Private ruling: PAYG Withholding - Allowance or Reimbursement
Date of advice: 25 July 2016
Published: August 2016
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021
Date scheme commenced: 1 July 2016

Ruling: Q1: Are payments paid to your employees for motor vehicle expenses for travel between home and work, calculated on, a cents per kilometre method considered an allowance? | A1: Yes | Q2: Are the payments paid to employees who use their own motor vehicle to travel between home and work subject to PAYG withholding tax? | A2: Yes

Relevant facts and circumstances: You are an employer whose employees are employed under an enterprise bargaining agreement. One of your EBA clauses is to reimburse staff for expenses incurred for travelling to join the vessel. The EBA states: An employee will be reimbursed for: (a) One taxi fare to or from the airport from the employee's home for the purposes of travelling to or from the vessel, upon production of a receipt, up to a maximum of $158.00 per trip; or (b) An allowance based on the Australian Taxation Office rate for a six-cylinder vehicle per kilometre of the distance travelled up to the cost of a maximum of $158.00. This includes driving the vehicle back home where applicable. When staff opt for option (b), they need to submit a reimbursement claim form specifying the kilometres travelled using the ATO mileage rate to work out the amount of the claim.

Relevant legislative provisions: Taxation Administration Act 1953 section 12-35 of Schedule 1 | Income Tax Assessment Act 1936 paragraph 26(eaa) | Income Tax Assessment Act 1997 section 8-1 | Fringe Benefits Tax Assessment Act 1986 section 22

Reasons for decision: Summary: Taxation Ruling TR 92/15 explains the difference between an allowance and a reimbursement for the purposes of determining whether a payment is a fringe benefit under the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986), or whether that payment is assessable income under the Income Tax Assessment Act 1936 (ITAA 1997). Paragraphs 2 and 3 of TR 92/15 states: 2. A payment is an allowance when a person is paid a definite predetermined amount to cover an estimated expense. It is paid regardless of whether the recipient incurs the expected expense. The recipient has the discretion whether or not to expend the allowance 3. A payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed. In general, the provider considers the expense to be its own and the recipient incurs the expenditure on behalf of the provider. A requirement that the recipient vouch expenses lends weight to a presumption that a payment is a reimbursement rather than an allowance. A requirement that the recipient refunds unexpended amounts to the employer adds further weight to that presumption. A further indication of a reimbursement is where the recipient is required to refund unexpended amounts to the provider. Paragraph 4 of Income Tax Ruling IT 2543 specifies that the treatment of transport allowances differs to the reimbursement by an employer of expenses incurred by an employee on transport. Reimbursement for expenses, are generally considered under the fringe benefits tax legislation which places the tax obligations (if any) on the employer and not the employee. However, there are some reimbursed car expenses which are exempt from fringe benefits tax under section 22 of the FBTAA 1986. Where this is the case paragraph 26(eaa) of the ITAA 1936 specifically includes the reimbursement amount in the employee's assessable income. Paragraph 3 of IT 2543 states that transport allowances, including those paid on a cents per kilometre basis, are assessable income of an employee. Where claims against these allowances cannot reasonably be expected to be deductible, the allowances should be included as part of the gross salary on an employee's group certificate and tax instalments deducted at the appropriate rate. As per section 8-1 of the Income Tax Assessment Act 1997, costs incurred for travel between home and work is not considered to deductible. A reimbursement is compensation of exact costs incurred by an employee. It cannot be calculated on a set formula. You pay an amount to cover the costs incurred by your employees for the use of their own motor vehicle to travel to and from work. The payment was calculated on a set rate for the number of kilometres travelled, not on the basis of exact expenses incurred. As such the payments you make to your employees are considered to be an allowance. Furthermore the payment is an 'exempt car expense payment benefit' as specified under section 22 of the FBTAA 1986 i.e. it is exempt from fringe benefits tax as it is income in the hands of the employee. Therefore the payments you make form part of an allowance and the amount paid to your employees is included in their assessable income. Section 12-35 of Schedule 1 to the TAA provides that you must withhold an amount from a payment of salary, wages, commission, bonuses or allowances you pay to an individual as an employee. In your case, the payments paid to employees who use their own motor vehicle to travel between home and work are allowances, and are therefore subject to PAYG withholding tax.