Payroll 101: The Payroll Nightmare of Allowances and Reimbursements
By Ken Mansell
Some things in managing payroll are hard… and then there are allowances which are stupidly hard!
Once you start paying your employees allowances for expenses they may incur while working for you, there are a series of issues that arise that you will need to wrestle with. This blog goes through some of the issues that arise for paying allowances through payroll.
1. Is it an allowance and reimbursement?
The first question is whether it is actually a reimbursement or is it an allowance? Reimbursements are payments made to an employee for actual expenses already incurred, while an allowance is a payment for estimated future expenses the employee might incur. Also, allowance might be given for other reasons, like:
- 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; or
- Work related expenses that may be claimed as a tax deduction by the employee - for example, travel between work sites.
All of these allowances have different rules regarding whether they are subject to payroll tax, must have PAYG withholding applied to them, or are included in ordinary time earnings and so will need to have superannuation applied to them.
2. Super obligations when paying allowances
As an employer, you need to pay super on an employee's ordinary time earnings, but what allowances are a part of ordinary time earnings? While most expense allowances are not ordinary time earnings, some allowances can be confusing, like “on call” allowances.
Super obligations apply to “on call” allowances paid for ordinary hours of work, such as an “on call” loading, but do not apply to “on call” allowances paid when employees are required to make themselves available during hours they aren't otherwise working. Applying the same description in your payroll system, but one is subject to super and the other is not… that is easy to handle it…
3. Allowances and PAYG withholding
While most allowances will be subject to PAYG withholding, there are a series of exemptions, for example:
- Payments made by applying an approved cents per kilometre rate to the number of kilometres travelled up to 5,000 business kilometres. But if you pay above the rate you include all the allowance and if you pay for more than 5,000 kilometres, you need to include the allowance for the kilometres over 5,000.
- Award transport payments that are deductible transport expenses.
- Laundry (not dry cleaning) allowance for deductible clothing, up to the threshold amount.
- Award overtime meal allowances, up to reasonable allowances amount.
- Domestic or overseas travel allowance involving an overnight absence from employee's ordinary place of residence, up to reasonable allowances amount.
Different treatment based on different thresholds for different types of allowances… I’m getting a headache.
4. Payroll tax and allowances
And just like PAYG withholding, while most allowances paid to employees are liable for payroll tax there are a series of exemption up to a certain amount on these following types of allowances:
- Motor vehicle allowances;
- Accommodation allowances; and
- Living away from home allowances.
In summary, once you decide to start paying some of the standard allowances that many employees expect, you will need to ensure any payroll systems you use handle them correctly for super, PAYG withholding and payroll tax. And then it is time for chocolate as you have earned a break!
About Ken Mansell
Ken takes the label “tax nerd” as a badge of honour. He has worked for KPMG and Deloitte, as the tax counsel for ASX and NYSE listed entities, worked on tax policy for the Federal Government, as an advisor to the Assistant Treasurer, and on the secretariat of the Henry Review of Taxation. Ken runs “Tax Rambling” where he tries to share his love of tax with the rest of the world.
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