The end of the year is in sight. It’s a time for festive cheer and for many people to take a well-earned break. Although you can’t claim your private holiday as a tax deduction, if you combine both work and private time, you may very well have expenses that can be claimed.
Travel expenses you can claim
There are several travel expenses related to your business that are tax deductible. Whether you travel within a single day or take overnight trips, costs like airfare, train or bus tickets can be written off. Taxi rides and car rentals can also be written off if they are for business purposes. You can also claim expenses for using a rental car for business purposes, such as petrol, tolls and parking fees.
If you travel overnight for work, any lodging and meal costs while you’re away from home are eligible deductions too. The only requirement is that you have a permanent home elsewhere and your job involves staying overnight in different locations.
Travel expenses you can’t claim
When traveling for work, only the portion related strictly to business operations is eligible. You have to remove any private or personal costs from the calculation. This includes things like adding a holiday or family visit onto a work trip. Taking family members along on business travel is also considered personal. Fun purchases on the road like souvenirs, gifts, sightseeing, or entertainment shouldn’t be deducted. Fees for travel documents and insurance aren’t deductible either. And relocation costs or living expenses if you’re temporarily stationed somewhere don’t qualify.
What if you have an employee who travels?
For expenses to be deductible to the company, the business needs to be the one paying directly from its accounts, providing an allowance, or reimbursing the employee. The business can pay for the expense by:
- paying directly for the expense from the business account
- paying a travel allowance to the employee
- reimbursing the employee for their expenses.
Business owners need to be aware of potential Fringe Benefits Tax (FBT) implications when paying for employee travel. However, there are some circumstances where FBT does not apply. For instance, if a staff member travels to a work-related conference, and the company reimburses their legitimate expenses for attending, FBT would not be an issue. This is because the employee could have claimed those costs themselves if they had paid out of pocket.
It’s important for businesses to only reimburse travel costs that were strictly for work purposes. FBT would apply if an employee adds personal days or activities to a business trip, and the company covers the entire cost of travel. Employers may also need documentation from employees around reimbursed expenses to prove what was work-related.
Directors face additional considerations under Division 7A rules. If a director’s private travel costs are paid by the business, there could be tax consequences.
Division 7A rules
Division 7A can apply broadly to any payment or benefit provided by a private company to a shareholder or their associate. It doesn’t matter if the parties treat it as a loan, gift, debt waiver or other transaction. It may still constitute a deemed dividend under Division 7A.
This division can also catch indirect benefits, such as where a trust allocates income to a related private company but distributes payments to the company’s shareholders instead.
The intent of Division 7A is to prevent profits or assets from being distributed to owners or related parties tax-free. Deemed dividends under this division are generally unfranked. The most tax-effective approach is to issue a normal dividend where franking credits can be utilized. Some payments, like regular dividends or director’s fees, are already covered by other tax laws. Division 7A does not apply. However, companies must be careful as this division can have wide-reaching implications.
If you do travel, keep a travel diary
Travel diaries are an important tax record for sole traders and partners.
If you travel for business purposes for six or more consecutive nights, you are required to keep a travel diary or similar documentation. The diary should be maintained before the end of your trip, or as soon as practicable afterwards.
The travel diary must include specific details for each business activity undertaken during the travel period. It should note the nature of the activity, date, approximate start and finish times, and location.
While the format of the travel diary can vary, it is important the information contained within adequately justifies any claims being made related to the travel expenses. Taking the time to fully document each day’s business activities and events provides the necessary substantiation should the Australian Taxation Office request verification of a deduction.
A clear, organized travel diary mitigates the risk of a sole trader or partnership being unable to fully evidence travel costs claimed for tax purposes. Maintaining this documentation is a prudent practice to follow for any extended business trips undertaken.
Be prepared for tax time – and be honest with yourself
If you’re planning to combine business travel with a Christmas holiday, it’s important to be careful about claiming travel expenses on your tax return. The ATO is vigilant about ensuring only deductible business costs are claimed.
While travel during the holiday season is often more enjoyable when you can tag personal time onto work trips, you cannot deduct any costs associated with private travel or leisure activities. Be sure to thoroughly document the specific dates, locations and business purposes of any travel during that period. Keep personal receipts separate from business expenses.
A good option is to take separate vacations so there is a clear distinction between business and private travel. But if you do combine them, allocate expenses properly. Only claim deductions for the portion of the trip related solely to business. It’s also wise to speak to your tax advisor if there are any gray areas. Proper record keeping and compliance is key to avoiding issues with the ATO down the road. With careful planning, you can enjoy time off with family and friends while still maximizing your tax deductions for legitimate work travel during the holidays.