their employees to locations that require them to spend nights away from home. To compensate their employees, the employer will generally provide for the accommodation, and may provide for food and incidentals, however where they don’t, it is important to structure the employees pay packet so they can maximise the full use of the tax system.
Travel allowance can be effective way to compensate employees but, if not done correctly, can have significant adverse effect for the employee which can result in unhappiness which can affect an employer’s business.
The Australian Taxation Office (ATO) (in its 2013-14 Compliance Plan) advised that it would “look closely” at high work-related travel expense claims. The ATO has followed through with that plan and has been focusing on allowances paid, not only in the 2013/2014 tax year but earlier years.
Recently, there have been a number of adverse outcomes (which have been for significant amounts) as a result of ATO audits. This risk highlights the importance of ensuring that allowances paid to employees are structured correctly and meet the requirements to limit this risk. Below, we have identified a number of areas of confusion for employers and employees.
Sources of confusions for Employers
When dealing with travel allowances, it is important that the Employer is able to answer the following:
- Are travel allowances required to be disclosed on an employee’s PAYG summary?
- Does PAYGW apply to travel allowances?
- Does Super apply to travel allowances?
- Does Payroll tax apply to allowances?
Getting it wrong with any of these questions can have serious personal consequences for employers.
Sources of confusions for Employees
When receiving a travel allowance, employees want to know:
- Are deductions allowed?
- Will PAYGW be withheld from my travel allowance?
Are travel allowances required to be disclosed on an employee’s PAYG summary?
In limited circumstances, the allowance does not have be shown as assessable income in the employee’s tax return (and therefore, not disclosed on the employee’s payment summary) and therefore, PAYGW is not required to be paid.
Where the “allowance” paid is not in fact an “allowance” but, say, salary and wages, PAYG, may be required to be withheld and remitted to the ATO. It is important for employers to get this right as getting it wrong may result in personal liability attaching to the employer.
Does PAYG withholding apply to travel allowances?
A travel allowance is assessable income to an employee and is generally included as income in the employee’s tax return.
Depending on whether the allowance is bona fide or not, will depend on whether PAYG is withheld.
Does Superannuation apply?
Super guarantee contributions are payable on an employee's ordinary time earnings. Most allowances are included in ordinary time earnings. However, most expense allowances and reimbursements are not 'salary or wages' and therefore are not ordinary time earnings.
Does Payroll tax apply to allowances?
Most allowances paid are taxable wages and therefore must be included in the employer’s calculation of payroll tax liability. However, certain allowances (including accommodation allowances) may be exempt and may be excluded from the purposes of payroll tax.
Are deductions allowed?
Deductions for expenses are allowed. In certain cases, the employee will not be required to provide proof of expenditure in order to claim the deduction (i.e. where the allowance is a bona fide travel allowance and where the amounts do not exceed what the ATO deems reasonable). However, the employee will should still have incurred the expenses. There can be significant costs to the employee, where the allowance is not found to be a bona fide travel allowance and the employee has not kept proof of expenditure.
Will PAYGW be withheld from my travel allowance?
As mentioned above, a travel allowance is assessable income to an employee and is generally included as income in the employee’s tax return. If the allowance is a bona fide travel allowance, no PAYGW will apply.
Structuring a travel allowance is critically important to maximize the benefits available under the current tax system. With the ATO’s focus on allowances, it is equally important for employees to understand how they work.