Vehicle Mileage Allowances (BP10) Finance in Practice, Taxation Unit, General Tax

Transcription

1 Vehicle Mileage Allowances (BP10) Finance in Practice, Taxation Unit, General Tax Custodian/Review Officer: Principal Finance Officer, General Tax Version no: 3 Applicable To: QH staff Approval Date: 07/03/2011 Effective Date: 07/03/2011 Next Review Date: 24/02/2012 Authority: Approving Officer Director, Tax Unit Signature Supersedes: 2 Key Words: tax, pay as you go, PAYG, motor vehicle, MV, allowance, expense, expenditure, reimbursement, payment, lease, novated lease, deduction Accreditation References: 1 Purpose The purpose of this Procedure is to provide information relating to the correct treatment, for income tax purposes, of payments to staff for allowances intended to cover travel costs and usage of personal vehicles 2 Supporting Documents References PAYG Withholding Bulletin No 1 Taxing of Allowances Income Tax Assessment Act 1936, Section 51AF Taxation Administration Act 1953, Schedule 1, Sections 12-35, 12-40, Taxation Administration Regulations 1976 TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements TR 2002/21 Pay As You Go (PAYG) Withholding from salary, wages, commissions, bonuses or allowances paid to office holders TR 2004/6 Income tax: substantiation exception for reasonable travel and overtime meal allowance expenses TR 2005/16 Income tax: Pay As You Go - withholding from payments to employees TD 2010/19 Income tax: what are the reasonable travel and meal allowance expense amounts for ? 3 Consultation Key stakeholders (position and business area) who reviewed this version are: Principal Finance Officer, General Tax Director, Taxation Unit Version No.3; Effective: 24/02/2011 Page 1 of 8

2 Contents Introduction Allowances generally Reimbursements -v- allowances Mileage allowance situations Taxation implications Novated lease situations Tax deductions Abbreviations Previous Determinations...8 Version Control Version No Date Author/Reviewer Version No Date Author/Reviewer 1 14/05/2007 Peter Curtis 2 28/05/2009 Peter Curtis 3 22/02/2011 Peter Curtis Version No.3; Effective From: 24/02/2011 Page 2 of 8

3 Introduction Generally, allowances should be paid through the payroll system and perhaps subjected to PAYG withholding tax deductions rather than being paid through the finance function (accounts payable). This latter method of payment will, or may, give rise to issues of compliance with the TAA53 1 and could result in the tax that should have been withheld having to be paid to the ATO (in addition to the full payment already made to the payee), together with penalties of $2,200 per instance of failure to withhold and the general interest charge. Most allowances are income in the hands of the payee, and are therefore assessable to income tax. There are exceptions and variations on this theme, of course. The majority of allowances must therefore be paid net of tax, and be recorded on the payee s payment summary. 1. Allowances generally Generally, allowances paid to employees are fully deductible for income tax purposes to the employer, and fully assessable in the hands of the individual, as salaries and wages. The term allowance can have quite specific reference, such as a tool allowance intended to recompense an employee for small tools consumed at his job. The term can also be somewhat allencompassing, such as a travel allowance, which might cover anything from accommodation to toiletries, or a foul linen allowance, which is an addition to the normal salary or wages, to remunerate an employee for handling soiled linen. The latter allowance may be paid even in the absence of the employee s having to handle the linen. Indeed, any allowance may be paid regardless of whether or not the employee actually incurs any expense. Nevertheless, such amounts are assessable, and where paid in advance (or even arranged in advance to be paid) or without relation to exact expenditure of the employee, should appear on the employee s payment summary, and should be subjected to PAYG withholding, subject to a small number of exceptions, noted in Section 5 of this Paper. 2. Reimbursements -v- allowances In broad terms, an allowance: Is generally a definite predetermined amount Is paid even in the event that the expense for which the employee is being compensated is not actually incurred Does not give rise to any control by the employer over the way in which the allowance is spent. A reimbursement, on the other hand: Compensates the employee for the precise amount of expenditure incurred Usually carries an obligation to vouch for the expenditure as a prerequisite to the reimbursement May be paid in advance of the incurrence of the expense. [TR 92/15] 1 Abbreviations are explained at the end of this Business Procedure Version No.3; Effective From: 24/02/2011 Page 3 of 8

