Employee Allowances

Payroll Employee Allowances

Allowances are distinct payments made to employees to reimburse expenses they incur while performing their duties.

These allowances, which are paid in addition to regular salary and wages, are not considered separate payments for PAYG withholding purposes, although the ATO may view them differently.

Allowances are payments made to employees to cover expenses they incur while working. Understanding the expenses set aside for travel and living away from home can be challenging.

Today, we will cover the differences between these two allowances and the methods used to calculate the taxes for each. When an employee is only away for a short period, there is no need for temporary accommodation since the absence is brief.

When an employee must stay in temporary accommodation like a hotel, it is unlikely that their spouse or family members will accompany them.

Typical exemptions include:

• Car, travel, and transport allowances and reimbursements of car expenses
• Living away from home allowance
• Tool, uniform, and laundry allowances
• Dirt, height, site, first aid, and risk allowances
• Meal and entertainment allowances

Travel and living away from home allowances are the most complex to understand. In today’s post, we will discuss the differences between the two and how taxes are calculated for each.

Let’s get straight to the point

This blog post explains the various types of payroll allowances provided to employees in Australia, focusing on travel allowances and living away from home allowances (LAFHA).

Travel allowances reimburse employees for costs incurred when they are away from home overnight for work purposes, typically covering lodging, meals, and other expenses.

Living Away From Home Allowances (LAFHA) are provided to employees who need to work temporarily away from their usual residence, covering costs such as food, rent, and other living expenses.

The key difference between these allowances is that travel allowances are for short-term absences with no change in work location. At the same time, LAFHAs apply when employees relocate temporarily near the new work site. LAFHAs often involve longer stays and may include family relocation, whereas travel allowances typically do not.

Regarding taxation, the ATO provides “reasonable amounts” each year for travel allowances, which can be claimed without written evidence if below the threshold.

Accurate records, such as travel diaries, are recommended. LAFHA is non-taxable if it does not exceed reasonable limits, but any excess is considered a taxable fringe benefit. Employers must submit declarations to reduce the taxable value.

Compliance and record-keeping are crucial. Employees should maintain detailed records to substantiate claims, especially if allowances exceed reasonable limits. Employers should ensure proper documentation and declarations to manage taxable fringe benefits effectively.

For further assistance, Bookkept offers comprehensive payroll management and tax compliance services to alleviate employers’ administrative burdens.

What is a Travel Allowance?

A travel allowance is a payment made to an employee to cover costs incurred when the employee is away from home overnight for work-related purposes. Travel allowances, per diems, typically cover lodging, meals, and miscellaneous expenses.

What is a Living Away From Home Allowance?

A living away from home allowance (LAFHA) is provided to employees working temporarily away from home.

This payment is provided directly from the employer to cover expenses such as food, rent, and other costs related to working in a different location from the employee’s usual residence.

In most cases, the allowance includes two components: food and lodging. Both are subject to limitations and only cover reasonable expenses.

Differences Between a Travel Allowance and a Living Away From Home Allowance

When an employee must live away from home, a temporary residence is usually established near the new work location. It is common for an employee’s spouse and family members to move to the new site with the employee.

The typical workplace location does not change for short absences, and temporary accommodation is unnecessary. Usually, the employee’s spouse and family do not accompany them when staying in temporary lodgings like motels.

The critical factor is the employment location rather than whether the employee’s family accompanies them. Employees generally live away from home if the temporary housing is in a different location from their usual residence.

An employee is deemed travelling if the job requires them to travel, even if the work location remains the same.

The duration of time away from home is not a decisive factor. The ATO usually considers shorter absences as travel. Employees attending short-term staff training courses as part of their job are typically considered travelling for business purposes.

There is no minimum or maximum duration for living away from home. However, if employees live away from their regular residence for more than a year and a half, the FBT rules may become less lenient.

The period of living away from home ends when the employee returns to their usual residence or relocates to a new location.

How Are Different Allowances Taxed?

Travel Allowance

The Australian Taxation Office (ATO) publishes a Tax Determination (TD) annually, detailing the “reasonable amounts” for travel allowances. These amounts are not automatically deducted.

