National Tax & Accountants Association Ltd Substantiation Exception for Reasonable Travel Allowance Expenses Submission 22 November 2016 1
Executive Summary The National Tax & Accountants Association Ltd ( NTAA ) is a national non-profit (memberbased) association, which currently represents almost 10,000 member firms (who, in turn, represent tens of thousands of accountants and tax agents in public practice). We welcome the opportunity to make a submission on exploring ways the ATO can improve its guidance and administrative practices in relation to the substantiation exception for reasonable travel allowance expenses. The NTAA s submission focuses on particular discussion questions raised in the document released by the ATO: Substantiation exception for reasonable travel allowance expenses ( discussion paper ), on which we are able to comment based on previous discussions with members whose clients have applied the substantiation exception. The law on the substantiation exception for reasonable travel allowance expenses 1. Claiming work-related travel expenses when receiving a travel allowance Broadly speaking, employees who travel overnight in carrying out their work duties (i.e., where an employee is travelling on work, not to work) are usually entitled to claim a tax deduction (under the general deduction rules in S.8-1 of the ITAA 1997) for the cost of meals, accommodation and/or incidentals (e.g., taxi fares) they incur in connection with that travel. However, in order to claim such a deduction, in addition to satisfying the conditions for deductibility in S.8-1, employees are also required under Subdivision 900-B of the ITAA 1997 to substantiate their work-related travel expenses by providing written evidence (e.g., receipts) and/or by maintaining a travel diary (if relevant), unless an exception applies. Refer to S.900-15. As a general rule, written evidence is basically a receipt, invoice or similar document that meets the requirements in Subdivision 900-E (e.g., date, amount of expense, etc). Where overseas or domestic travel involves being away for six or more nights in a row, a travel diary must be kept in accordance with Subdivision 900-F (i.e., showing the date, destination, purpose of trip, etc). However, where the expense being claimed by an employee is a travel allowance expense, the substantiation exception in S.900-50 (for domestic travel) or S.900-55 (for overseas travel) may apply. A travel allowance expense is basically a travel expense that relates to meals (i.e., food and drink), accommodation and/or incidental travel expenses, incurred by an employee travelling away from home overnight for work purposes, where the following conditions are met: The employee is paid a bona fide travel allowance to cover the cost of food, drink, accommodation and/or incidental travel expenses an amount paid to an employee will be bona fide if it could reasonably be expected to cover the costs of meals, accommodation (for domestic travel only) and/or incidental costs. The employee s travel allowance is paid to cover the costs of meals, accommodation, and/or incidental expenses, for specific work-related trips. Where the amount claimed by an employee for a travel allowance expense does not exceed the Commissioner s reasonable allowance amount, there is generally no requirement to substantiate the claim (i.e., by providing written evidence or a travel diary). However, claims for overseas accommodation expenses must be fully substantiated by obtaining written evidence (e.g., receipts) and by maintaining a travel diary for trips of six or more continuous nights in a row. Refer to S.900-15, S.900-20 and S.900-55. For the purposes of the above substantiation exception, the Commissioner publishes reasonable allowance amounts annually (for food and drink, accommodation for domestic travel only, and incidental travel expenses). Separate reasonable allowance amounts are also prescribed for food and drink expenses incurred by employee truck drivers who are travelling overnight for work-related purposes. For example, refer to TD 2016/13. 2
NTAA feedback and comments on particular ATO discussion questions The NTAA would like to submit the following feedback and comments on particular discussion questions raised by the ATO in its discussion paper, which focuses on exploring ways the ATO can improve its guidance and administrative practices in relation to the substantiation exception for reasonable travel allowance expenses. Discussion question 1 In what way could the ATO guidance products (TR 2004/6 and TD 2016/13) be improved to reduce or resolve the misunderstandings around the application of the exception from substantiation for reasonable travel allowance expenses? 