We have new guidance from the Australian Taxation Office (ATO) on the tax deductibility of travel expenses (which also has Fringe Benefits Tax implications). The ATO has kindly provided us with an early Christmas present (rather exciting for those of us advising in this area), with the issue of draft taxation ruling TR 2019/D7 on Friday 13 December 2019.
For those of you keeping track of the developments in this area, you will be familiar with TR 2017/D6 on the tax deductibility of travel expenses, which issued on 28 June 2017. The ATO recently announced TR 2017/D6 was to become two, with the draft ruling to be re-issued in two parts. The newly issued TR 2019/D7 covers transport, being travel by airline, train, taxi, car, bus, boat or other vehicles. The deductibility of accommodation, meals and incidental expenses, will be covered in further products to be released by the ATO in 2020.
We note the following points of interest:
- Home to work travel broadly non-deductible: The ruling confirms that ordinarily home to work travel is private in nature, and therefore the transport expenses are non-deductible
- Home to work travel deductible situations: The following includes examples of where the home to work travel would be considered tax-deductible:
- Between work locations: The ruling notes that travel between work locations are deductible
- Sufficient connection to employment income: It also notes a review is required of a particular employee’s work activities, in order to determine if the transport has a sufficiently close connection to the earning of employment income. Broadly, where the expense is considered to be incurred in gaining or producing assessable income, the expense will be tax deductible work transport.
- Not covered: Interestingly, we note the draft ruling does not address:
- Itinerant workers: See TR 95/34
- Substantiation exception; and travel allowances generally: See TR 2004/6
- Self-education expenses: See TR 98/9.
- Under the direction and control of the employer: This concept was considered in the John Holland case (see ‘References’ below for case reference), and there was little guidance provided in the previous ruling. The new draft ruling provides further clarification of this concept, including paragraph 61 which states it should be considered in the overall context of the facts and circumstances of each case as direction and control alone is not sufficient to establish the relevant connection with employment. We note further that Example 9 indicates the employee in the example will be subject to his employer's direction and control, where all of their employer's workplace policies and procedures apply to them while travelling. Noting these comments are provided in the example rather than the body of the ruling which may limit the reliance that can be placed on this guidance. That is, it may only be applied to similar situations to the example (i.e. where the employee is travelling together with a number of other employees on an employer chartered plane).
The ruling does not provide any other situations an employee would be considered to be under the direction and control of the employer. For example, a common situation is where a salaried employee regularly flies by themselves from an airport near home to their work location and they undertake work on the computer while on the flight. And commonly, in this case, the employee’s employment agreement says they are subject to the employer’s workplace policies and procedures whenever working for the employer. Would the employee be under the ‘direction and control of the employer’ in this case? Situations like these are not addressed in the recently released draft ruling, therefore the application of this concept to typical situations is still uncertain.
There are several important differences between the new and previous draft rulings.
On-call and standby arrangements
This was not covered by the earlier draft TR 2017/D6, and the information included in the new ruling mainly replicates the guidance in Miscellaneous Taxation Ruling MT 2027. The ruling confirms “The fact that an employee is awaiting a call from their employer to attend a regular place of work, does not in itself justify characterising travel to the regular place of work as deductible’.
Transport of bulky equipment
This was also not covered by TR 2017/D6, and again mainly replicates the guidance in Miscellaneous Taxation Ruling MT 2027. Unfortunately, the information is only brief and does not provide much-needed guidance on what is ‘bulky’ such as weight guidelines. It also does not provide clarification surrounding what is considered ‘secure’, in terms of secure area (noting where a secure area is provided at the workplace to store the equipment, then the transport is not deductible).
Special demands travel
This was a new concept referenced substantially in the previous draft ruling TR 2017/D6 and is absent from the new ruling. Instead, the new ruling refers to being within duties of employment and relevant to the practical demands of carrying out the work duties.
Two different offices
Example 8 in the new ruling can be contrasted to its previous equivalent as example 11 in the previous ruling TR 2017/D6. Example 11 in the previous ruling provided broad guidance, that where a person has two different work offices, then travel to both offices is tax deductible. However, example 8 in the new ruling notes that where ‘at her discretion can work out of the second office’ then the transport is not tax deductible. The distinction appears to be the employee must have an arrangement with the employer that the employee is required to attend both offices, in order for the transport to be tax deductible.
Therefore, care should be taken to ensure that this requirement is appropriately documented in order for the transport to be considered tax deductible.
Point of hire FIFO workers
There is also change in respect to examples 9 and 10 in the new draft ruling, compared to examples 3 and 4 in the old ruling, in relation to situations such as FIFO workers. This mainly relates to references to ‘transit points’ rather than where rostered on duty (referred to as the point of hire). It is noted that the cost of travel between the transit point, and the place where the person carries out their substantive duties will be deductible where it can be said that the employment is the occasion for the expense.
There is guidance and a new example included where the employee is working from home, which concludes that any travel into the office is private home to work travel (due to the employee’s choice to work from home rather than in the office). The draft ruling also provides a brief comment in relation to a home office being the sole base of operation, and that any travel to perform work duties such as to client premises would be considered tax deductible.
Where the employer pays for the travel expenses, and the expenses are considered ‘otherwise deductible’ under the FBT legislation, then Fringe Benefits Tax (‘FBT’) will not apply. The otherwise deductible rule means that the employee would have received a tax deduction in their individual income tax return if the employee had incurred the expenditure himself or herself (instead of the employer meeting the expense). Therefore, this ruling is also relevant to determine if the expenses would be otherwise tax deductible, and therefore whether FBT applies (depending on the facts and circumstances of the case, there may also be an FBT exemption that applies, for example - remote area travel).
The finalised ruling will apply both before and after its issue date, however, taxpayers can apply TR 2017/D6 to relevant financial years until then.
Comments due 28 February
Submissions on draft taxation ruling TR 2017/D6 are due to the ATO by 28 February 2020.
Final points to note
The area of tax deductibility of travel expenses remains complex with the outcome often depending on the particular facts and circumstances of each case. We recommend that employers and employees revisit their transport situations, to assess the tax deductibility of such arrangements, under the newly issued draft ruling TR 2019/D7.
If you would like to share any comments or have any questions on the tax deductibility of travel expenses please contact your BDO adviser.
References: Draft Taxation Ruling TR 2019/D7 Income Tax: when are deductions allowed for employees’ transport expenses? issued 13 December 2019; and John Holland Group Pty Ltd v Commissioner of Taxation (2015) FCAFC 82.
Disclaimer: This article is general information only and not professional advice, and please contact your BDO adviser for advice.