ACCA Advanced Taxation (ATX) Practice Exam

What is the tax treatment of overnight expenses exceeding the exempt limit for employees?

1. They are fully tax-exempt

2. They are considered taxable income

3. They are deductible for business expenses

4. They are ignored for tax purposes

The correct answer is: They are considered taxable income

The tax treatment of overnight expenses exceeding the exempt limit for employees is that they are considered taxable income. When an employee incurs overnight expenses that surpass a specified exemption threshold, the excess amount cannot be classified as a tax-free reimbursement. Instead, it must be reported as taxable income to the employee. This taxable treatment stems from the principle that only certain expenses that meet the criteria set by tax legislation can be excluded from income for tax purposes. When expenses exceed the allowable limits, they lose their exempt status and instead increase the employee's taxable income, which may have implications for the amount of tax the employee needs to pay. Understanding this treatment is crucial for both employees and employers, as proper classification of these expenses impacts personal income tax as well as payroll reporting and compliance.