4 The word allowance is not a technical term, and therefore its ordinary meaning must be considered. In The Australian Concise Oxford Dictionary 2 it is defined as an amount or sum allowed to a person, especially regularly for a stated purpose. In Taxation Ruling TR 92/15, which looks at the difference between an allowance and a reimbursement, the Commissioner says: A payment is an allowance when a person is paid a definite predetermined amount to cover an estimated expense. It is paid regardless of whether the recipient incurs the expected expense. The recipient has the discretion whether or not to expend the allowance. In 10 TBRD 480 Case 153 the Taxation Board of Review said at p 484: Our view is that between employer and employee there is a marked difference between a reimbursement and an allowance. A reimbursement transfers from the employee to the employer the burden of expenses actually incurred in the course of the employment. An allowance is designed to compensate the employee because the employer does not wish to be under the obligation of meeting such expenses directly or indirectly. The distinction between an allowance and a reimbursement is significant because, generally, most allowances (other than living-away-from-home allowances) are assessable income and most reimbursements are fringe benefits. The word reimburse is defined in s.136(1) of the FBTAA to include any act having the effect or result, direct or indirect, of a reimbursement. The Australian Concise Oxford Dictionary 3 defines the word reimburse as meaning 1 repay (a person who has expended money) 2 repay (a person s expenses). See Taxation Ruling TR 92/15. In Roads and Traffic Authority of NSW v FC of T 93 ATC 4508 Hill J says (at p 4512): The concept of reimbursement requires that the payment in question be made by reference to actual cost, that is to say that there would need to be some correspondence between the payment and the expenditure incurred, even if the reimbursement were to be but partial reimbursement.'' Although the words allowance and reimbursement would appear to have quite separate meanings in ordinary usage, Hill J points out at p 4514 that:... the extended definition of reimbursement [in s.136(1) of the Fringe Benefits Tax Assessment Act 1986] clearly leads to the conclusion that the two words are not necessarily mutually exclusive. In that case, which involved the correct treatment of payments for fares and vacation travel, it was held that the payments fell within the definition of salary or wages within s.221a. Consequently, it was unnecessary to determine whether the payments were allowances or reimbursements. 2 Oxford University Press, Third Edition, op. cit. Version No.3; Effective From: 24/02/2011 Page 4 of 8

5 3. Mileage allowance situations The mileage allowance is essentially paid to recompense the payee for the use of his or her private vehicle on Queensland Health business. Typically, this would occur because a car pool vehicle is not available for the payee to use, or the circumstances prevent a car pool from being used by the payee. Listed below are common situations in which the mileage allowance is paid. This list is not intended to be an authority for any entitlement; it is simply a compilation of references that have been found on the intranet. The common situations are: o Compensating an employee for business use of his or her privately owned (or leased) vehicle (Directive 07/05 Motor Vehicle Allowances, Clause 1.1) o Out of pocket expenses payable to Visiting Medical Officers in accordance with the Terms and Conditions of Employment, Queensland Government Visiting Medical Officers 2005 ( 2005 VMO Agreement ) (Clause 3.2) and Directive 02/02 Terms and Conditions of Employment of Queensland Government Visiting Medical Officers o Compensation of volunteer workers (IRM 3.20, Section 6.3) o Payment of mileage allowance paid to Senior Medical Officers in lieu of a vehicle being provided (IRM , Section 3.4) o Payment of mileage allowance to radiographers on call (IRM , Section 6) o Payment of mileage allowance to itinerant Medical Officers (IRM , Section 14) o Payments of mileage allowance for employees on call (IRM ) o Payment of mileage allowance to medical practitioners for providing specified services in country hospitals (IRM 2.6-2) o Payment of mileage allowance to radiographers employed on mobile screening vans (IRM ) o Payment of mileage allowance to registered nurses who do not have access to an airport with commercial services (IRM , Sections 1(d) and 2(d)) o Payments to Home Help staff for the excess over 20 kilometres of their trip to their first place of work, each way (IRM ) o Payment to private medical practitioners (IRM Fees For Consultations Private Medical Practitioners) o Motor cycle mileage specific authorities not found, although evidence of the payment of this allowance may be found in various expense claim forms o Payment under the Registered Nurses professional development package (IRM ) o Payment for transfer of employee under the integrated mental health services certified agreement (IRM , Section 3.6) o Payment to a patient under the Patient Travel Subsidy Scheme Guidelines For The Administration Of The Patient Travel Subsidy Scheme, clause It is noted that there are, among these, payments to persons who might not be receiving the entitlement in the capacity of employee. In such circumstances, PAYG tax may be required to be deducted from the payment. Guidance on this issue may be found in PAYG Business Procedure No.6 PAYG Withholding Obligations. Version No.3; Effective From: 24/02/2011 Page 5 of 8

