Relocation costs can be expensive and are often $10,000 – $20,000. Employees who relocate for work purposes however, are not entitled to a tax deduction for the relocation costs and airfares they incur, as these expenses are deemed private.
How is it possible to make these relocation expenses tax deductible to the employee?
Under the Fringe Benefits Tax Act there is an exemption from fringe benefits tax for an employer who either pays or reimburses an employee’s relocation costs. In addition, the employer gets a tax deduction for the relocation costs paid and can claim the GST input tax credits back on the payment as well.
For an employee to effectively make their relocation expenses tax deductible they need to salary sacrifice the relocation costs with their employer. This involves the employee having their gross annual wage reduced by the amount of relocation costs. The employer then either pays the relocation costs directly or reimburses the employee for the relocation costs they have already paid.
An example in practice: Jill relocates from Perth to Darwin for a new job and pays $11,000 relocation costs to transport her furniture. Once starting work in Port Hedland Jill salary sacrifices the $11,000 of expenses with her employer. The employer reduces Jill’s gross wage for the first month by $10,000, and not $11,000, as the employer claims back the $1,000 GST input tax credits on the $11,000 relocation expenses reimbursement. The employer then reimburses Jill the $11,000 relocation costs she has incurred. This results in no overall cost to the employer. Jill’s tax saving is $5,170 (which is the tax she would have normally paid on the $11,000 of salary income).