Income tax and fringe benefits tax: employee expenses incurred on relocation of employment
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FOI status: May be released
This Office was recently asked to consider the taxation treatment of certain allowances granted, or payments made, to employees who had been permanently transferred by their employer to a new location.
2. One of the allowances was in the nature of "compensation for depreciation and disturbance" and was paid under the Crown Employees (Transferred Officers Compensation) Award. The provision of the award which governed the conditions of service stated that "a transferred officer shall be entitled to compensation for the accelerated depreciation of personal and/or household effects removed to a new location, occasioned by the relocation". The term "transferred officer" was defined in the award to mean "an officer who has been assigned to a new location ... at which he is to perform duty and who, as a consequence of such assignment, finds it necessary to leave the existing residence and seek or take up a new residence ...". The definition excluded officers transferred at their request or on account of misconduct. It was clear from the award that the compensation was paid without any real regard to costs actually incurred by the transferred officer and was additional to an allowance which was intended to cover the officer's costs of removing furniture and personal effects. It is understood similar allowances are paid under other Federal and State awards.
3. The issue which arose was whether the compensation payment constituted a fringe benefit under the provisions of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) or was assessable income under the provisions of the Income Tax Assessment Act 1936 (ITAA). A further issue was whether, where the compensation payment was used by the transferred officer to purchase household items such as curtains, blinds, light fittings, etc., the expenditure was deductible under subsection 51(1) of the ITAA if the compensation constituted assessable income.
4. In addition to the issues arising in relation to the specific compensation payment mentioned in paragraph 2, this Ruling is intended to provide general guidance on the taxation treatment of various allowances paid by an employer to an employee in respect of removal and storage costs incurred as a result of a permanent transfer from one place of employment to another. This Ruling also extends to the situation where, instead of a relocation in an existing employment, an employee moves location to take up a new job with a new employer and the employer reimburses (wholly or in part) the cost of removal to the new locality of employment.
5. An allowance paid in respect of a temporary transfer may constitute a living-away-from-home allowance as explained in Taxation Ruling MT 2030.
Depreciation and Disturbance Allowance
(A) Fringe Benefits Tax
6. In determining whether a payment to an employee is a
fringe benefit taxable to an employer or assessable income for income
tax purposes in the hands of the employee, it is always necessary to
begin with the question whether the payment constitutes a fringe
benefit. The FBTAA generally applies to non-cash benefits although
certain cash benefits may constitute fringe benefits, provided they fall
within the definition of "fringe benefit" in subsection 136(1) of the
7. In essence, a "fringe benefit" is defined in the FBTAA
as any benefit provided to an employee, or an associate of an employee,
in respect of the employment of that employee. However, the term by
paragraph (f) of the definition does not include a payment of salary or
wages for the purposes of the ITAA. The term "salary or wages" is
defined in subsection 136(1) of the FBTAA to mean "assessable income,
being salary or wages within the meaning of section 221A of the" ITAA.
Under subsection 221A(1) of the ITAA "salary or wages" means, inter
alia, "allowances paid (whether at piece work rates or otherwise) to an
employee as such".
8. Under paragraph 20(b) of the FBTAA where a person
(employer/provider) reimburses another person (employee/recipient), in
whole or in part, in respect of an amount of expenditure incurred by the
employee/recipient, the reimbursement is taken to constitute the
provision of a benefit by the employer/provider to the
employee/recipient. The term "reimburse" is defined in subsection
136(1) of the FBTAA to include "any act having the effect or result,
direct or indirect, of a reimbursement." The ordinary meaning of the
word "reimburse", according to the Macquarie Dictionary, is either "to
make repayment for expense or loss incurred" or "to pay back; refund;
9. In order to determine whether a payment constitutes a
fringe benefit or is assessable income in the recipient's hands it is
therefore necessary to decide whether the payment is an "allowance" or a
"reimbursement" of expenses.