1.1 Provide more guidance on what is a bona fide travel allowance The NTAA believes that the ATO should provide more guidance, specifically by way of examples, on what will be accepted as a bona fide travel allowance. Currently, existing ATO guidelines merely refer to a token amount (e.g., in TR 2004/6 at paragraph 61) as not being considered to be a bona fide allowance. Furthermore, the recent decisions in Fardell v FCT [2011] AATA 725 ( Fardell s case ) and Gleeson v FCT [2013] AATA 920 ( Gleeson s case ) have created confusion in this area. Accordingly, the NTAA suggests that the ATO s guidance products (particularly TR 2004/6) should at least be updated to provide examples of when an allowance that is paid to cover work related travel would qualify as a bona fide travel allowance to be eligible for the substantiation exception. 1.2 Provide more clarity that the purpose of the ATO s reasonable amounts is to facilitate a substantiation exception, and not to authorise an automatic deduction for employees. There appears to be a common misunderstanding that employees in receipt of a travel allowance are entitled to claim an automatic tax deduction up to the ATO s reasonable amount without having to keep any records. Although TR 2004/6 addresses this issue at paragraphs 11, 13 and 41, the NTAA suggests that the ruling is at least updated to include examples to further clarify/illustrate the point that the ATO s prescribed reasonable amounts only facilitate a substantiation exception, and do not prescribe an automatic deduction for travel expenses. This will also greatly assist practitioners when advising clients wanting to claim travel expenses (i.e., practitioners will be able to refer to ATO examples to illustrate the danger of claiming an automatic deduction up to the ATO s reasonable amount). 1.3 Provide examples of what evidence the ATO will expect to see when relying on the substantiation exception Where a taxpayer relies on the substantiation exception to claim a deduction for reasonable travel allowance expenses, the ATO s guidance products (TR 2004/6 and TD 2016/13) currently state that the taxpayer may still be required to show the basis for determining the amount of their claim (including that the expenses being claimed were actually incurred). Refer to paragraph 3 of TD 2016/13 and paragraph 15 of TR 2004/6. 3
However, the ATO s guidance products do not provide any guidance on what the ATO would expect to see as sufficient evidence of how a taxpayer s claim was determined (including whether the amount being claimed was actually incurred). Accordingly, consideration should be given to including examples within the ATO s guidance products as to what the ATO would expect to see as sufficient evidence for work-related travel expenses claimed as a deduction by taxpayers relying on the substantiation exception. Common examples of sufficient evidence may include any one or more of the following: Bank and/or credit card statements showing cash withdrawals used to pay for work-related travel expenses. A letter from an employer or job description showing work-related travel as being required. Diary records confirming work-related travel and expenditure as being incurred. Copies of menus from restaurants/eateries regularly visited. Discussion question 3 Do the exceptions from substantiation for travel expenses only add complexity or do they simplify and reduce costs for employees and employers? The NTAA believes that the substantiation exception still plays an important role in reducing compliance costs for taxpayers (including employers), but more guidance is needed regarding how certain aspects of the substantiation exception apply (as noted in our feedback and comments to Discussion question 1 above). Discussion question 7 Given accommodation allowance rates are set out in many awards, or have otherwise been determined by the employer as reasonable and appropriate based on enquiries made, would it be accepted that we cease publishing accommodation rates in the annual taxation determination, and instead accept the amount of the allowance paid as being the reasonable amount for the purpose of the exception from substantiation for accommodation expenses? Based on discussions with NTAA members, the NTAA believes that the ATO should continue to publish accommodation rates in an annual taxation determination, as these are still widely relevant to many taxpayers and are still used as a reference point by employers. Furthemore, the accommodation rates published by the ATO in the annual taxation determination apply only for short stays in commercial establishments, like hotels, motels and serviced apartments (refer to paragraph 8 of TD 2016/13). In this regard, consideration should be given to providing more guidance and examples on how the rules apply in respect of other accommodation arrangements, such as where for example, an employee: shares their accommodation with another employee; stays in low-cost accommodation (e.g., a caravan park); stays with relatives or friends; or uses Airbnb for short-term accommodation to stay in someone s home or apartment for the duration of their work-related travel. Consideration should also be given to publishing accommodation rates for the different scenarios outlined above that are currently not addressed by the ATO s guidance products. For example, this could involve the ATO (after consultation with industry) providing shared rates (for shared accommodation) and low-cost accommodation discount factors (for stays in a caravan park). 4
