Employee reimbursements and GST

Making reimbursements

You make a reimbursement where you pay your employee for the price, or part of the price, of a particular purchase they make. For example, if your employee incurs an expense of $220 for a purchase, you may pay them $220 (the whole price) or you may decide to pay them a lesser amount, say $110 (half the price). Either payment will be a reimbursement.

You also make a reimbursement if:

• you pay your employee for a particular expense they haven't paid, providing they have become liable for the expense
• you pay your employee an advance for an expense they have not yet incurred, providing they have to repay any unspent amount of the advance to you
• you pay an expense on behalf of the employee, for example, to the business who has made a sale to the employee (the GST legislation treats this type of payment as a reimbursement).

Example

Alexandra employs Petra in her advertising agency. Petra purchases taxable craft materials for a client presentation that she is responsible for. The materials cost Petra $90. The expense is for Petra's work in the agency and Alexandra's policy is to reimburse such expenses if tax invoices are presented. Petra makes a claim for her expense with the receipts attached and Alexandra pays her $90.

Alexandra is entitled to a GST credit on the reimbursement she pays Petra for her purchase. Alexandra can claim the GST credit as Petra has given her a tax invoice for the purchase.

Example

Colin's children attend a non-government school. Colin pays their yearly school fees in advance. He also pays for school uniforms. Colin's employer agrees to reimburse him these expenses after he gives his employer all of the relevant receipts and invoices. Colin's employer makes separate payments for each of the supplies of education (GST-free) and uniforms (taxable). Both payments to Colin are expense payment benefits.

Colin's employer is entitled to a GST credit on the reimbursement for Colin's purchase of taxable school uniforms. The employer can claim the GST credit as Colin has provided the relevant documentation. However, even though his employer reimbursed the school fees, they cannot claim a GST credit because the cost of education is GST-free.

Colin's employer may have a fringe benefits tax (FBT) liability for the reimbursed expenses.

For more information about expense payment benefits, refer to: Goods and Services Tax Ruling GSTR 2001/3 Goods and services tax: GST and how it applies to supplies of fringe benefits Taxation Ruling TR 2001/2 Fringe benefits tax: the operation of the new fringe benefits tax gross-up formula to apply from 1 April 2000.