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Allowances - Getting it right

For the many bookkeepers who handle payroll, according to the ATO the treatment of allowances is one of the most misunderstood areas. Whether it be misclassifying an amount as an allowance (when it's actually a reimbursement) or applying the incorrec

From the outset it’s important to define an allowance, and in particular distinguish it from a reimbursement as the payment summary, PAYG withholding, superannuation and payroll tax treatment can differ significantly. On the one hand, allowances:

• Are generally assessable income to the employee
• May be included on an employee’s payment summary
• May attract superannuation, and
• The employee may be able to claim a deduction against the allowance for a work-related expense incurred.

Conversely, reimbursements:

• Are generally not taxable to the employee
• Will generally not be included on an employee’s payment summary
• Will be fringe benefit taxable to the employer where they constitute an expense payment fringe benefit or a living away from home allowance
• May be liable for payroll tax where they constitute a fringe benefit
• Will not attract superannuation, and
• The employee will not be able to claim a tax deduction for the original expense incurred.

An allowance is a definite sum of money allotted or granted to meet expenses or requirements. An allowance usually consists of the payment of a definite or pre-determined amount to cover an estimated expense, and is paid regardless of whether the recipient incurs the anticipated expense. An amount is not an allowance if it’s just folded in to normal salary and wages. Rather an allowance must be a separately identifiable payment made to an employee.

Conversely, a payment is a reimbursement when the employee is compensated exactly (i.e. precisely, not approximately), for an expense they have already incurred. The employer considers the expense to be their own, with the employee effectively incurring the expenditure on behalf of the employer.

Having determined that the amount is an allowance, the PAYG rules require that certain types of allowances are subject to withholding whilst others are not, while the payment summary treatment can also differ markedly depending on the nature of the allowance paid. By using these Tax Office tables you can eliminate PAYG withholding and payment summary reporting errors going forward.

Regarding superannuation, the general rule is that all allowances received by an employee, except for expense allowances that are expected to be fully expended and allowances that are fringe benefits (e.g. LAFHAs), will attract superannuation. However, where an allowance relates to work outside ordinary hours, it will not attract superannuation (for example, overtime meal allowances).

Article written by Australian Bookkeepers Network (ABN)

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