Today’s job market is more competitive than ever. To secure top talent, it’s now common for employers to cast their recruitment nets wide, searching beyond their local area. But sometimes, this comes with the added complexity of employee relocation costs.
As an employer, it’s important to understand the tax implications and structure employee relocation costs in a way that benefits both you and your new hire. So, what’s the best approach?
In this article, we’ll outline the most tax-effective and mutually beneficial ways to handle your employee’s relocation expenses.
Is it better to reimburse actual relocation costs or pay a lump sum relocation allowance?
When providing financial assistance for an employee’s move, you have 2 options:
1. Reimbursing actual relocation expenses
The most tax-effective approach is to reimburse the actual expenses your employee incurs. With this method, the employee provides documentation for the costs they’ve covered, and you reimburse only those amounts.
This is considered a reimbursement rather than assessable income, so your employee won’t pay tax on it, although it’s still a deductible expense for the employer. And it’s generally exempt from fringe benefits tax (FBT) if the costs fall under the relocation exemption categories, which we detail below.
2. Paying a lump sum relocation allowance
Alternatively, you could pay your employees a fixed lump sum to cover their relocation costs. However, without any salary packaging arrangements, the payment will likely be treated as an allowance.
This option also comes with considerable tax implications. As the employer, you’re required to remit PAYG withholding on the amount, and the payment would be considered assessable income for your employee. Additionally, your employee can’t reduce this income by deducting the relocation costs they’ve incurred because they’re not considered a deductible expense.
In most cases, reimbursement is better for both parties.
What costs are covered under the FBT relocation exemption?
The following conditions must be satisfied to qualify for the FBT relocation exemption:
- The relocation cost/s are one of the eligible cost types, summarised below
- The relocation is provided solely because the employee is required to live away from his or her usual place of residence to perform employment duties
- The relocation is provided to enable a family member to take up residence at the new or former usual place of residence
- Where the relocation is in respect of a spouse or child of the employee, this must not be concurrent with a business trip of the employee
- The relocation must not be for an employee undertaking travel in the course of performing employment duties
- Documentary evidence is provided to the employer
- The benefit is provided under an arm’s length arrangement.
What are the eligible relocation cost types?
The eligible relocation cost types are:
Relocation transport, accommodation and meals:
This includes costs incurred to transport your employee and their family to the new location, including meals and accommodation. It can also include the cost to return later if needed. Costs for trips taken before the official relocation date may also be included if necessary for arranging suitable accommodation.
Temporary accommodation:
For permanent relocations, the costs of temporary accommodation while seeking long-term housing can be covered. Time limits apply, and time at the new location as well as short-term accommodation leading up to your employee’s move.
Removal and storage of household effects:
These costs can include packing, unpacking, insurance, and arrangements for pets.
Connection and reconnection of certain utilities:
Some utilities like gas, electricity and phone connections can be covered where the service is connected within 12 months of the employee’s relocation.
Sale or acquisition of a dwelling:
Costs associated with stamp duty, advertising, selling costs and borrowing expenses may be covered for permanent relocations that involve selling the family home and buying a new one, subject to specific time limits.
Examples of reimbursable, FBT-exempt relocation costs
Examples of relocation costs that can be paid as a reimbursement and exempt from FBT include, but are not limited to:
- Travelling with family: Flights, accommodation, and meals during a trip to the new location to meet with a real estate agent and search for a new home.
- Hiring a removalist: Covering removalist costs and insurance for packing and transporting the family’s belongings.
- Transporting family pets: Expenses related to transporting family pets to the new location.
- Travelling to the new location with family: Covering flights, meals, and accommodation for the employee and their family during the journey.
- Rental costs: Reimbursing rental expenses at the new location while seeking long-term accommodation (subject to time limitations).
- Selling costs for the sale of the family home: Including agent commissions, legal fees, advertising and mortgage discharge fees related to the sale of the family home after the move.
Structure your employee relocation expenses the right way
Offering relocation assistance can make all the difference in attracting top talent.
When putting your relocation arrangement together, it’s crucial to get the structure right from the start. In doing so, you can mitigate some nasty tax implications for you and your new employee and pave the way towards a long-term, positive working relationship.
Need help navigating the tax implications for employee relocation expenses? Get in touch with our team of specialists on 03 5221 6399 or via info@davidsons.com.au — we’d be delighted to assist you.
This article was written by Kylie McEwan, Director.
Disclaimer: This information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they’re unclear as to the meaning of anything contained in this article. Davidsons accepts no responsibility for any loss suffered as a result of any party using or relying on this article.