Other Issues

Salary and Wage Adjustments

9.46. It is not uncommon for an employee to receive an amount of wages relating to a period of employment during an earlier year: a wage increase may have been made retrospective to a date in the previous year of income. Less frequently, an employee will receive wages in advance: he may be paid a sum, say in June, for a period of long-service leave he is about to take. The consequence of the cash method of tax accounting applying to employment income is that the wages are taxed in the year of receipt without regard to the period of employment to which they relate. Because of the progressive rate structure, this usually results in greater tax than would have been payable had the wages been received at the time of the employment to which they relate.

9.47. In Chapter 8 it was assumed that in determining the income of a business or profession for tax purposes, efforts should be made to relate receipts to the year of income to which they properly belong. The Committee sees force in the argument that the same should be done for employment income.

9.48. However, the administrative costs in reopening earlier returns, and in deferring the inclusion in other cases to later returns, would be very considerable. They might be mitigated if a lower limit were set on the amount which could be taken into the other return, but this would introduce elements of inequity. Because of the wider marginal tax brackets now obtaining, the number of cases where there will be a significant tax disadvantage is not likely to be very great. In some circumstances, the income equalisation scheme proposed in Chapter 14 will assist the employee to defer the inclusion of an amount to a later return.

9.49. On the balance of considerations, the Committee feels that no change in the existing position is warranted.

Travel and Removal Expenses

9.50. In Chapter 7 the appropriate treatment of fares to and from work was considered, and the Committee recommended against extending the law to allow these fares to be deducted. However, it was also explained that expenses of travel between two places of work within an employment are properly allowable as deductions. Where an employee travels within an employment to a place of work away from his normal base, his own travel expenses are deductible whether the movement is necessary for some temporary purpose or involves an employment in the new place of work for a more permanent purpose. Where the purpose is temporary, his travel expenses will include accommodation and sustenance expenses in the new place of work, but where the purpose is more permanent this will not normally be so. In the case of travel for a more permanent purpose, a question arises whether the travel expenses of his family and the expenses of removal of his home are deductible. When a person

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accepts a new employment involving his moving to another city, there will be a question of the deductibility of his own expenses of travel and also of the expenses of travel of his family and removal of his home. There are, in addition, two marginal situations requiring separate examination, one concerned with living away from home and the other with study leave.

9.51. Travel within employment for a temporary purpose. Travel expenses, including in this case accommodation and sustenance, are deductible by the employee as expenses in deriving income. Where the employee can be said to act on his employer's behalf in incurring the expenses, it is appropriate to treat any allowance or reimbursement provided by the employer as not being the employee's income and any amounts paid by the employee as not being deductible by him. The general practice would be to treat expense allowances and reimbursements in this way. If the employer himself meets the expenses directly, there will be no income derived by the employee.

9.52. There is ordinarily no question of deductibility of the expenses the employee may choose to incur in having his wife or other members of his family travel with him. These expenses are private. The expenses of a member of his family are only deductible in the unusual case where the role of that member is essential for the performance of the employment. If the employee receives a sum of money from his employer in respect of the expenses of his family, this is included in his income.

9.53. Travel and removal expenses within an employment for a more permanent purpose. The travel expenses of the employee are deductible: these expenses ordinarily include accommodation and sustenance expenses, though this is not the case if he may be said to have established a home at the new place of work. Where the expenses are the subject of an allowance or reimbursement or are met directly by the employer, there is again ground for the view that the employee is not entitled to any deduction and does not derive any income. The deductibility of the travel expenses of members of his family and of removal expenses raises a somewhat different issue. An employee who is required to move to a new place of work where he will have to stay for any length of time may fairly claim that these expenses are not private but are incurred in deriving income. In this case, however, it would appear that the expenses are not deductible.

