By Michael Cochrane & Jack Stuk
ATO disallows overtime meal deduction and imposes penalties (Kael v ATO)
Mr Kael (K) claimed as tax deductions, overtime meal expenses for two (2) years during which K worked on building sites during the day, with paperwork performed at night and site inspections on weekends as overtime.
Each year K and his employer in calculating K’s remuneration, “annualised” his salary by using the base rate under the applicable Building and Construction General On-site Award 2010 (Award) and added an amount estimated to cover regular overtime, work at home and out of pocket expenses for the year ahead. From that discussion, K was paid a fixed amount weekly for his labour regardless of the actual hours worked or expenses paid by K during the day or out of business hours.
The ATO disallowed the deductions claimed in K’s tax returns and imposed a 25% penalty (which could have been 75%) because K and his tax agent “failed to take reasonable care”.
K lost his case as he was paid an annualised salary and “was not paid for ordinary time worked and then overtime on a penalty rates basis” under the Award.
The effect of sections 8-1 and s.32-50 of the Income Tax Assessment Act 1997 is that a worker can claim overtime meal expenses (amongst other things) paid during overtime if the worker receives a separate allowance categorised in that way under an “industrial instrument” which includes “an award, order, determination or industrial agreement in force under an Australian law”. Unfortunately for K, there was no specific separation of payments for overtime under his remuneration package. So he was ineligible to claim overtime expenses as tax deductions with dire consequences.
- Employers should consider the tax implications that annualised salaries under an industrial instrument such as an award may have on the ability of employees to claim tax deductions.
- Care should always be taken when annualising salaries to ensure compliance with the relevant award.
- When annualised salaries are used, both employers and employees alike should ensure that they are properly documented. All the elements that are included in the annualised salary should be separately categorised and recorded. Some awards specifically require that employers do this when annualising salaries: see clause 17 of the Clerks — Private Sector Award 2010.
- Failure to do so can result in confusion and possible underpayment claims under the applicable award but can also result in further headaches for your staff with the ATO when they are claiming tax deductions.
- If you have concerns about annualised salary arrangements and award compliance, it is important to act immediately and review your documentation.
If you have any queries with workplace or tax issues, please call Jack Stuk or Michael Cochrane.