2023 FBT Series: New travel ruling guidance - Transport expenses
13 April 2023
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In February 2021, the Australian Taxation Office (ATO) released Taxation Ruling TR 2021/1, which provides guidance on the income tax deductibility of transport expenses incurred in connection with travel. To the extent that an employer provides these types of benefits to employees, this rulings will be relevant for employers in determining the extent that these expenses may be otherwise deductible for FBT purposes, provided sufficient documentary evidence in the form of declarations or travel diaries have also been maintained.
This article highlights some of the key takeaways from TR 2021/1 to keep in mind as you undertake the 2023 FBT compliance process, as well as areas of potential risk of which you should be mindful.
TR 2021/1
General principles
TR 2021/1 re-affirms a number of general principles in relation to income tax deductibility of transport expenses (eg. flight, bus, taxi, train, car, boat), namely:
- An employee’s cost of travelling between home and a regular place of work is not deductible; and
- Travel expenses incurred in gaining or producing assessable income of the employee are deductible.
The ATO has stated that travel will be considered incurred in gaining or producing assessable income, and therefore deductible, where the travel:
- Fits within the duties of employment (i.e. the obligation to incur transport expenses arises out of the employment itself and not the employee’s personal circumstances); or
- Is relevant to the practical demands of carrying out the employee’s work duties or role (i.e. the transport expenses are a necessary consequence of the employee’s income producing activity).
Other facts that may be relevant for the purpose of determining whether a transport expense is incurred in gaining or producing assessable income include:
- The employer asks for the travel to be undertaken;
- The travel occurs on work time; or
- The travel occurs when the employee is under the direction and control of the employer.
The above factors must be considered in the context of both the form and substance of the specific employment arrangement. Importantly, no single factor on its own will necessarily support a conclusion that an expense is deductible. In the absence of the expense being incurred in gaining or producing assessable income of the employee, the provision of transport expenses would be considered non-deductible to the individual and may therefore attract FBT (subject to any other available FBT exemptions or concessions).
Careful attention should be paid by employers to the above factors and ATO examples contained within TR 2021/1 to ensure that transport expenses provided to employees in these circumstances are appropriately considered in the FBT return.
Working from home and flexible work arrangements
TR 2021/1 also clarifies the income tax deductibility of transport expenses incurred where an employee undertakes some of their duties from home.
Generally, the fact that the employee chooses to perform some of their duties from home at their convenience, does not make travel between their home and another regular place of work deductible as the travel is attributed to the choice of the employee to work from home rather than being explained by the employment duties or practical demands of the role.
In contrast, transport expenses may be deductible where:
- An employee has an area of their home set aside as their sole base of operations;
- Their employer does not provide them with another location to work from; or
- The expenses relate to travel from home to a client’s premises.
Potential areas of risk and common mistakes in applying TR 2021/1
We have outlined below some of the more common challenges that employers may face in applying these rulings to their circumstances:
- It is important to note that TR 2021/1 only addresses the deductibility of transport expenses. Where accommodation, food and drink expenses are also provided, consideration must be given to the principles contained within TR 2021/4 and PCG 2021/3 when determining the income tax deductibility of these particular expenses;
- The subjective nature of the ATO guidance in relation to whether the travel ‘fits within the duties of employment’ or is ‘relevant to the practical demands of the role’, means that careful consideration should be given this assessment, particularly in light of the potential flow on impacts for the FBT return where non-deductible transport expenses are provided to employees;
- The ATO has confirmed within TR 2021/1 that the above-mentioned assessment is not impacted by the distance between the employee’s home and regular place of work, or other factors such as lack public transport options, or whether an allowance is provided to the employee in connection with the travel by their employer;
- An employee’s ‘regular place of work’ may change over time, and an employee could also have more than one regular place of work at any one time, which means that particular care should be taken in making this assessment where an employee temporarily changes their place of employment or works from a number of different locations on a regular basis; and
- Be mindful of instances where apportionment of expenses may be required for income tax deductibility purposes. The most common scenario is where additional costs are incurred by an employer that relate solely to an employee’s spouse or family members as these individuals cannot be said to have incurred the expenses in connection with their employment duties. Typically, the provision of these expenses by an employer will attract FBT.
Other considerations
While TR 2021/1 does not directly address the treatment of COVID-related travel scenarios, additional guidance has been released by the ATO both in relation to the income tax deductibility of quarantine and isolation expenses and the availability of the Emergency assistance FBT exemption in certain circumstances, should benefits of this nature be provided to your employees during the 2023 FBT year.
If you have any questions relating to FBT or employment taxes more generally, please do not hesitate to reach out to your PwC representative.