9.54. Where the employer meets family travel and removal expenses, either directly or by giving an allowance or reimbursement, there is a question of how the amount involved should be treated. It is at least arguable that the amount is not income of the employee. It appears to be the Commissioner's practice to treat such an amount in this way, provided it does not exceed the actual expenses and those expenses are reasonable.

9.55. In the result there would appear to be an unfair discrimination between an employee whose employer is prepared to meet the expenses and another whose employer is not. To overcome the unfairness it would be necessary to provide that the reasonable expenses incurred by the employee will be deductible where he is required by his employer to move to a new place of work.

9.56. In the Committee's view the law and practice assumed in paragraph 9.54 should be confirmed. Where the employer meets the reasonable removal costs of an employee, no amount should be included in the employee's income. Where the employee who is required to move meets his own reasonable expenses, he should be entitled to a deduction for those expenses.

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9.57. Travel and removal expenses to take up a new employment. The expenses of seeking new employment are currently not deductible: they are akin to the expenses of exploring the possibility of undertaking new business operations. The denial of a deduction, to a person who is unemployed, of expenses in seeking a job may appear unfair. However, the difficulties in defining the expenses to be allowed rule out the possibility of giving a deduction. If the Commonwealth Employment Service provides financial assistance to meet the expenses of seeking a job, this assistance should be excluded from income.

9.58. The expenses of taking up a new employment are, it seems, not deductible. In the view of the Committee, the treatment in paragraph 9.54 should apply in respect to any amount provided by the new employer to cover those expenses.

9.59. Treating a reasonable amount provided by the employer in respect of these expenses as non-taxable could in this case, even more than in the previous one of movement within an employment, be justified as contributing to greater mobility of labour.

9.60. Living away from home. Since 1945 there have been express provisions in section 51A allowing a limited deduction to an employee in receipt of a living-away-from-home allowance, i.e. an allowance paid to him for the additional expenditure he is obliged to incur in meeting living costs in a place of employment away from his home. The deduction is limited to what the Commissioner considers reasonable, but in general it may not be more than the amount by which the allowance exceeds two dollars. Two dollars is supposed to represent the amount by which his permanent household expenses would be increased were he at home; but clearly, with a decline in the value of money, theory and reality have parted company.

9.61. This deduction does not fit comfortably into any of the situations already considered. In its terms it is intended to cover expenses in deriving income not deductible under the general provisions of the Act. Some element of permanence in being away from home seems to be contemplated, so that the expenses would not necessarily be in the nature of travel expenses in the sense of those words in paragraph 9.53. Travel expenses, deductible under the general provisions, include accommodation and sustenance expenses only when the taxpayer has not established a home in the new place of work. Provided there is an establishment elsewhere which the employee may claim to be his home, there is a prospect of his being permitted deductions against a living-away-from-home allowance even though, in a sense, he has a home in the place where he works.

9.62. The distinction between travel expenses deductible under the general provisions and the expenses to which section 51A applies is not readily apparent. Having regard to the nominal character of two dollars at today's prices, very little turns on whether a deduction is classified as the one or the other. If the sum is increased to a more realistic figure, the classification will become of some consequence. In the Committee's view, section 51A should be regarded as a special provision appropriate to the case of an employee who, because of the limited time he spends in any one place of work or the remoteness of the place of work, does not move his principal home to his place of work.

9.63. Study leave expenses. Another situation that does not fit comfortably into any of those dealt with in paragraphs 9.51–9.59 is that of a person, most often on the staff of a university, who goes abroad on study leave in the course of his employment. The leave may be of varying length, quite commonly twelve months. It is not unusual for

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the employee to be given allowances by his university intended to cover his own fares and those of his family and extra costs associated with his going abroad.

9.64. The practice of the Commissioner, it would appear, is to treat the employee as a person travelling within his employment for a temporary purpose. He is allowed to deduct his own fares and his accommodation and sustenance expenses; any allowances he receives from his university are taxed as income.

