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Understanding the ATO Travel Allowance

Understanding ATO Travel Allowances

When employees travel and spend the night away from home for business purposes, they are entitled to reimbursement for travel expenses they incur related to performing their employment duties. 

If employees don't spend the night away from their house, they cannot claim travel expenses. 

However, employers and employees need to understand the ins and outs of the Australian Tax Office’s (ATO) travel allowance rules as there are some intricacies in the details.

A travel allowance is not the same thing as travel expenses. This guide will help explain the ATO’s travel allowance for employers and their employees.

3 things to know before claiming tax deductions

To claim a tax deduction for work-related expenses, employees must:

  • Have spent money themselves and have not already been reimbursed by their employer.
  • Only claim expenses directly related to earning income.
  • Have evidence to prove the expenses (receipts or a travel diary).
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What Are Travel Expenses?

Generally speaking, travel expenses fall into two categories:

  • Transport expenses
  • Accommodation, meals, and incidental expenses 

When employees travel as part of their job, transportation costs are deductible. This covers the price of driving their vehicle, flying, or taking a train, taxi, or bus.

When employees travel for work-related purposes and spend the night away from home, their lodging, meals, and incidental expenses like parking fees are all tax deductible.

Travel Expenses vs Travel Allowances

Generally speaking, travel allowances are payments specifically made to employees to cover the cost of business-related travel.

The employee typically should provide receipts for any expenses incurred as part of the travel and may be required to return any unused portion of the allowance.

A travel allowance given by an employer may be taxed in addition to pay and wages under the PAYG withholding regime.

In contrast, a travel expense refers to the actual costs incurred by an employee while travelling for work. These expenses may include airfare, car rentals, and hotel costs. The employer may reimburse the employee for these expenses with the support of receipts.

In Australia, travel allowances folded into an employee's salary or wages, are generally taxable to the employee unless they meet certain conditions set by the ATO.

Understanding the ATO’s Rules on Travel Allowances

The ATO has specific rules and guidelines regarding the taxation of travel allowances and expenses for employees in Australia. Understanding these rules can help ensure compliance and avoid any potential issues with the ATO.

Here are some key points to consider when it comes to understanding the ATO's rules on travel allowances:

  • A travel allowance is a predetermined amount of money provided by an employer to an employee to cover the expenses associated with traveling for work-related purposes.
  • The ATO considers a travel allowance to be tax-free if it meets the following conditions: 
  • The travel is required as part of the employee's job duties, 
  • The travel involves an overnight stay away from the employee's normal place of work, and 
  • The travel is not for the employee's private or domestic purposes.
  • If the employee's travel allowance does not meet these conditions, it may still be eligible for a tax deduction if the expenses are directly related to earning the employee's income. In this case, the employee must be able to show that the expenses were necessary for their job and must have receipts or other documentation, like a travel diary, to support the claim.
  • Employees may be required to provide receipts for any expenses incurred as part of the travel and may be required to return any unused portion of the allowance.

It is important for both employers and employees to understand the ATO's rules and guidelines regarding the taxation of travel allowances in order to ensure compliance.

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What is a Reasonable Amount?

Each year, the ATO releases recommendations on what constitutes a reasonable amount for a travelling employee. These recommendations provide a daily travel allowance amount and take the following things into account:

  • Travel destination
  • Meals
  • Accommodation
  • Ranges of employees salary
  • Incidentals
  • Specific rates for truck drivers

For employees travelling outside Australia, countries are divided into "cost groups," with the daily allowance ranging from the lowest in cost group (one) to the greatest in cost group (six).

There is no allocation necessary for the first and last day of travel because the reasonable amounts are meant to apply to each full day of travel covered by the travel allowance.

Set Up Travel Allowances In Your Pay Runs

Finding out how to pay travel allowances, claim travel expenses, and ensure tax compliance is always a challenge for business owners.

It’s easy to get lost in the details and keep track of employee payroll when travel allowances or expenses are involved.

Using QuickBooks’ accounting software is the quickest and simplest way to complete the task, whether you need to set up a travel allowance for staff on a regular basis or just as a one-off.

With QuickBooks, you can set up a travel allowance so it automatically appears in each pay run for specific employees, or apply it on an ad-hoc basis as necessary. With QuickBooks payroll software, this automation takes away the hassle for employers, ensures ATO compliance, and also gives employees the chance to quickly see a breakdown of their payslips on demand. 

Get started by visiting the pricing page free 30-day trial of our services today. 


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