• Withholding from allowances

    What are allowances?

    Allowances are separately identified payments made to an employee for:

    • working conditions - for example, danger, height or dirt
    • qualifications or special duties - for example, first aid certificate or safety officer
    • expenses that can't be claimed as a tax deduction by the employee – for example, normal travel between home and work
    • work related expenses that may be able to be claimed as a tax deduction by the employee - for example, travel between work sites.

    Allowances that have been folded-in to normal salary or wages are not treated separately for withholding.

    What are the differences between allowances and reimbursements?

    Allowances are amounts paid to cover anticipated costs or as compensation for conditions of employment and are paid regardless of whether the employee incurs an expense. Allowances are assessable income to the employee and are generally included as income in their tax return. The employee may be entitled to claim a deduction for the expense.

    Reimbursements made to employees are exact compensation for actual expenses incurred, and the employer may be subject to fringe benefits tax (FBT). If the reimbursement is covered by FBT, the amount is not assessable income to the employee, and the employee cannot claim a deduction for the expense.

    See also:

    • TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement

    What are your super obligations when paying allowances?

    Super guarantee contributions are payable on an employee's ordinary time earnings.

    Expense allowances and reimbursements aren't 'salary or wages' and therefore aren't ordinary time earnings.

    Expense allowances are paid to an employee with a reasonable expectation that the employee will fully expend the money on tax deductible items, in the course of their work,

    Similarly, a reimbursement that compensates an employee for an expense they have incurred on behalf of the employer is also not salary or wages.

    'On call' allowances paid when employees are required to make themselves available during hours they aren't otherwise working are excluded from ordinary times earnings. On call allowances paid for ordinary hours of work, such as an on call loading, are ordinary time earnings.

    See also:

    • SGR 2009/2 SG: Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages'

    For ordinary time earnings check list refer to OTE checklist

    What is the correct withholding treatment for allowances?

    The correct withholding treatments and payment summary requirements for various allowance types are listed in the tables below.

    Table 1 lists the various types of allowances that an employee might receive and describes how these allowances are treated.

    Table 2 lists those allowances which are subject to a varied rate of withholding.

    You must follow the withholding and reporting requirements as outlined in the tables below to allow your employees to correctly complete their income tax return.

    Table 1

    Allowances subject to PAYG withholding

    Allowance type

    Are you required to withhold?

    Is the allowance included on payment summary? If so, how should it be shown?

    Does super guarantee apply?

    Allowances paid for working conditions, qualifications or special duties

    For example:

    • crib, danger, dirt, height, site, shift or travelling time
    • trade, first aid certificate or safety officer.

     

     

    Yes

     

    Yes (include total allowance in gross payment)

     

    Yes

    Allowances for non-deductible expenses

    For example:

    • part-day travel (no overnight absence from employee's ordinary place of residence)
    • meals (not award overtime meal allowance or overnight travel allowance)
    • motor vehicle for non-deductible travel - for example, home to work, including cents per kilometre payments.

     

     

    Yes

     

    Yes (include total allowance in gross payment)

     

    Yes

    Allowances for expected deductible expenses

    For example:

    • tools
    • compulsory uniform or dry cleaning
    • motor vehicle for work- related travel, including cents per kilometre payments in excess of Australian Tax Office (ATO) rate (1)
    • overseas accommodation for deductible travel.

     

     

    Yes

     

    Yes (show total allowance separately in the allowance box with an explanation)

     

    No

    On-call allowance

    • ordinary hours 

     

    Yes

     

    Yes (include total allowance in gross payment)

     

    Yes

    • outside ordinary hours

    Yes

    Yes (include total allowance in gross payment)

    No

    Table 2

    Allowances which are subject to a varied rate of withholding:

    • provided the employee is expected to incur expenses that may be able to be claimed as a tax deduction at least equal to the amount of the allowance, and
    • provided the amount and nature of the allowance is shown separately in the accounting records of the employer.

    Allowance type

    Are you required to withhold?

    Is the allowance included on payment summary? If so, how should it be shown?

    Does super guarantee apply?

    Cents per kilometre car expense payments using the approved rate(1)

    For payments made by applying the approved rate or a lower rate, to the number of kilometres travelled up to 5,000 business kilometres.

    No

    Yes (show total allowance separately in allowance box with an explanation)

    No

    For payments made by applying the approved rate or a lower rate, to the number of kilometres travelled where the usage is in excess of 5,000 business kilometres.

    Yes (from payments for the excess over 5,000 kms)

    Yes (show total allowance separately in allowance box with an explanation)

    No

    For payments made at a rate above the approved rate, for distances travelled up to 5,000 business kilometres.

    Yes. From the amount which relates to the excess over the approved rate.

    Yes (show total allowance separately in allowance box with an explanation)

    No

    Award transport payments(2)

    For deductible transport expenses

    No

    Yes (show total allowance separately in allowance box with an explanation)

    No

    For non-deductible transport expenses

    Yes (from total payment)

    Yes (include total allowance in gross payment)

    Yes

    Laundry (not dry cleaning) allowance for deductible clothing(3)

    Up to the threshold amount

    No

    Yes (show total allowance separately in allowance box with an explanation)

    No

    Over the threshold amount

    Yes (from the excess over the threshold amount)

    Yes (show total allowance separately in allowance box with an explanation)

    No

    Award overtime meal allowances(4)

    Up to reasonable allowances amount

    No

    No

    No

    Over reasonable allowances amount

    The allowance must be paid under an industrial instrument in connection with overtime worked

    Yes (from the excess over reasonable allowances amount)

    Yes (show total allowance separately in allowance box with an explanation)

    No

    Domestic or overseas travel allowance involving an overnight absence from employee's ordinary place of residence(4)

    Up to reasonable allowances amount

    No

    No

    No

    Over reasonable allowances amount

    An allowance for overseas accommodation must be subject to PAYG Withholding and be shown in the allowance box on the Payment Summary

    Yes (from the excess over reasonable allowances amount)

    Yes (show total allowance separately in allowance box with an explanation)

    No

    1. The approved rate is 66 cents per kilometre for the year commencing 1 July 2015.
    2. An award transport payment is a payment covering particular travel that was paid under an industrial instrument (that is, an award, order, determination or industrial agreement) that was in force under Australian law on 29 October 1986.
    3. The current threshold amount for laundry expenses is $150. Dry cleaning allowances should have an amount withheld in accordance with Table 1.
    4. Each year we publish a determination setting out the reasonable amounts for      
      1. overtime meal allowance expenses
      2. domestic travel allowance expenses
      3. travel allowance expenses for employee truck drivers
      4. overseas travel allowance expenses.

    See also:

    TD 2016/13 Income tax: what are the reasonable travel and overtime meal allowance expense amounts for the 2016-17 income year?

    More information

    For more information about allowances refer to:

    You can also phone us on 13 28 66 (8.00am – 6.00pm, Monday – Friday).

      Last modified: 14 Nov 2016QC 16395