| May 19, 2017
In order to assist our clients better understand the tax environment in which they operate, last month Vincents released the first of a two part series to summarise the rules relating to claiming deductions for building and construction employees. Part 2 will outline how receiving an allowance from your employer expands the claims available to construction workers. The information within this article is of a general nature only and should not be relied upon in place of specific taxation advice.
Claims against allowances
Building and construction employees may receive allowances that are shown as a separate amount on their payment summary. These amounts are considered to be part of an employee’s income. Allowances are specifically to be declared at item 2 on the taxpayer’s income tax return.
However, while all taxpayers are entitled to claim deductions for the expenses they incur in deriving income, including an allowance, there are some special rules that relate to allowances that may reduce substantiation requirements and in effect increase a claim.
Allowances include the following:
- Car, travel and transport allowances;
- Award transport payments;
- Tool, clothing and laundry allowances;
- Dirt, height, site first aid and risk allowances; and
- Meal and entertainment allowance.
An employee is not automatically entitled to a deduction just because they are receive an allowance. In order to claim allowance expenses, the expense claimed must have been incurred and be an allowable deduction. The expense claimed cannot exceed the amount actually incurred and the expense must be incurred for work-related purposes.
Additionally, the documentation required to be kept to claim an expense is different for taxpayers who receive an allowance from their employer. Where a taxpayer receives a travel or overtime meal allowance and their claim does not exceed the reasonable allowance amounts declared by the Australian Taxation Office (ATO), no written evidence or travel diary is required to support their claim. Effectively, they can claim an amount equal to the reasonable allowance amount declared by the ATO without retaining documentation relating to the claim.
Reasonable allowance amounts are published each year by the ATO. For the 2016-17 income year, reasonable travel and overtime meal allowances can be found at Tax Determination TD 2016/13
For the cost of overtime meals to be a deductible expense, a genuine overtime meal allowance must be paid by the taxpayer’s employer under an industrial law, award or agreement. The employee must include the amount of the allowance at item 2 of their income tax return. Where the employee’s claim is no more than $29.40 per meal (for the 2016-17 income year), an amount of $29.40 per meal can be claimed without written evidence such as receipts being kept. This is provided the expenses claimed do not exceed the amount actually incurred.
Contrast the above example with the standard tax deduction claim where actual amounts claimed must be appropriately substantiated, normally by way of written evidence. Without appropriate substantiation, a tax deduction may not be claimed.
If the claim in respect of an allowance exceeds the reasonable allowance amount, then the whole claim must be substantiated, not just the excess over the reasonable amount.
Also note that if an employee receives an allowance that it is not shown on their payment summary and the amount was equal to or less than the reasonable allowance amount, the taxpayer does not have to include the allowance at item 2, as long as they have fully spent the amount on deductible work-related travel expenses. The taxpayer does not get to claim deductions against their other income in this circumstance.
Further, an employee cannot claim a deduction for expenses incurred if those expenses are reimbursed to the employee by their employer.
If you know of anyone who requires assistance in preparing their income tax return or wishes to find out more information in relation to the above, please don’t hesitate to contact Vincents.