The purpose of this Circular is to advise you of further developments on the issue of taxation of overtime meal and travelling allowances.

Circular No 98-45 advised that the ATO was not prepared to grant an extension of time to comply with Taxation Rulings requiring PAYE deductions on overtime meal and travelling allowances beyond 30 September 1998. The Taxation Rulings (Currently TR 98110) require that where the relevant NSW public sector allowance rate is greater than the A TO 1C4C reasonable amount.', then PAYE deductions are required on the excess above the reasonable amount and the whole amount is to be shown on employees'group certificates.

The Taxation Rulings provide that when employees submit their taxation returns they have the choice of claiming a deduction from their assessable income for overtime meal and/or travel allowance received as a work expense. If employees choose to claim up to the reasonable limit then no substantiation is required. However, if the employee chooses to claim above the reasonable limit (for example, the full amount of the allowance) then substantiation may be required by the ATO for the full amount. Further, if the employee chooses to claim above the reasonable amount for a particular overnight stay then all other travelling allowances received during the financial year may require substantiation regardless of whether or not only the reasonable amount was claimed on the other occasions.

Circular No 98-78 advised that a formal appeal against the ATO's reftisal to grant the NSW public sector an exemption from the relevant Taxation Rulings had been lodged. If successful, the appeal will lead to the ATO accepting that NSW rates of allowances for overtime meals and travelling involving an overnight stay are reasonable within the terms of the Taxation Rulings.

Circular No 98-78 also advised that having regard to the appeal process and the uncertainty fo r Dep artments, agencies and individual employees, the ATO has also been requested to grant a further extension of time for PAYE deductions and substantiation requirements for the 1998-99 income year for employers and employees respectively. No advice has been received from the ATO on the request for extension of time or the appeal. It is unlikely that the appeal process, in particular, will be concluded in the short term.

It was also stated in Circular 98~78 that the Public Employment Office had lodged an Interim Award application with the New South Wales Industrial Relations Commission to enable the reasonable allowances set by-the ATO to be paid pending the appeal. It was foreshadowed that agreement with the Public Service Association (PSA) was necessary. Agreement has not been able to be reached with the PSA on this proposal. Accordingly, every effort should be made to comply with the Taxation Ruling by inclusion of relevant allowance payments on employee group certificates. Employees should be advised of the need to keep receipts of expenses where they seek to claim the amounts as a deduction against income, that is, where the allowances paid exceed the ATO reasonable amount.

I will continue to keep you informed of developments.

Any enquiries may be directed to your client contact officer or Doug Cowell on telephone number 9228 3575.

C. Gellatly
Director-General