10. In Case 153 10 TBRD 480 the Board of Review said at
"Our view is that, as between employer and employee, there is a
marked difference between a reimbursement and an allowance. A
reimbursement transfers from the employee to the employer the burden of
expenses actually incurred in the course of employment. An allowance is
designed to compensate the employee because the employer does not wish
to be under an obligation of meeting such expenses directly or
11. A reimbursement seems to assume that an employee is
to be compensated exactly for an expense already incurred although not
necessarily disbursed. As between an employer and an employee, a
reimbursement transfers from the employee to the employer the burden of
expenses actually incurred in the course of employment. In the
generality of such cases the employer considers the expense to be its
own and the employee initially incurs the expense on behalf of the
employer (Case B55 (1951 2 TBRD (NS) 227). Whether an expense has been
treated as that of the employer is a question of fact which depends on
the circumstances of each case. However, a requirement that an employee
vouch expenses may suggest that a payment is a reimbursement rather than
12. The word "allowance" is defined in the Macquarie
Dictionary to mean "a definite sum of money allotted or granted to meet
expenses or requirements." An allowance will usually consist of the
payment of a definite pre-determined amount to cover an estimated
expense, and will be paid regardless of whether the employee incurs the
expected payment. The payment is merely an extra amount contributed
towards the defraying of a particular type of employee expense, and is
made regardless of whether the employee incurs the expected payment, or
whether an expense is likely to be incurred. Whether the allowance is
expended is at the discretion of the employee.
13. An amount paid to an employee as compensation for
accelerated depreciation of personal and/or household effects as a
result of relocation in employment is considered to be an allowance paid
to an employee as such within the definition of "salary or wages". Such
an amount is paid to the employee in connection with and by reason of
the employee's service as an employee or in respect of an incident of
the employee's service (see Mutual Acceptance Co Ltd v. F.C. of T.
(1945) 69 CLR 389 and Trustees of the Estate of George Adams (Deceased)
v. Commissioner of Pay-roll Tax (Victoria) 80 ATC 4424; (1979) 10 ATR
238. The amount is clearly attributable to the employment of the
employee (see Glambed v. F.C. of T. 89 ATC 4259; (1989) 20 ATR 428).
The allowance is therefore not a fringe benefit under the FBTAA.
(B) Assessable income
14. As the payment described in paragraph 13 is not a
fringe benefit it will not be excluded from the operation of paragraph
26(e) of the ITAA by subparagraph (iv) of that provision. Consequently,
the payment will be assessable as an allowance given or granted to a
taxpayer in respect of that taxpayer's employment. Such an allowance is
also considered to be income within ordinary concepts and assessable
under subsection 25(1) of the ITAA.
Payment for Removal and Storage Expenses
15. Where an amount is paid by an employer to an employee
by way of a reimbursement of expenses incurred by the employee in
relocating to a new locality of employment, the payment is considered to
be an expense payment fringe benefit which may be taxable to the
employer under section 20 of the FBTAA. Similarily, where an amount is
paid by an employer to a future employee (a future employee also being
an "employee" as defined) by way of a reimbursement of costs incurred by
the future employee in moving location to take up new employment, the
payment is considered to be an expense payment fringe benefit in terms
of section 20 of the FBTAA.
16. Some expense payment fringe benefits will be taxable
to the employer e.g., reimbursement of expenses incurred by an employee
in finding tenants for the employee's previous residence. Other expense
payment fringe benefits may qualify for exemption. If an expense
payment fringe benefit is paid, for example, in respect of the removal
or storage of an employee's household effects as a result of a
relocation of the employee's employment, the benefit may be an exempt
benefit under subsection 58B(1) of the FBTAA. It may accordingly be
exempted from the definition of "fringe benefit" by paragraph 136(1)(g)
of the definition. Exempt benefits might also arise on the sale or
acquisition of a dwelling as a result of relocation (section 58C of the
FBTAA), on the connection or re-connection of the telephone service, the
gas or electricity (section 58D of the FBTAA) and for certain benefits
in respect of relocation transport (section 58F of the FBTAA).
17. It should be borne in mind that under paragraph
58B(1)(e) of the FBTAA one condition for the application of sections
58B, 58C, 58D and 58F is that documentary evidence of the
recipient/employee's expenditure must be provided to the employer. By
subsection 136(1), the expression "documentary evidence" means a
document that would constitute documentary evidence of the relevant
expense under the substantiation provisions of the ITAA. To the extent
to which the employee fails to obtain suitable documentary evidence, or
fails to provide such evidence to the employer by the "declaration
date", (i.e. the date of lodgment of the fringe benefit tax return for
that year or such later date as the Commissioner allows) the benefit
will no longer be an exempt benefit. Instead the employer will be
assessed, under section 20 of the FBTAA, on the value of the unvouched
18. For income tax purposes any income derived by an
employee by way of the provision of a fringe benefit or a benefit which,
but for paragraph (g) of the definition of "fringe benefit", would be a
fringe benefit is exempt income in accordance with section 23L of the
ITAA. Further, subparagraph 26(e)(v) of the ITAA specifically excludes
from the operation of paragraph 26(e) payments which are exempt benefits
under paragragh (g) of the definition of "fringe benefit" in the FBTAA.
