Employers urged to consider employment tax traps

It is not uncommon for employees to be relocated within a business’s national network, yet it is important to understand the possible tax implications associated with this.

Judy White, BDO executive director of tax, said she often came across differing transactions for relocation expenses, demonstrating how the taxation impact could differ depending on the transaction.

The implications associated with employee relocation were usually related to PAYG withholding tax or fringe benefits tax (FBT), two crucial areas often lacking consideration, White noted.

An example given by White included an employee having moved to Melbourne from Sydney for their job with the incur of removal costs for their household effects.

“Broadly speaking, where an allowance is paid at a set amount, say $5,000, by the employer to the employee, then the employee is subject to PAYG withholding tax,” she said.

“Therefore, the allowance is subject to tax in the hands of the employee, and the employee will only have the after-tax amount left to spend.”

In this case, where an employer reimbursed the relocation expenses incurred by the employee upon the provision of supporting receipts or the employer paid for the costs directly, FBT would be applicable.

The reimbursement was subject to tax in the hands of the employer; however, an FBT exemption could be available under the FBT law for the removal of household effects as a result of relocation, meaning in that instance the employer would have no FBT liability, White said.

To avoid this confusion and hidden tax trap, White recommended that employers ensure they took PAYG withholding and FBT into account.

“Employers should take into account the PAYG withholding and FBT implications of paying for employee relocation expenses, prior to entering into such transactions.”

“Where it is appropriate that an employer reimburses relocation expenses, and those expenses are FBT exempt, then no tax will apply to the provision of the benefit by either the employer or the employee.”

In another employment tip given by White, when travelling, employees were advised to avoid falling into the “travel allowances record-keeping trap”.

White noted she often experienced that employees were unaware that record-keeping was still required even when the exception applied, such as the substantiation record-keeping exception.

As modelled in the Shaw and Commissioner of Taxation [2025] ARTA 224 case in March this year, when an employee received a travel allowance which was recorded on their annual income statement, the employee would be able to claim a tax deduction on their income tax return.

“Where the claim is up to the reasonable amounts as stated by the ATO in its annual determination, there is a record-keeping/substantiation exception available. However, the employee must still be able to prove that the employee spent the money for work duties and how the claim was worked out.”

“Be aware that employees can’t simply claim up to the reasonable amounts, when claiming a tax deduction against a travel allowance recorded on their annual income statement.”

“Instead, the employee will need to keep records to prove that the employee spent the money for work duties and how the claim was worked out.”