Meeting a substantiation exemption criterion allows for the deduction of expenses without written documentation, such as bank statements or invoices, similar to other tax deductions.

However, if audited, you must provide evidence of reasonable expenditure, typically through documentation of menu prices or bank statements showing meal payments.

The substantiation exemption for travel allowances applies if a taxpayer has legitimate deductible travel costs and receives a genuine travel allowance. Taxpayers meeting these prerequisites can claim this exemption.

You must have incurred the cost, but no written evidence is needed if your claim is below the reasonable maximum. This exemption applies only if the claim is below the reasonable maximum.

A “bona fide” travel allowance is a sum provided to cover work-related travel costs.

It is highly recommended that you keep a travel diary recording dates, locations, and nights away from home, especially if the ATO investigates.

Key considerations for employees:

• If your payment summary does not include the travel allowance and does not exceed a reasonable amount, you do not have to include it in your tax return.
• If the travel allowance is included in your payment summary, you must include it in your tax return to claim the necessary deductions.
• Deductions for travel costs exceeding the reasonable limit require proof of payment for each cost.
• If the allowance is below the reasonable limit, you can claim a deduction equal to or larger than the reasonable limit without formal evidence of payment.
• Written evidence is not required if the deduction is up to the reasonable limit; if the travel allowance exceeds the reasonable limit, documentation is necessary.

Living Away From Home Allowance (LAFHA)

A LAFHA that does not exceed a reasonable limit is not considered a taxable LAFHA fringe benefit and is not taxable in the employee’s hands.

Exempt components of a LAFHA include:

• ‘Reasonable’ accommodation costs
• ‘Reasonable’ food costs (see schedule below)
• A reduction from the “usual” statutory food costs, estimated at $42 per week for adults and $21 per week for children (under 12)

Statutory food levels are outlined in the Fringe Benefits Assessment Act, and TD 2019/7 includes provisions for appropriate food and drink components (per week), reviewed annually.

A taxable fringe benefit arises when an allowance exceeds exemption limits. The gross-up amount increases the taxable value before the FBT rate is applied to determine the tax payable.

Taxpayers should compare the after-tax result of the taxable allowance with an equivalent amount received as salary, as the taxable allowance is treated differently from wages.

Employers must have employees complete and submit a Living Away From Home Allowance Declaration to reduce the taxable value associated with an LAFHA fringe benefit.

Conclusion

A “bona fide” travel allowance reimburses work-related travel costs. If your payment summary does not include the travel allowance and does not exceed the reasonable limit, you do not have to include it in your tax return.

An LAFHA that does not exceed a reasonable limit is not a taxable fringe benefit. The gross-up amount increases the taxable value before applying the FBT rate to calculate the tax due.

For further information, please call us on (03) 8568 3606. With over ten years of combined experience working with a diverse range of clients, Bookkept is well-equipped to assist with your personal tax needs.

If you are an employer, we can take over your payroll function completely and remove the compliance stress or provide support as needed.

Frequently Asked Questions

Are Allowances Taxable?

Most allowances are taxable, and they must be declared on the employee’s income tax return. However, allowances like travel or meal allowances may be tax-exempt or partially exempt if they fall within specific limits set by the Australian Taxation Office (ATO).

Do Employers Need To Pay Superannuation On Allowances?

Employers are generally required to pay superannuation on allowances that are part of ordinary hours of work, such as shift or on-call allowances. However, reimbursements or allowances for specific expenses (like travel or tools) usually don’t attract superannuation.

How Should Allowances Be Reported On Payslips?

Allowances should be itemised on the employee’s payslip and clearly labelled to distinguish them from ordinary wages. This transparency helps employees understand their pay breakdown and ensures compliance with the Fair Work Act.

Can Allowances Vary By Industry?

Yes, allowances often vary based on industry requirements. For example, construction and mining may have specific tool and equipment allowances, while hospitality employees might receive allowances for uniforms or split shifts.

How Does The Ato Define Reasonable Allowances?

The ATO sets specific limits on what it considers “reasonable” for allowances like travel and meals. If an employer provides an allowance within these limits, it may be exempt from fringe benefits tax (FBT). Employees should check the current limits with the ATO to ensure compliance.