Taxation of allowances in a multi-pronged tax system

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July 11, 2024 | My Tax Accountant |

The taxation of meal and travel allowances is an area of our tax law that is often misunderstood and inconsistently applied. For practitioners who do not frequent this area of the law, it is well summarised in TR 2004/6:

3. Subdivision 900-B of the [Income Tax Assessment Act 1997 (ITAA 1997)] sets out substantiation rules for work-related deductions, and provides for exceptions in the case of some types of expenses.

4. This Ruling explains the way in which the substantiation exception operates for work expenses of employees that are either reasonable travel allowance expenses or reasonable overtime meal allowance expenses.

5. In addition to this Ruling, for each income year the Commissioner publishes amounts that are considered to be reasonable for the purposes of this substantiation exception (reasonable amounts). It is the Commissioner’s practice to publish these reasonable amounts in a Taxation Determination issued before the start of each income year.

The annual Taxation Determination published for the 2023–24 income year is TD 2023/3. 

In addition to the above, TR 2004/6 broadly explains that:

  • at paragraph 9 that Subdivision 900-B of the ITAA 1997 does not require written evidence to be produced if the amount incurred is less than the limits in the annual determination and the expenses are covered by either:
    • an overtime meal allowance paid under an industrial instrument; or
    • a domestic travel allowance or overseas travel allowance, whether or not the allowance is paid under an industrial instrument; and
  • at paragraph 12 that all allowances must be shown as assessable income in the employee’s tax return unless the allowance:
    • is not shown on the employee’s payment summary;
    • received is a bona fide overtime meal allowance or a bona fide travel allowance;
    • received does not exceed the reasonable amount; and
    • has been fully expended on deductible expenses.

The above position has resulted in a multi-pronged application of our tax law, and in my view, unfair outcomes being achieved by the ATO against individuals, as evidenced in the following AAT decisions:

The taxpayer in Gleeson worked as an employee truck driver and claimed deductions for the cost of food and drink consumed by him at roadhouses and service stations along the interstate routes driven by him as a truck driver. Mr Gleeson did not keep any receipts for his purchases of food and drink as he was under the impression he could rely on the relief from the substantiation provisions in the income tax law on the basis that he was in receipt of a travel allowance. The amounts he claimed for food and drink were based on the Commissioner’s reasonable daily rates set out in the relevant annual taxation determination.

The AAT found that as Mr Gleeson received an eligible travel allowance and incurred the expenses in relation to food and drink while on trips away from home, it followed that he was entitled to claim a deduction for those expenses, even though he did not have complete written evidence. Accordingly, he was entitled to claim only the amount he incurred, which was much less than the Commissioner’s daily limit.

In Mitchell, the taxpayer received an overtime meal allowance in accordance with an industrial award for regular overtime. Similar to the taxpayer in Gleeson, Mr Mitchell was under the belief he could claim up to the reasonable limits without complete written evidence and claimed $8,130 as a tax deduction in his original return. Under audit, the ATO allowed $1,608, being the amount determined that he actually incurred. Under review, the AAT agreed with the ATO’s decision to limit his deductions to what was reasonably incurred.

The take-away points from the Mitchell and Gleeson decisions are that if a taxpayer is in receipt of a relevant taxable allowance from their employer, while they are relieved from full substantiation, they must nevertheless show that the expense was incurred. 

In my view, when dealing with a Subdivision 900-B audit, the process of explaining the amount of expenses that were incurred is difficult as no records have been kept by taxpayers. They typically do not retain records as numerous sections throughout Subdivision 900-B state that written evidence is not necessary.

In contrast to the difficulties faced by taxpayers and practitioners during audit, there is a different application when para 12 of TR 2004/6 is utilised by public servants. In the public service, an amount approximately equal to the daily limit (from TD 2024/3 for example) is paid to these employees in a tax-free manner on the presumption that the employee is incurring the expenses up to the reasonable limit. 

This amount is effectively tax-free because the allowance meets the four conditions set out in paragraph 12 of TR 2004/6.

Having worked for approx. a decade in the public service, including at the ATO and the Department of Defence, I have never seen a recipient of these allowances fully expend it on deductible expenses. Further, as the allowance is not reported as assessable income, and no associated claim is made at label D2 on the tax return, it seems to escape ATO compliance activities.

Therefore, it is my view that the substantiation exemptions in Subdivision 900-B are being applied in an inconsistent manner. A conservative version of the law is applied to Truck Drivers and other blue-collar workers who generally do not have the financial resources to defend themselves, while a generous version of the law is reserved for the public service and similar employees.       

A consistent and ethical approach may be for the ATO to either tax all allowances by removing the exception in para 12 of TR 2004/6; or conduct compliance activities to ensure public servants are incurring up to the reasonable limits. When auditing public servants, the Mitchell and Gleeson decisions will serve as relevant precedents. 

Kind regards,

Patrick Sheehan CTA

My Tax Accountant