Summary
As a general rule, allowances are taxable in full even if they are paid to compensate an employee for an expense which may be (or has been) incurred in relation to work (e.g. uniform allowances). This is the case even if an allowance is paid under an award or employment agreement (e.g. overtime meal allowances).
The only exceptions to the general rule that allowances are taxable in full relate to motor vehicle, accommodation and living away from home allowances. Under the Act, conditions apply for motor vehicle and accommodation allowances. Information regarding the treatment of such allowances under the Act is provided in Revenue Ruling PTA-005v3.
Motor vehicle allowances
Motor vehicle allowances are paid to compensate employees for any business use of their own private vehicle.
Wages do not include the exempt component of a motor vehicle allowance. Therefore if the motor vehicle allowance does not exceed the exempt component, the allowance is not included as wages. However, any amount in excess of the exempt component is taxable.
The exempt component is calculated using the formula E = K x R where:
- E is the exempt component
- K is the number of business kilometres travelled during the financial year
- R is the exempt rate
The number of business kilometres travelled during the financial year is determined by:
- a continuous recording method during the financial year, or
- the ATO 12-week averaging method, or
- some other method the Commissioner approves in writing.
The exempt rate for payroll tax purposes is the rate prescribed by the regulations under section 28-25 of the Income Tax Assessment Act 1997 (ITAA) used to calculate a deduction for car expenses for a large car using the cents per kilometre method for the previous financial year.
Payments made to employees in respect of the business use of vehicles provided by the employer are fully taxable for payroll tax purposes.
Information regarding the treatment of motor vehicle allowances from 1 July 2007 is available in Revenue Ruling PTA-005v3.
The exempt rate for motor vehicle allowances used for payroll tax purposes paid during 2023-24 is 78 cents per km.
Example
| Motor vehicle allowance paid per month ($) | 400 (A) |
| Business kilometres travelled in the month | 300 |
| Multiply by ATO large car rate per kilometre (66 cents) | 0.78 |
| Amount of allowance exempt from Payroll Tax ($) | 234 (B) |
| Subtract (B) from (A) to get the amount on which tax is payable ($) | 166 |
Overnight accommodation allowances
Overnight accommodation allowances are paid to cover temporary accommodation costs where an employee is required to stay away from his or her usual place of residence.
Wages do not include an accommodation allowance that does not exceed the exempt rate. The exempt rate is based on the related ATO figure and is the total reasonable amount for daily travel allowances using the lowest capital city for the lowest salary band for the financial year.
For the 2023-24 financial year, the exempt amount is $310.70 per night, which includes accommodation, meals and incidental expenses. Amounts paid in excess of $289.15 are taxable.
Information regarding the treatment of accommodation allowances from 1 July 2007 is available in Revenue Ruling PTA-005v3.
Living away from home allowances
A living away from home allowance is paid to compensate an employee for additional expenses they may incur as a result of being required to temporarily live away from home in order to perform their duties of employment. This usually occurs where the employee has been required to work temporarily at another location, which necessitates a temporary change in residence. This allowance will include components designed to compensate for additional food and accommodation costs. It is distinguishable from a travel allowance which is paid to an employee to compensate for accommodation, meals and incidental expenses incurred while the employee is travelling on a short-term assignment that does not involve a temporary relocation of the employee's place of employment.
Generally, a living away from home allowance is a fringe benefit under section 30 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).
If the allowance falls within the definition of a living away from home allowance under section 30 of the FBTAA, the taxable value of the benefit under the FBTAA, grossed-up by the Type 2 factor as shown in the FBTAA return is subject to payroll tax. However, if the allowance is not considered a living away from home allowance under the FBTAA, the treatment of the allowance for payroll tax purposes will be the same as the treatment of an accommodation allowance.
Reimbursements
Reimbursements of expenses incurred by employees on behalf of their employers are not taxable unless they have a taxable value under the FBTAA.
For a payment to be considered a reimbursement, it must have the following two characteristics:
- The expense must be incurred by the employee with the precise amount then reimbursed, or if the payment was made in advance, a receipt relating to the expense must be given to the employer along with any change.
- The expense must be incurred in the course of the employer's business.
If a payment does not have both characteristics, it is not considered a reimbursement and is generally taxable in full. Similarly, if a reimbursement is subject to fringe benefits tax, it is also subject to payroll tax regardless of whether the reimbursement has both of the above characteristics.
Information regarding the treatment of reimbursements under the Act is provided in Revenue Ruling PTA-011.
Assistance
If you need further information on this topic, please contact our payroll tax enquiry service on 13 21 61.