Q & A on LAFH and Travel Allowance

Here is a question I reveiced from an online client relating to LAFH and tavel allowance:

Q - We run our own family trust in Victoria and I contract as an electrical contractor in WA (Kimberly) . Can you advise how we can claim LAFH and travel allowance?
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A - The LAFH allowance is a little tricky. Firstly, we need to clarify the allowance terminology and definitions:


1. The true LAFH allowance is paid under FBT rules and, if it relates to remote areas, is exempt from FBT. Of course, the benefit is also exempt from income tax to the recipient.
2. There is also a "Travel" allowance, that many people confuse with the LAFH allowance above (ie. it is different terminology).
 

If an "employee" is in receipt of a taxable "travel" allowance, the allowance is included as income and a deduction can be claimed against it. There are two ways a deduction for travel can be claimed:

  • Receipts and records retained of actual expenses as evidence of deduction - ie substantiated deduction
  • "Reasonable Travel" deduction allowed by ATO - various amounts, set by the ATO each year, can be claimed without substantiation.
In most circumstances, the second option will give a better result for various reasons:

  1. the rates allowed by the ATO are quite generous
  2. no requirement for substantiation
  3. for many taxpayers, retaining appropriate records is just difficult.
You can see that if you are self employed, the second option is not available as you are not an employee in receipt of a "travel" allowance.


However, as you operate with a family trust, you do have the option to pay yourself a wage and include a travel allowance on the PAYG summary. You could then pick up option two - "reasonable travel" amount set by the ATO with no substantiation requirements. 


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