Embarking on work-related travels can impose various demands on employees, encompassing financial, physical, and emotional aspects.
In response to these challenges, compensation methods have evolved, giving rise to both travel allowances and the living away from home allowance (LAFHA). Understanding the distinctions between the two is essential for both employers and employees.
In the past, a common rule-of-thumb was employed by the Australian Taxation Office (ATO) to differentiate between the two: travel of less than 21 days fell under travel allowance, while more extended periods were considered LAFHA. However, it’s crucial to note that the 21-day threshold is no longer applicable.
Typically, employees receiving travel allowances are:
- Paid a standard allowance covering accommodation and food.
- Working at a single location.
- Returning home on weekends.
- Staying in accommodation provided by the supplier, which may be used by other customers when the employee is absent.
The ATO issues annual guidelines defining reasonable amounts for travelling employees, but it’s noteworthy that some employees may be on a travel allowance for six weeks or more.
The tax treatment and financial outcomes differ for LAFHA and travel allowances, prompting the question of whether to apply Fringe Benefits Tax (FBT) rules or income tax rules. Generally, the FBT framework provides a more concessional tax outcome if specific LAFHA requirements are met compared to the income tax effect of a travel allowance.
Determining whether an employee is merely travelling or genuinely living away from home becomes crucial. If an employee is required to travel for business, their food, drink, and accommodation expenses become deductible and FBT-free for the employer. On the other hand, an employee on LAFHA must temporarily change their usual place of residence, making their expenses private and non-deductible. The employer requires FBT concessions for such cases.
Substantiating the Distinction
The line between travelling and living away from home is a matter of substance, and it must be substantiated to prove the eligibility of LAFHA. Similarly, if treated as a travel allowance, the ATO generally won’t challenge such treatment if it is adequately substantiated.
In essence, navigating travel compensation involves a nuanced understanding of the circumstances, and staying informed on ATO guidelines and rulings is crucial for both employers and employees.
For more detailed guidance, it’s advisable to consult with tax professionals.