Deduct Travel Expenses
When you deduct travel expenses from your income you save tax. That is a good thing. But high travel expenses will also bring you to the ATO’s attention, because….
Deduct Travel Expenses
This is where a lot of tax dodge happens. And the ATO knows it and is on the watch.
You travel whenever you move from point A to point B. A travel expense is any cost related to that travel, be it an expense for the actual transport – by plane, train, car, bus or other vehicle – or accommodation, meals and incidentals.
But whether and how these costs actually hit your return as a tax deduction depends on a range of factors.
There are three basic rules that the ATO often refers to. They call them the Three Golden Rules. And these apply to all expenses, not just travel.
You must have actually incurred the cost, meaning you paid for it and weren’t reimbursed, for example from your employer. See TR 97/7 for timing of deductions and the meaning of ‘incurred’.
You must have the records to show it. Also called substantiation. The details depend on the type of expense.
And you must have incurred the expense in connection with producing assessable income. So you must meet one of the two limbs in s8-1 ITAA97 and not hit any of its negative limbs that would prevent the deduction.
Positive Limb # 1
If you travel for business, you can claim the expense as a tax deduction. The exact words are:
s8 -1 (1)(b): You can deduct…any…outgoing…that: …(b)…is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
So when you run a business, your business must aim to gain or produce assessable income. But you don’t need a direct link between the expense and assessable income. You just incur the expenses you think your business needs to incur.
This applies to a sole trader just as it does to a company or trust. All that matters is that it is a business expense and your business aims to make money.
Positive Limb # 2
But the bar is much higher if you travel for any other purpose. You can claim a tax deduction if you incurred the expense in gaining or producing assessable income .
s8 -1 (1): You can deduct…any…outgoing…that: (a)…is incurred in gaining or producing your assessable income;…
So when you don’t run a business, you need a direct link between expense and assessable income.
Negative Limb # 1
A capital gain hits your assessable income. So capital expenses would be deductible under s8-1 (1). After all, the capital expense is to produce a capital gain, hence assessable income.
But here comes the first negative limb in s8-1 (2)(a). It specifically prevents the deduction of a capital expense.
s8-1 (2):…you cannot deduct an …outgoing … to the extent that: (a) it is a loss or outgoing of capital, or of a capital nature;…
Negative Limb # 2
Do you recognise a common theme this far? For a tax deduction you need to have the intention to produce assessable income. So if there is no assessable income, there is no tax deduction.
Private and domestic expenses have no link to assessable income. And so don’t qualify for a tax deduction under s8-1 (1) anyway.
s8-1 (2):…you cannot deduct an …outgoing … to the extent that:… (b) it is a loss or outgoing of a private or domestic nature;…
Negative Limb # 3
Income is not enough. It needs to be assessable income. So expenses incurred to derive exempt or non-assessable non-exempt income (NANE) are not deductible either under s8-1.
s8-1 (2):…you cannot deduct an …outgoing … to the extent that: …(c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income;…
Negative Limb # 4
And last but not least is a point blank reference to the rest of the Income Tax Assessment Act 1997. If any other provision in ITAA97 says that you can’t deduct the expense, then you can’t.
s8-1 (2):…you cannot deduct an …outgoing … to the extent that: … (d) a provision of this Act prevents you from deducting it.
So these are the basic rules that apply to all expenses. And life would be easy if this was all there was to it.
But there is more to travel than that. Travel expenses cost the Australian government billions of dollars each year. So there are plenty of rules.
# 1 More Than One Purpose
The first issue comes up when you travel for more than one purpose. You might visit a conference but then add a 5-day beach holiday. What do you do then?
You need to apportion the expense. But there is no point-blank rule in ITAA97 how to do this. It depends on the type of expense.
There are specific rules for some types of expenses. To apportion car expenses for example you either use the logbook method in subdiv 28-G ITAA97 or the cents-per-km in Subdiv 28-C ITAA97. For overnight travel that lasts for 6 nights or more you need to keep a travel diary per s900-20 ITAA97.
