Staff Reimbursements and Allowances

On a busy payday, "reimbursement" and "allowance" get used as if they were the same thing. In the payroll rules they are very different, and mixing them up changes what appears on an employee's income statement, what tax is withheld, and sometimes what super is owed.

The distinction is simple to state. A reimbursement repays an employee the exact amount of an expense they actually incurred for the business, supported by a receipt. An allowance is a fixed amount paid because an employee is expected to incur costs or work in certain conditions — whether or not they actually spend it. The label on the pay run does not decide which one you have; the substance does.

How reimbursements are treated

• Not wages. A genuine reimbursement is generally not assessable income to the employee and does not go through the pay run as earnings.
• Generally no withholding and no super. Because it is not income, there is generally nothing to withhold, and a true expense reimbursement generally does not form part of ordinary time earnings — check the current ATO guidance for the specific payment before relying on this.
• The receipt is the point. Keep the employee's receipt attached to the payment. Without one, you are not repaying a documented business expense — you are just paying money.
• Watch the fringe benefits angle. Reimbursing a private or mixed-use expense can create a fringe benefits question, so keep the business purpose clear on the record.

How allowances are treated

• They are wages. Allowances go through payroll, appear on the payslip, and are reported through Single Touch Payroll — under STP Phase 2, most allowances are reported separately by type rather than rolled into gross.
• Withholding usually applies. Many allowances have tax withheld like ordinary salary, though some — such as travel and cents-per-kilometre car allowances — have their own treatment up to certain limits, so check the current ATO withholding guidance for the allowance you are paying rather than assuming.
• Super depends on the type. Some allowances count towards ordinary time earnings and attract super, others do not — again, check the current classification for the specific allowance.
• Awards often set them. Tool, travel, meal, uniform and first-aid allowances are frequently required by the applicable award at prescribed rates.

Fuel, tools and phones in practice

The same cost can be either, depending on how it is paid. An employee who submits fuel receipts for business trips and is repaid those amounts is being reimbursed. An employee paid a set weekly amount for using their own vehicle is receiving a car allowance, and it belongs in payroll. Repaying the invoice for a specific drill is a reimbursement; a standing tool allowance under a trades award is wages. Covering part of a phone bill against an itemised account leans towards reimbursement; a flat monthly phone amount is an allowance.

What we commonly see go wrong

• A flat weekly "reimbursement" with no receipts behind it. However it is labelled, a fixed amount paid regardless of actual spend is an allowance and belongs in the pay run.
• Allowances paid outside payroll — direct bank transfers that never reach STP, discovered when the income statement does not match the bank.
• Generous "reimbursements" used as a quiet wage top-up. That understates wages, withholding and potentially super, and it unravels badly in a payroll review.
• Award allowances simply missed, creating an underpayment that compounds every pay cycle.

A worked example

As an illustration: a plumbing business pays each tradesperson a set amount every week, described in the bank as a fuel reimbursement, with no receipts collected. In a payroll review it is treated as what it is — a car allowance. It should have been going through STP, generally with tax withheld, and its super treatment should have been checked. The catch-up involves amended reporting, potential back super, and awkward conversations with staff whose income statements change. Set up as an allowance in the payroll software from the first pay, the cost to the business would have been almost identical — without any of the clean-up.

When to get help

If money regularly leaves the account for staff outside the pay run, if you cannot say which of your payments are allowances and which are reimbursements, or if an award allowance question has come up, it is worth a one-off review of how the pay items are set up. Recoding a handful of pay items is quick; unwinding a year of misreported payments is not.

Does a reimbursement appear on the employee's payslip or income statement?

Generally no. A genuine reimbursement of a documented business expense is not treated as the employee's income, so it sits outside wages and STP reporting. The moment it becomes a fixed amount paid without receipts, it is an allowance and belongs in payroll.

Do I have to withhold tax from a car allowance?

Often yes, but car and travel allowances have their own withholding treatment up to certain limits, and the rules are detailed. Check the current ATO guidance for the specific allowance, or ask your bookkeeper to set the pay item up correctly once.

Can I just pay everything as a reimbursement to keep things simple?

No. A payment only qualifies as a reimbursement if it repays an actual, documented expense. Fixed regular amounts are allowances regardless of the label, and treating wages as reimbursements understates payroll, withholding and potentially super.