6 4. Taxation implications Subject to the exceptions noted in Section 5 of this Paper, allowances received by employees are to be included as assessable income. They are to be paid through the payroll system and reported on the employees payment summaries. Expenses may be claimable against assessable allowances, however the substantiation rules may also apply, meaning that the expense has to be incurred, and the deduction has to be supported by documentation. Most allowances which, in substance, are not reimbursements fall within the definition of salaries and wages and consequently they are assessable to the employee. They are also withholding payments, amounts from which tax must be withheld under s of Schedule 1 to the TAA53. In respect of mileage allowances, PAYG tax is not required to be withheld while the kilometres on which the allowance is based are not more than 5,000 in the one financial year 4 unless the rate of payment is in excess of the rate allowed by the ATO for deduction purposes. Prior to the SAP HR implementation, the kilometres could not be tracked within the payroll system. Therefore, the most practical solution was to subject all of the payments to PAYG withholding at source, to ensure that Queensland Health was not at risk and the employee was not under-taxed. In the SAP HR payroll system, the kilometres can and will be tracked, for the purpose of the withholding requirements. It should be borne in mind, though, that SAP HR payroll can only track the kilometres reimbursed by Queensland Health to its own employees. Kilometres reimbursed elsewhere to that employee cannot be captured. Queensland Health is not exposed, but the employee who receives the allowance from another employer as well may face the consequence of insufficient PAYG tax having been withheld. It is then the employee s responsibility to provide for this. An allowance is a separately identified payment made to a payee: for working conditions eg danger, height or dirt for qualifications or special duties eg first aid certificate or safety officer for expenses that cannot be claimed as a tax deduction by the payee eg normal travel between home and work, or for work-related expenses that may be able to be claimed as a tax deduction by the payee eg travel between work sites. Although an amount is required to be withheld when an allowance is paid to an individual as an employee, the Commissioner has approved a variation of the amount required to be withheld. The variation basically has the effect that, for some allowances, withholding is not required if the allowance paid does not exceed the amount determined by the Commissioner to be reasonable for the year. The Commissioner's practice is explained in PAYG Bulletin No 1, Taxing of allowances for the 2000/01 and future income years. An amount does not have to be withheld from salary, wages, commissions, bonuses or allowances that are the subject of an effective salary sacrifice arrangement. (An effective salary sacrifice arrangement is one where income that has not yet been earned is relinquished in exchange for employer-provided benefits of a similar value. See Taxation Ruling TR2001/10.) 4 Table 2, PAYG Bulletin No.1, issued by the Australian Taxation Office Version No.3; Effective From: 24/02/2011 Page 6 of 8

7 S of Schedule 1 to TAA53 only requires a withholding to occur if the payment is made to an individual who is an employee. S of Schedule 1 to TAA53 requires withholding to occur if a supply has been made by the payee and the payee has not quoted an ABN. (Please refer to PAYG Business Procedure No.6 for more details on this.) In the case of a subsidy paid to a patient under the Patient Travel Subsidy Scheme, neither of these withholding requirements will apply because (a) the patient is not an employee or (b) there has not been a supply by the patient. In the case of a medical practitioner being paid the mileage allowance, but the practitioner is not an employee, then s would not apply, but s may apply because the payment may be being made in relation to a supply. If the payment is made in relation to a supply (the use of the vehicle was triggered by the supply) and an ABN is not quoted, then the allowance is also a withholding payment. Payments to visiting medical officers who are paid as contractors rather than as employees should be looked at more thoroughly, to ensure that the payment should not be paid net of PAYG tax. If the contract visiting medical officer is an employee of another entity, such as a medical practice company or a medical practice service entity, then s of Schedule 1 to the TAA53 will have application, and withholding should apply as if the visiting medical officer was an employee of Queensland Health. S simply says An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity). If an employee is reimbursed on a cents per kilometre basis for the cost of using a car (whether owned or leased), such a benefit, with certain exceptions, is an exempt fringe benefit but the amount of the reimbursement is assessable income of the employee (ITAA36 s.23l(1a); ITAA97 s.15-70; ITAA s.26(eaa)). While allowances are assessable income, the employee may (not will ) be able to claim tax deductions, depending upon the circumstances. Employees should consider obtaining independent tax advice on these matters. 5. Novated lease situations The Public Service Commission has advised in Directive 14/10 that departments may now pay mileage allowances in respect of vehicles that are supplied under novated leases. Prior to September 2010, the policy was that departments should not be making official use of vehicles that are supplied under a novated lease entered into under the Queensland Government salary sacrifice arrangements. Therefore, departments were not to pay any mileage allowances for these vehicles. Under the terms of the novated lease, the lease obligations are transferred from the employee to the employer, and the employer thereby becomes the lessee. Consequently, to all intents and purposes, especially from an FBT perspective, it is now the employer s vehicle that is being provided to the employee for private use. Version No.3; Effective From: 24/02/2011 Page 7 of 8

8 6. Tax deductions An employee is unable to claim a tax deduction in their personal income tax returns in respect of any vehicle provided to the employee by the employer for the exclusive use of the employee or any relative of the employee, or its running costs. This applies to a vehicle supplied under a novated lease, as well as any Government-owned vehicle, or any vehicle leased by the Government. The denial of the deduction, it should be noted, covers any use of the vehicle, whether that is private use, or business use. The denial of the deduction is contained in s.51af of the ITAA Abbreviations ATO: Australian Taxation Office FBTAA: Fringe Benefits Tax Assessment Act 1986 (Cwlth) ITAA97: Income Tax Assessment Act 1997 (Cwlth) ITAA36: Income Tax Assessment Act 1936 (Cwlth) TAA53: Taxation Administration Act 1953 (Cwlth) TR: Taxation Ruling, issued by the Australian Taxation Office 8. Previous Determinations Income Year Determination TD 2006/ TD 2007/ TD 2008/ TD 2009/15 Version No.3; Effective From: 24/02/2011 Page 8 of 8