9.65. This practice seems to the Committee appropriate where the employee goes abroad for only a short period of leave. It does not appear appropriate, however, when an extended period of leave is involved, say four months or more. It would not be thought fair in this case to disregard the necessity for the employee to be accompanied by his wife and dependent children. Yet this appears to be the consequence of the Commissioner's practice. Even though an allowance has been given by the university intended to cover the fares of members of the employee's family, these expenses are not deductible. Moreover, where the employee has taken members of his family with him and has established a temporary home abroad, he may find himself limited in the amount of the deduction for his own accommodation and living expenses he will be allowed: the Commissioner will attribute a substantial proportion of the expenses of the temporary home to the members of his family who have accompanied him.

9.66. In the Committee's view, the amount of a reasonable allowance provided by the employer to cover the fares of the employee, his wife and dependent children, and the extra expenses which fall on the employee in undertaking the study leave and are met by way of a per diem allowance, should not be included in his income when an extended period of leave is involved.

Payments to Obtain Release from Employment Contracts

9.67. It is not uncommon for scholarships and cadetships under which a person undertakes some form of training to provide that he must enter or continue in the employment of the organisation giving him the scholarship or cadetship for a period of years after completing his training. If he does not fulfil this condition, he may be required to pay an amount to the organisation to obtain his release. Under the present law there does not appear to be any basis on which a deduction of an amount so paid might be claimed: it would be regarded as a capital cost of obtaining freedom of action to enter on other employment.

9.68. There is a general principle appropriate at least to business income that moneys received are not income if, under the terms of the receipt, there are outstanding conditions yet to be fulfilled; the moneys will become income only as the conditions are fulfilled. If this principle were applied to moneys received under the scholarship or cadetship, it would bring about a result somewhat different from a deduction of the amount paid to obtain release. Receipts under the scholarship or cadetship would cease to be taxed as received but would become income during the years of service following training, and this would mean a bunching of income which would not be welcomed by the former trainee. The Committee would not, in any event, favour the application of such a principle in the present context.

9.69. If the law is to make any allowance in respect of payment under an employment contract, it will have to be by way of a special provision permitting a deduction of the whole or some part of the payment at the time it is made. However, the Committee does not favour such special provisions.

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Standard Deduction

9.70. A number of employment expenses of relatively minor significance for the vast majority of taxpayers are deductible under the general provisions of the Act. These largely relate to tools of trade, special clothing and its maintenance, and professional, technical and trade journals. The administration of the law in this regard involves considerable compliance and administrative costs which might be thought disproportionate to the revenue involved. Some taxpayers who are unaware of the available deductions or are unwilling to submit to the tedium of record-keeping do not obtain deductions to which they are entitled. Claims for deductions put the Commissioner to considerable trouble in verifying the amount of claims and whether they qualify.

9.71. In some countries, for example Canada and New Zealand, a standard deduction in respect of these items is given. The deduction, usually of modest amount, is allowed without proof of actual expenses and any further deduction is denied. In Canada's case the amount is 3 per cent of employment income up to a maximum of $150. There is considerable merit in this approach, though it must cause injustice to some taxpayers for whom the expenses are of more than minor significance. Both Canada and New Zealand have found it necessary to treat some classes of taxpayers more generously.

9.72. Were the Canadian and New Zealand approach adopted, it is likely that some occupations would seek to be excluded. It might be more realistic, therefore, to provide that the standard deduction be available but not obligatory: a taxpayer would still be allowed to itemise his claims. If a taxpayer chose to itemise, he would not be subject to the money limit on deductibility. At least some saving in compliance and administrative costs would be achieved.

9.73. The Committee recommends that an optional standard deduction against employment income be available. The amount of the deduction might be set, as in Canada, at $150 or 3 per cent of employment income, whichever is less. It will be necessary to specify the kinds of claims the standard deduction is intended to cover in addition to those listed in paragraph 9.70. The Committee does not contemplate that the standard deduction, if taken, would preclude the allowance of separate deductions for such expenses as subscriptions to trade and professional associations.