How you employ allowances or reimbursements could save you money or bring unexpected tax costs.
Businesses need to be well aware of the tax implications of allowances and reimbursements. There are differences in how each are subjected to tax. This means your choice to provide your employees with allowances or reimbursements could save you money or bring unexpected tax costs.
What’s the difference between allowances and reimbursements?
Allowances are given to employees in the form of set payments which are to be used for ordinary work purposes.
For example, the Golden Family have a number of employees working at their private college in Sydney. Since many of these employees need to travel regularly to offer in-house classes and to meet with clients, the Golden Family may consider giving these employees an allowance of $100 per week to cover these travel costs. Reimbursements are given to employees when they spend money on ordinary work expenses, such as fuel or meals.
These expenditures are incurred during the course of ordinary work. If employees are spending money for private expenses connected to the business, then these costs are considered fringe benefits and are impacted by the Fringe Benefits Tax.
For example, the Golden Family may decide to permit their employees to pay for their own costs of travel to and from the premises of students and clients. If so, these employees will be reimbursed by the company upon delivering receipts for these costs.
How are allowances and reimbursements taxed differently?
| Allowance | Reimbursement | |
|---|---|---|
| Income Tax consequences for the employee | Included in employee’s assessable income and subject to income tax | Not included in employee’s assessable income and subject to income tax |
| Tax consequences for the employer | Employer may need to withhold PAYG on behalf of the employee depending on the allowance Deduction allowance where it is incurred as part of the employer’s business | Employer is subject to Fringe Benefits Tax. The taxable value may be reduced depending on whether the employee could deduct the expense under the otherwise deductible rule. |
| NSW Payroll Tax | All allowances paid to an employee are liable for payroll tax except for the exempt component of both the overnight accommodation and motor vehicle allowance or if they are a direct reimbursement against a receipt. | Unless the reimbursement is subject to Fringe Benefits Tax, the reimbursement is not included in taxable wages |
Allowances or reimbursements – whichever an employer chooses, there will clearly be a difference in tax payable. Moreover, employers need clear policies outlining when and how employees are able to access allowances and reimbursements. Fairness is the platform on which these policies should be built.
For example, the Golden Family has decided to provide an allowance of $100 per week only to teachers and sales representatives whose regular work involves travelling to and from the premises of students and clients. This allowance will cover fuel and meal expenses incurred during this travel and employees. Reimbursements will be given to employees who may need to engage in such travel to and from the premises of students and clients on an ad hoc basis. These reimbursements will be limited to a $100 per week and will only be provided if receipts and documentation describing the expenses.
The Golden Family and, indeed, all employers, need to consistently and carefully review the fairness and costs of these allowances and reimbursements. Here’s where the top tax accountants will be able to manifest simpler options from complex choices. The policies need to outline the limits, boundaries, and required documentation.
Important Disclaimer: Readers should not act solely on the basis of the material on this page. Items herein are general comments only and do not constitute or convey advice. Legislation and proposals of legislation are also subject to constant change. We therefore recommend that formal advice be sought before acting in any of the areas. This news article is issued as a guide to the readers. Calibre Business Advisory Pty Ltd and its associated entities disclaims any losses that may be incurred as a result of the reader undertaking any action based on this article.