Discussion question 13 In the interest of simplification, should our reasonable rates for meals be streamlined so that singular rates apply regardless of annual salary level and location of travel? The NTAA believes that the ATO should continue to publish reasonable rates for meals based on different salary ranges and locations of travel, as any attempt to publish a standard meal rate for all salary ranges and all for locations would fail to reflect the different meal expenditure patterns of taxpayers earning different levels of income, as well as meal offerings and pricing of meals in different locations. Discussion question 18 Should we introduce an approach where another rate is established to provide a minimum that might be claimed as a deduction for meals when travelling overnight for work without any evidence? That is, in the event that an employee has not retained receipts or a reasonable basis for the amount they have claimed (to demonstrate the amount actually incurred), they would be permitted to claim an amount up to the minimum amount and this would be accepted. The NTAA believes that introducing such an approach would only create confusion regarding the correct application of the substantiation exception rules. Furthermore, this would promote automatic claims without any regard to whether the expenditure has been incurred (which is an issue that the ATO is already concerned about, as outlined in the ATO s discussion paper). Discussion question 23 Is it accepted that in current times it is unlikely that expenditure on incidentals would qualify as a deduction? The NTAA believes that expenditure on incidentals still qualifies as a deduction in current times, under S.8-1, where they are incurred in the course of an employee travelling overnight for workrelated purposes. For example, incidental travel expenses which can still be deductible include taxi fares, public transport fares, airport parking and mini-bar consumption. Based on our discussions with practitioners, employees who undertake overnight work-related travel in current times may continue to incur expenditure on incidental travel expenses which are not reimbursed by an employer, and which can still therefore qualify for a deduction under S.8-1. Further to the above, the ATO s guidance products should be updated to include examples of the types of incidental expenses an employee could incur in the course of travelling overnight on work, together with which incidental expenses are considered to be deductible or non-deductible. Examples of incidental travel-related expenses an employee could incur include the following: Taxi fares and public transport fares. Car parking costs, including airport parking, on-street parking and off-street parking (i.e., in a commercial parking station). Costs associated with replacing travel documents. Car hire, including insurance excess for car hire. Road and bridge tolls. Cost of personal hygiene items (e.g., a toothbrush and toothpaste). Cost of items consumed from a hotel mini-bar. Cost of in-house pay TV (or movies). 5
Discussion question 27 Should all long-distance truck drivers (including owner-drivers) who incur deductible travel expenses be eligible for the exception from substantiation in respect of deductible meal expenses? The NTAA believes that all long-distance truck drivers (including owner-drivers) who incur deductible travel expenses should be eligible for the exception from substantiation in respect of deductible meal expenses. As with long-distance employee truck drivers, long-distance owner-drivers face similar compliance difficulties associated with substantiating meal expenses. Accordingly, long-distance owner-drivers should also have access to the same substantiation exception that applies to employee truck drivers, to ensure that they are not unfairly disadvantaged and that a level playing field is established. Discussion question 29 Apart from truck drivers who are long distance owner-drivers, are there any other non-employee individual occupations that frequently incur deductible travel? Based on previous discussions with NTAA members, other non-employee individual occupations that would be expected to incur deductible travel include the following: IT consultants. Engineers. Architects. Life coaches. Professional speakers, including seminar presenters. Locum doctors (or other locum practitioners operating in the health industry). Plumbers. Electricians. Travelling Salespersons. These other non-employee individuals would also benefit from the substantiation exception for travel allowance expense claims, as it would be expected that these individuals could also face similar compliance difficulties with substantiating deductible overnight travel expenses (which employees in the same occupation experience). 6