Overtime Meal Allowances Question
: In the lead-up to Christmas the elves are required to put in long working days and to work well into the evening beyond their normal work hours. As a result, Santa is paying the elves a meal allowance in addition to their normal wages and overtime pay.
Will the meal allowances be taxable income to the elves? Answer
: The starting position is that any monetary benefit employees receive in connection with the performance of their employment will form part of their income. However, an amount that an employer pays to an employee for a meal while that employee is working overtime may be exempt income of the employee.
An employee is considered to be working overtime when the person works hours on a particular day that are beyond the person’s ordinary hours of work as set out in their employment agreement.
For the overtime meal allowance to be exempt income, the employee must have worked at least two hours’ overtime on the day of the meal and either:
- The person’s employment agreement provides for overtime pay, or
- The employer has an established policy or practice of paying for overtime meals.
There is no restriction on the amount of the overtime meal allowance that an employer can pay. However, the amount of the allowance paid must be either:
- The actual cost of the meal to the employee (with documentation required for amounts over $20 per meal), or
- A reasonable estimate of the expenditure likely to be incurred by the employee or a group of employees for whom an amount is payable.
The overtime meal allowance will be tax exempt in the hands of the elves that have worked at least two hours overtime on the days in relation to which the allowance is paid provided the allowance is a reasonable estimate of the likely cost of them purchasing a meal.
: Many of Santa’s elves make use of the North Pole Bus Service to get from home to the workshop and home again at the end of the working day. Because most elves are working longer hours, the Bus Service has stopped operating when they leave work at night so the elves have to get a taxi home. Santa has agreed to pay the elves a transport allowance in recognition of the extra cost they face in getting home.
Is the transport allowance taxable income to the elves? Answer
: As with the meal allowance, the transport allowance will be taxable income unless it comes within a specific exemption.
An allowance that employees receive from an employer to reimburse the employee’s additional transport costs is exempt income to the extent to which the employees incur the costs in connection with their employment and for the employer’s benefit or convenience. Additional transport costs are the costs to employees of travelling between their home and place of work that are more than would ordinarily be expected and which are attributable to one or more of the following:
- The day or time of day when the work duties are performed
- The need to transport any goods or material for use or disposal in the course of the employee’s work
- The requirement to fulfil a statutory obligation
- A temporary change in the employee’s place of work while in the same employment
- Any other condition of the employee’s work
- The absence of an adequate public passenger transport service that operates fixed routes and a regular timetable for the employee’s place of work
An employer may make a reasonable estimate of the amount of expenditure likely to be incurred by the employee or a group of employees for which the reimbursement is payable.
The travel allowance will, therefore, be exempt income to those elves using taxis home after working late, provided the allowance reimburses only the additional cost of taking a taxi over the bus (or is a reasonable estimate of that additional cost).
: Santa’s elves generally wear a distinctive uniform of green pants, red jacket with green trim, and red and green cap. In the lead-up to Christmas, Santa sends some elves out on scouting missions to prepare the way for his Christmas deliveries. It is important that these elves go unnoticed in the communities they are scouting, so Santa provides them with a clothing allowance to buy clothes that will allow them to blend in.
Is the clothing allowance taxable income to the elves? Answer
: As a monetary benefit received in the course of their employment, the clothing allowance will be taxable income to the elves.
There is a general exemption for an allowance an employer pays to an employee for “distinctive work clothing”. “Distinctive work clothing” is clothing that:
(a) is worn by an employee as, or as part of, a uniform that can be identified with the employer
- through the permanent and prominent display of a name, logo, or other identification that the employer regularly uses in carrying on their activity or undertaking; or
- because the colour scheme, pattern, or style is readily associated with the employer; and
(b) is worn in the course, or as an incident, of employment; and
(c) is not clothing that employees would normally wear for private purposes.
This exemption will not apply because the allowance Santa is paying is not for distinctive work clothing.
In very limited and specific circumstances an allowance paid to an employee to acquire plain clothes will be exempt. However, the plain clothes exemption is aimed primarily at allowances paid to plain clothes police officers.
In this instance, the allowance Santa pays to his elves to acquire plain clothes will be taxable income to the elves.
Question : Santa is throwing a Christmas party for the elves. He will provide the elves with a meal and drinks. There will also be a live band. As well as the cost of the food, drink and band, Santa will incur hireage costs associated with hiring crockery, glassware, utensils and waiting staff for the party.
Santa is wondering if the expenditure associated with the Christmas party will be deductible for tax purposes and whether it makes a difference if he hosts the party at his workshop or hires a venue? Answer : Expenditure on entertainment is only 50% deductible for tax purposes.
This limitation applies to deductions for expenditure on food and drink that a person provides off their business premises. It also applies to deductions for expenditure on food and drink such as a party or celebration meal that is provided on business premises. Light refreshments, such as a morning tea, are the exception to this rule and are 100% deductible.
The 50% limitation on a deduction also applies to any incidental expenditure on matters such as hireage of crockery, glassware, or utensils, waiting staff, and music or other entertainment provided in association with the food and drink.
Therefore, the expenditure Santa incurs on hosting the Christmas party will be only 50% deductible to Santa.
It makes no difference to the deductibility of the expenditure whether Santa hosts the party at the workshop or at a hired venue.