For other expenses it is up to you how you apportion it. It just has to make sense.
# 2 Car Expenses
Car expenses (or motor vehicle expenses – same thing) are a form of travel. But they have their own set of rules since they are highly prone to dodgy claims.
Take work-related car expenses in individual tax returns as an example. Travel between work and home is not deductible and yet, in 2016, 3 million (out of 10 million) employees in Australia claimed a total of $8.5 billion, so an average of $2,800 in work-related car expenses.
Car expenses cover anything that directly affects your car but doesn’t relate to a specific trip. So petrol, insurance, repair and maintenance are all car expenses. But parking and road tolls aren’t, since these relate to a specific trip and hence fall under travel expenses.
Car expenses cover an entire division in ITAA97. Division 28. You have two methods to claim car expenses. The logbook method and the cents-per-km method.
To use the logbook method in Div 28-F you need to keep a log book for 12 weeks. You then apply the business or work use percentage to your actual costs. And this is what you claim.
For the cents-per-km method per Div 28-C you don’t claim a percentage of actual costs. Instead you charge a standard cents per km for the kilometres you travel for up to 5,000 kilometres. For 2018/19 this is 68 cents per km.
# 3 Travel
Travel expenses cover accommodation, flights and other travel expenses that relate to a specific trip, for example taxis, parking and road tolls.
You charge actual expenses but apportion for any private use. When you are away for 6 nights or more, you need to use a travel diary per s900-20 ITAA97 to work out what parts of your trip are private and which ones are work or business related.
# 4 Work-Related
The ATO is particularly suspicious about the extent of work-related expenses. And so they issued TR 2017/D6. This ruling stipulates 7 important concepts.
Concept No 1 Your work must require you to travel.
“A transport expense is not deductible unless the work requires the employee to undertake the travel.”
Concept No 2 You need to be paid for the time of travel.
“A transport expense is not deductible unless the relevant travel can be characterised as an income-producing activity for which the employee is paid.”
Concept No 3 You must be under employer’s direction and control.
“…travel is in the course of the employee’s work activities, …[if] the employee is subject to the employer’s direction and control during the period of the travel.”
Concept No 4 Don’t make a private trip look like a business trip.
“A private journey is not …work … merely because an obligation to travel has been contrived to create the appearance of work travel.”
Concept No 5 Receiving a travel allowance is not enough.
“An employee is not entitled to deduct an expense simply because they receive an allowance… The nature of the expense and its connection to the income producing activities determines whether it is deductible.”
Concept No 6 There are four categories of travel.
“…four categories of travel: ordinary home to work travel, special demands travel, co-existing work locations travel, and relocation travel.”
Concept No 7 Ordinary home to work travel is not deductible.
“Ordinary home to work travel involves ordinary travel between home and a regular work location. The cost of such travel is not deductible.”
Concept No 8 Relocation travel is not deductible.
“Relocation travel involves travel undertaken in relocating for work. Expenses incurred in undertaking this travel are not deductible.”
Concept No 9 The other two categories might be.
“It is a question of fact whether such travel is in performing an employee’s work activities.”
# 5 Traffic Infringements
You can’t deduct any traffic fines. And this is unique to traffic fines but applies to any penalties per s26-5.
s26-5 (1): You cannot deduct…: (a) an amount …of penalty, under an Australian …or …foreign law; or (b) an amount ordered by a court…
# 6 Relative’s Travel
You can only tax-deduct a relative’s travel expenses under very specific circumstances (unless of course the expense is subject to FBT).
s26-30 (1): You cannot deduct …your relative’s travel, if: (a) you travelled …as an employee or …on… business …and (b) your relative accompanied you while you travelled.
