2023 FBT Series: Accommodation, food and drink expenses
13 April 2023
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In August 2021, the Australian Taxation Office (ATO) finalised Taxation Ruling TR 2021/4 and PCG 2021/3, which provide guidance on the income tax deductibility of accommodation, food and drink expenses incurred in connection with travel. To the extent that an employer provides these types of benefits to employees, these rulings will be relevant 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 2021/4 and PCG 2021/3 to keep in mind as you undertake the 2022 FBT compliance process, as well as areas of potential risk of which you should be mindful.
Overview or TR 2021/4
TR 2021/4 provides useful guidance to employers on how to appropriately identify ‘travelling on work’ expenses from ‘living expenses’. This is important as only ‘travelling on work’ expenses are considered deductible for income tax purposes, which means that the otherwise deductible rule may be available where such expenses are provided by the employer.
In contrast, where an employer provides ‘living expenses’ to an employee, the otherwise deductible rule will not apply, and the employer will instead need to consider the application of other FBT exemptions and concessions in their FBT returns with respect to these expenses.
General principles
In order to be deductible, the accommodation, food and drink expenses must have a sufficiently close connection to the performance of the employment duties and activities through which the employee earns income. In these circumstances, the employee will be viewed to be ‘travelling on work’. It is not enough for there to only be a general link or casual connection between the expenditure and the production of income by the employee.
In making this assessment, consideration of the relevant employment duties is ultimately a question of fact and degree that requires examination of the employment contract along with the observed duties of the employee and the tasks they are required to perform for their employer. TR 2021/4 does not impose a specific limit on the length of time that an employee may be considered ‘travelling on work’, however, as a general statement, the longer an employee is travelling, the higher the risk that they would no longer be considered by the ATO to be ‘travelling on work’.
Importantly, TR 2021/4 re-affirms the position that a deduction cannot be claimed for food and drink expenses when the employee does not travel and stay away from their usual residence overnight, even if the travel was objectively in connection with their employment duties.
Difference between ‘living expenses’ and ‘travelling on work’ expenses
Living expenses are considered to be a prerequisite to gaining or producing assessable income and are therefore not incurred in performing an employee’s income-producing activities and are not deductible to the individual for income tax purposes.
The ruling identifies three different scenarios in which accommodation, food and drink expenses will be ‘living expenses’ rather than ‘travelling on work’ expenses:
Expenses incurred because the employee’s personal circumstances are such that they live far away from where they work;
Expenses incurred because the employee is living at a location (eg. living away from home temporarily); and
Expenses incurred because the employee has relocated from their usual residence.
Careful attention should be paid by employers to the above scenarios and ATO examples contained within TR 2021/4 to ensure that accommodation, food and drink expenses provided to employees in these circumstances are appropriately considered in the FBT return.
Overview of PCG 2021/3
PCG 2021/3 simplifies the process of determining whether an employee is travelling on work or living at a location, where each of the specific criteria outlined within PCG 2021/3 has been satisfied. Where these criteria have not been satisfied in full, employers must revert to more subjective guidance contained within TR 2021/4 for the purpose of making this distinction.
In circumstances where the criteria outlined within PCG 2021/3 have been satisfied in full, the ATO will generally not apply compliance resources to determine whether travel expenses are in respect of an employee who is ‘travelling on work’ where the employee is away for:
- no more than 21 days at a time continuously; and
- an overall aggregate period of fewer than 90 days in the same work location in an FBT year.
Potential areas of risk and common mistakes in applying TR 2021/4 and PCG 2021/3
We have outlined below some of the more common challenges that employers may face in applying these rulings to their circumstances:
These rulings only address the deductibility of accommodation, food and drink expenses. Where transport expenses are also provided, consideration must be given the principles contained within TR 2021/1 when determining the income tax deductibility of these particular expenses;
PCG 2021/3 may only be relied upon for the purpose of making the distinction between ‘travelling on work’ and ‘living at a location’ where all of the conditions outlined at paragraph 12 of the PCG are satisfied;
In the absence of being able to use PCG 2021/3 to differentiate between employees who are ‘travelling on work and those that are ‘living at a location’, TR 2021/4 requires consideration of the following subjective factors;
Is there a change in the employee’s regular place of work?
Is their length of stay away from their usual residence relatively long?
What is the nature of the accommodation?
Is the employee either accompanied, or able to be accompanied, by family, or visited by family and friends?
An employee is only able to be classified as ‘travelling on work’ where they are required to stay overnight away from their usual place of residence;
While the distinction between ‘living at a location’ and ‘relocation’ does not change the treatment of expenses in these circumstances as non-deductible for income tax purposes, it is important to keep in mind that this classification may directly impact the available FBT exemptions and concessions that can be accessed by the employer; 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 2021/4 and PCG 2021/3 do 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.
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