Are you an employer who pays a car allowance to your employees? Did you know that you may have to withhold tax from their allowance?

It's important to note the various requirements to withhold tax on different allowances. 

So what is an allowance? 

Allowances are separately identified payments made to an employee for:- 

  • expenses that cant be claimed as a tax deduction by the employee - e.g. normal travel between home and work
  • work related expenses that may be able to be claimed as a tax deduction by the employee - e.g. travel between work sites or travel to a client's premises or to a work related seminar. 
  • working conditions - e.g. site, crib, danger, height or dirt
  • qualifications or special duties - e.g. trade, first aid certificate or safety officer

What are the differences between allowances and reimbursements?

Allowances are amounts paid to cover anticipated costs or as compensation for conditions of employment and are paid regardless of whether the employee incurs an expense. Allowances are assessable income to the employee and are generally included as income in their tax return. The employee may also be entitled to claim a deduction for the expense in their tax return.

Reimbursements made to employees are exact compensation for actual expenses incurred.

What is the correct withholding treatment for allowances?

The ATO has some great information on withholding from allowances which is detailed in easy to use tables. 

But lets concentrate on car allowances.

You should be aware that from 1 July 2015, there is now a single rate available for the cents per kilometre method. This is currently 66 cents per kilometre for up to 5,000 kilometres. If you base your allowances on a set rate, these are the withholding requirements:-

If the allowance is for non deductible expenses, for example, for travel from home to work:-

  • yes, you are required to withhold
  • you include the total allowance in the payment summary as part of the gross payment

If the allowance is for expected deductible expenses and the allowance is in excess of the 66 cents per kilometre but only paid up to 5,000 kilometres:-

  • yes, you are required to withhold, but only for the amount which is in excess of the cents per kilometre rate.
  • you include the allowance separately in the allowance box in the payment summary

If the allowance is for expected deductible expenses and the allowance is equal to or below the 66 cents per kilometre rate and only up to 5,000 kilometres:-

  • no, you are not required to withhold
  • the allowance is included in the payment summary and shown separately in the allowance box.

If the allowance is for expected deductible expenses and the allowance is equal to or below the 66 cents per kilometre rate and in excess of 5,000 kilometres:-

  • yes, you are required to withhold for the payments but only those that are in excess of 5,000 kilometres
  • the allowance is included in the payment summary and shown separately in the allowance box.

What if you are paying a car allowance that is simply a set weekly, fortnightly or monthly amount to your employees for their expected deductible expenses, and is not in reference to the cents per kilometre rate? Well the treatment in this case is:-

  • yes, you are required to withhold on the entire amount
  • the allowance is included in the payment summary and shown separately in the allowance box.

If you need any further information, get in touch, we are happy to help!