(2): Subsection (1) does not stop you … if: (a) your relative, while accompanying you, performed substantial duties as your employer’s employee, or as your employee; and (b) it is reasonable to conclude that your relative would still have accompanied you even if he or she had not had a personal relationship with you.
# 7 Travel to Residential Property Investment
Since 2017 with the insertion of s26-31 in ITAA97 you can no longer deduct travel to your residential investment property.
26-31 (1): You cannot deduct …a loss or outgoing …related to travel, if: (a) …residential accommodation; and (b) it is not necessarily incurred in carrying on a business…
26-31(2) Subsection (1) does not stop you … if…you are: (a) a corporate tax entity; or (b) a superannuation plan that is not a [SMSF]; or (c) a managed investment trust; or (d) a public unit trust …; or (e) a unit trust or partnership, if each member …is covered by …this subsection…
# 8 Entertainment
Travel expenses might fall under entertainment per s32-1- ITAA97.
s32-10 (1): Entertainment means:…(b) accommodation or travel to do with providing entertainment by way of food, drink or recreation.
If they do, they are not deductible per s32-5 ITAA97.
s32-5 (1): To the extent that you incur a loss or outgoing in respect of providing entertainment, you cannot deduct it under section 8-1.
# 9 Fringe Benefits
Even though travel expenses representing entertainment are not tax deductible as such, they are deductible per s32-20 ITAA97 if a fringe benefit.
s32-20: Section 32-5 does not stop you deducting a loss or outgoing to the extent that you incur it in respect of providing entertainment by way of providing a fringe benefit.
Travel benefits might be a car fringe benefit falling under Div 2 FBT Assessment Act. They might be a car parking benefit under Div 10A, an expense payment benefit under Div 5 or a residual benefit under Div 12 FBTAA.
# 10 Travel Allowance
Just because you receive a travel allowance doesn’t mean that you can claim a deduction for the same amount. You must have actually incurred the expense. The Three Golden Rules and everything else still applies.
Each year the ATO updates the reasonable amounts for travel allowances and publishes them in a taxation determination (TD). For 2019 it is TD 2018/11.
Whether your claim is below or above the reasonable amounts will determine the extent of written evidence required.
When you are below the threshold, you still need a travel diary for 6 nights or more but you don’t need any written evidence apart from receipts for overseas accommodation. When you are above the threshold, the normal substantiation rules apply.
# 11 Substantiation
To claim a travel expense you must have written evidence for all your expenses, provided that you didn’t receive a travel allowance.
In most cases these are invoices and receipts plus possibly a bank or credit card statement. The later is relevant if you incur costs in foreign currency and need to show how much you were actually charged in Australian dollars.
You only need to keep a travel diary though if you are away for six nights or more. This applies both to domestic and international travel.
For car expenses you need to keep a log book and collect receipts if you want to claim a portion of actual expenses. If you use the cents per km method, you need neither a logbook nor receipts. You just need to be able to show how you determined the kilometres you drove.
# 12 Disclosure
A travel expense is not necessarily disclosed as a travel expense in your tax return.
In an individual tax return travel for example your work-related costs of travel are either listed as car expenses or travel or self-education or other expenses in D1, D2, D4 or D5 respectively.
Car Expenses (D1)
A car expense is any expense directly related to your car. Examples are repairs and maintenance, petrol, insurance and the lot. But nothing that you specifically incur for a particular trip like road tolls or parking.
If you pay for petrol or other costs for a car not registered in your name, you don’t have car expenses, but travel expenses.
Travel Expenses (D2)
D2 is for travel expenses incurred in performing your work as an employee. This includes bus and plane tickets, accommodation, car hire, taxi and similar expenses. It also includes costs related to your car that you specifically incur for a particular trip like road tolls and parking.
Self Education Expenses (D4)
In D4 you list travel costs for work-related self-education expenses, but only the costs that are not part of your trip between home and work.
Other Expenses (D5)
D5 is for work-related travel that is not part of performing your work as an employee. For example when you visit a conference as an attendee.