Accordingly, payments made to an employee by way of reimbursement for
actual removal and storage expenses are not assessable to the employee
under paragraph 26(e).
19. Where an amount is paid by an employer directly to
the removalists or storage providers in respect of the removal or
storage of the transferred employee's household effects or where an
employer pays an employee an amount being an estimate of removal or
storage expenses and requires vouching for the actual expenditure and
return of any unused funds, the payment is a reimbursement rather than
an allowance. The amount may therefore constitute an exempt benefit for
the purposes of the FBTAA and, if so, is not included in the assessable
income of the employee.
20. However, where an employer pays an employee an amount
which represents an estimate of removal and storage expenses, without
requiring any vouching for the actual expenditure, the amount does not
constitute a fringe benefit under the FBTAA. The payment is considered
to be an allowance and not a fringe benefit for the reasons outlined in
paragraphs 7 to 13. It is therefore included in the assessable income
of the employee by the operation of subsection 25(1) or paragraph 26(e)
of the ITAA.
21. There may also be situations where an employer pays
an employee an amount being an estimate of removal and storage expenses
and requires vouching of the actual expenditure incurred but allows the
employee to retain any excess of the amount paid over the expenditure
incurred. In these situations, the whole amount is considered to be an
allowance which constitutes assessable income of the employee under
either subsection 25(1) or paragraph 26(e) of the ITAA.
22. The matters dealt with in Taxation Ruling IT 2173 are
now covered by this Ruling and that earlier Ruling is withdrawn.
Indemnity for Loss or Damage
23. Where an employee receives from his/her employer a
payment by way of indemnity for vouched expenses incurred in respect of
any loss or damage to household effects caused by relocation, the
indemnity constitutes a reimbursement of actual expenditure incurred.
The indemnity is an exempt benefit under section 58B of the FBTAA and
therefore does not constitute assessable income of the employee.
24. Where an employee in receipt of a depreciation and
disturbance allowance uses the allowance to purchase household items the
expenditure incurred is not an allowable deduction for income tax
purposes. The fact that an allowance paid to an employee is expended by
that employee for the purpose for which it was paid does not of itself
impress an outgoing with any greater degree of deductibility than that
which it would have had if no allowance been paid. It is the nature or
character of the outgoing itself, without regard to the nature or
character of any allowance that might be received, which determines
whether it is an outgoing that is deductible under subsection 51(1):
Taxation Board of Review in Case R22 84 ATC 212 at 214, (1984) 27 CTBR
(NS) Case 76 at 603. The expenditure in this case is considered not to
be incurred in gaining or producing assessable income and is essentially
of a private or domestic nature. Similarly, removal and storage
expenses in respect of which a removal or storage allowance of the type
discussed in paragraphs 15 to 18 has been received are not allowable
Tax Instalment Deductions
25. Tax instalment deductions are required to be made
from any allowances of the type referred to in paragraph 13 that are
paid to transferred employees as compensation for accelerated
depreciation of personal and/or household effects. Tax instalments are
also required to be deducted from any allowances of the kinds considered
in paragraphs 20 and 21 paid to employees to meet removal and storage
costs incurred because of a relocation from one place of employment to
another. The amount of the allowance must be included in the gross
income shown on the group certificate.
Date of Effect
26. The change in policy from Taxation Ruling IT 2173 to
this Ruling in relation to the assessability of relocation allowances
(paragraphs 20 and 21 above refer) is to apply in respect of all amounts
paid on or after 1 July 1991.
COMMISSIONER OF TAXATION
27 September 1990
Date of effect:
EMPLOYEE - TRANSFER IN LOCALITY OF EMPLOYMENT
25(1) [rewritten as ITAA 97 6-5(1); (2); (3); 6-10(1); (2); (4); (5); 6-15]
26(e) [rewritten as ITAA 97 15-2; 15-70; 15-75]
51(1) [rewritten as ITAA 97 8-1]
10 TBRD 480
(1951) 2 TBRD (NS) 227
Mutual Acceptance Co Ltd v. F.C. of T
(1945) 69 CLR 389
Trustees of the Estate of George Adams (Deceased) v. Commissioner of Pay-roll Tax (Victoria)
80 ATC 4424
(1979) 10 ATR 238
Glambed v. F.C. of T
89 ATC 4259
(1989) 20 ATR 428
84 ATC 212
(1984) 27 CTBR (NS) 601