Business Tax Tips – Allowances in STP2 Australia
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Published on Thursday, 17 October 2024 13:47
Allowances are typically designated sums that are added to a predetermined salary. These amounts are clearly specified and pertain to various categories such as:
- Working conditions, e.g., danger and height allowance;
- Qualifications or special duties, e.g., first aid officer, leading hand;
- Expenses not claimable as a tax deduction, e.g., travel from home to work;
- Work-related expenses that can be claimed as a tax deduction, e.g., travel between work sites.
It's important to note that not all allowances are subject to Pay As You Go Withholding (PAYGW) or Superannuation Guarantee (SG) contributions.
Generally, deductible expenses are listed separately on the Income Statement in an allowance section and do not incur SG, as these allowances are not classified as Ordinary Time Earnings.
In the context of STP2, allowances are usually reported individually and are fully detailed on the income statement. However, it is advisable to verify the specifics for each allowance provided.
General Principles for Tax and SG Requirements
PAYGW
PAYGW applies generally when you make a payment to an employee.
PAYGW applies to allowances when:
- They are occupation, qualification, working conditions type allowances;
- They are allowances for non-deductible expenses;
- The employee is entitled to a tax deduction at the end of the year for the allowance paid.
- Example: Tool Allowance: the employees are able to claim the expenses at the end of the year therefore PAYGW applies.
- Refer to the table included below.
Superannuation
Superannuation applies when the allowance is not a deductible expense and qualifies as ordinary times earnings and generally applies to those allowances that relate to work conditions, qualifications, tasks, and special duties.
- Example: Height, danger and first aid officer allowances fall into this category as there is no deduction at the end of the financial to the employee.
When Doesn’t PAYGW or SG Apply?
There are some allowances that the ATO defines a threshold (a reasonable amount limit). Regarding these allowances amounts up to the threshold PAYGW or SG don’t apply.
- Example: Cents per kilometre. The ATO defines the threshold of this allowance and PAYGW or SG is not payable. However, once an allowance goes over that limit, generally as per award, that difference is taxable. In this instance a second wage line will need to be created to capture the amount over the limit so that it can be taxed appropriately. In these cases, SG is not applicable.
ATO Defined Allowances
There are 2 allowances that the ATO allocates a reasonable amount to, where there is no PAYGW, SG, requirement to allocate to an STP field and are not reported on the Income Statement. Current allowances that fall under this requirement are:
- Award overtime meal allowance.
- Domestic or overseas travel allowance involving an overnight absence.
For amounts paid over the reasonable allowance PAYGW will apply and the allowance will be reported on the Income Statement on the difference.
Source: Withholding for allowances | Australian Taxation Office
In a Single Touch Payroll environment and definitely with STP2 the allowances are typically reported separately, and all disclosed on the income statement. However, you should check the details for each allowance paid.
Note:
- ATO have confirmed – Allowances are included on the BAS at label W1 if they are reported on the income statement even if there is not a requirement to withhold PAYGW.
- Review the relevant award or agreement for clarification of allowance rates and conditions.
- Exempt component is calculated E = K × R (K = business kilometres, R = exempt rate derived from income tax legislation). If paying this type of allowance seek guidance from tax agent regarding correct treatment
ATO Policy
ATO policy now is that these components are required to be reported separately if the allowances are identifiable. The breakdown of these allowances can generally be found under the Fair Work Pact Calculator.
The reasoning behind this is because, different components previously reported within gross have different treatment by Services Australia (as well as the ATO in regard to OTE/SG) and flow on impacts on the use of the information by the employees and their practitioners when completing tax returns.
Examples:
- SG being paid on an allowance where the allowance is not part of salary and wages for SG as it is expected that the allowance will be expended by the employee. E.g.: Tool allowance;
- Services Australia includes this allowance in the employee’s income when it is excluded as it is expected to be expended by the employee;
- Tax Agents won’t have visibility of the allowance when completing employee’s completion of their tax return;
- ATO can’t assist employee preparing their own tax with tailored information relating to claiming work related expenses;
- ATO may question work related expense claims where there is no allowance and it is common for the industry.
Single Touch Payroll – Phase 2
STP2 imposes additional reporting requirements for Allowances.
You will now need to report all allowances separately in your STP Phase 2 report across most income types, not just expense allowances that may have been deductible on your employee’s individual income tax return.
This means that allowances previously reported as gross must now be separately itemised and reported.
Don’t report
Reimbursements: These are an amount that reimburses an expense which was (or will be) incurred by the employee in the course of their duties and can be verified by receipts.
Types of Allowances
- Cents per km (allowance type CD).
- Award transport payments (allowance type AD).
- Laundry (allowance type LD).
- Overtime meal allowance (allowance type MD).
- Domestic or overseas travel (allowance type RD).
- Tool allowances (allowance type TD).
- Qualification and certification allowances (allowance type QN).
Task allowances (allowance type KN).
Other Allowances
(Allowance type OD). Description required here also.
- G1 (general). Laundry allowances for the cost of laundering deductible conventional clothing.
- H1 (home office). Home office equipment allowances. Internet allowances.
- ND (non-deductible). Cents per km payments for private travel such as travel between home and work. Allowance payments for the cost of transport for private purposes.
Laundry allowance for the cost of laundering uniforms for private purposes. Part-day travel allowances. Allowances paid in relation to equipment used for private purposes.
- T1 (transport/fares). Allowance payments for the cost of transport for business related travel not traceable to a historical award in force on 29th October 1986.
- U1 (uniform). Allowances paid for the purchase of a uniform.
- V1 (private vehicle). Cents per km payments for vehicles other than a car such as a motorbike or van. Flat rate car allowance that is referable to the kilometres travelled.
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