Allowance vs Reimbursement

It’s important to distinguish between payments which are allowances versus reimbursements. The character of an amount as an allowance or a reimbursement has implications in an array of different tax areas, including:

the deductibility of the payment to the payer
the assessability of the payment to the recipient
the application of fringe benefits tax
the application of GST
the inclusion of the amount as ordinary times earnings with a consequential superannuation guarantee contribution obligation.

We have addressed each of these matters in this article.

Although not covered in this article, you should also have regard to any payroll tax implications.

What is an allowance or reimbursement?

Broadly, an allowance is a definite sum of money allotted or granted to meet expenses or requirements. It involves the payment of a predetermined amount to cover an estimated expense and is paid regardless of whether the recipient actually incurs the expected expense. On the other hand, a reimbursement is a refund / repayment for an expense incurred. The recipient is compensated precisely for the expense they incurred.

In TR 92/15, the ATO provides views on the differences between the two concepts from an income tax perspective. A payment will tend to be an allowance where:

it is for a definite predetermined amount to cover an estimated expense; and
it is paid regardless of whether the recipient incurs the expected expense; and
the recipient has the discretion whether or not to expend it.

Conversely, a payment will tend to be a reimbursement where:

the recipient is compensated exactly (not approximately) for an expense already incurred; and
the provider considers the expense to be its own; and
the recipient is required to vouch expenses; and
the recipient is required to refund unexpected amounts back to the provider.

TR 92/15 also provides the following example to demonstrate the difference between allowances and reimbursements:

Danielle and Thomas are both employees of Faraway Investments Pty. Ltd. Apart from her usual salary, Danielle, an investment consultant, is paid $500 per month to cover expenses she is expected to incur while entertaining clients. Under an industrial award, Danielle also receives $50 per fortnight to cover medical insurance premiums for herself and her family. To be entitled to the $50 per fortnight, Danielle is required to produce a letter from the health fund certifying that she is a member. Apart from that, she is not required to vouch any of the expenses incurred in relation to both payments. Thomas, a bookkeeper, is entitled to payment for medical insurance premiums for himself and his family up to a limit of $300 per year. To claim the amount from his employer, he is required to produce his insurance premium statements to his employer verifying the amount incurred by him in relation to those premiums. The payments made to Danielle for entertaining clients and for medical insurance are allowances. Danielle is paid regardless of whether she spends the $500 on clients and whether she spends the whole $50 on medical insurance. On the contrary, the payments made to Thomas are reimbursements. He is compensated exactly for his medical insurance and would not be entitled to payment if he is unable to vouch his claim. The upper limit of $300 per year does not alter the character of the payment. The payment is based on the precise accounting of actual expenditure.

As you can probably see, an allowance is designed to compensate the recipient because the payer does not wish to be under the obligation of meeting such expenses directly or indirectly. Conversely, a reimbursement transfers the burden of expenses actually incurred from the recipient to the payer.

Note that a payment can still be a reimbursement where the expense being refunded is already incurred by the recipient but not yet paid.

For simplicity, from here onwards we will refer to the payer of an allowance or reimbursement as the employer and the recipient as the employee.

Though keep in mind it is possible for allowances and reimbursements to occur outside of an employment relationship. That said, fringe benefits tax and superannuation guarantee contributions are only applicable where the relevant relationship is defined (under those regimes) as an employment relationship.

Income tax treatment

Generally, an allowance payment is deductible to the employer under section 8-1 of the ITAA in the income year it is incurred and included in the assessable income of the employee under section 6-5 of the ITAA in the income year it is derived. The employee might also be able to claim a deduction under section 8-1 (or another provision, if applicable) over amounts of the allowance they spend for deductible purposes.

Take the example of an employer who provides an employee a $1,000 allowance. The employee subsequently purchases a $1,000 item which is entirely deductible in the year of purchase. Here, the employer will be entitled to a $1,000 deduction for the allowance paid. The employee will be assessed on the $1,000 allowance in the income year they derive the allowance. They will then be eligible to claim a $1,000 deduction on the allowance monies spent in the income year the expense is incurred.

The meaning of incurred is addressed by the ATO in TR 97/7. The meaning of derived is addressed in TR 98/1.

For a reimbursement, the employer may be entitled to a deduction for the payment under section 8-1 (or another provision, if applicable) if the expense incurred by the employee incurred was a deductible expense. The employee is not entitled to a deduction for the monies expended, nor are they assessed on the reimbursement payment.

Take the example of an employee who spends their own money to purchase an item for $1,000 which is entirely deductible in the year of purchase. The employer subsequently reimburses the employee. Here, the employer is entitled to a $1,000 deduction under section 8-1 for the reimbursement paid. The employee is not assessed on the $1,000 received as a reimbursement nor are they entitled to a deduction for the $1,000 which spent on the deductible item.

PAYG withholding requirements

Most allowance payments carry a PAYG withholding obligation. There is no PAYG withholding obligation for reimbursements.

You will see that withholding tends to apply to certain allowances only once those allowances exceed reasonable limits or at the point where the allowance amount exceeds the maximum deduction an employee could claim for the item the allowance is intended to cover.

The reasonableness of travel and overtime meal allowance expenses is published by the ATO on a yearly basis. Refer to TD 2024/3 for guidance applicable to the 2024/25 income year. The ATO also provides guidance on the following:

when employee transport expense is deductible – see TR 2021/1
when employee work expenses are deductible – see TR 2020/1
when laundry expenses are deductible – see TR 98/5

The table below (adapted from the ATO website) sets out different types of allowances and shows whether PAYG withholding applies.

Allowance type	PAYG withholding required
Working conditions, qualifications or special duties allowance	Yes
Non-deductible expenses	Yes
Deductible expenses	Yes
On-call allowance (ordinary hours)	Yes
On-call allowance (outside of ordinary hours)	Yes
Cents per kilometre car expense payments using the approved rate – payments made by applying the approved (or lower) rate to the number of kilometres travelled up to 5,000 business kms	No
Cents per kilometre car expense payments using the approved rate – payments made by applying the approved (or a lower) rate to the number of kilometres travelled in excess of 5,000 business kms	Yes (from payments for the excess over 5,000 kilometres)
Cents per kilometre car expense payments using the approved rate – payments made at a rate above the approved rate for distances travelled up to 5,000 business kilometres	Yes (from the amount which relates to the excess over the approved rate)
Award transport payments that are deductible transport expenses	No
Award transport payments that are non-deductible transport expenses	Yes (from total payment)
Laundry (not dry cleaning) allowance for deductible clothing up to the threshold amount	No
Laundry (not dry cleaning) allowance for deductible clothing over the threshold amount	Yes (from the excess over the threshold amount)
Award overtime meal allowances up to reasonable allowances amount	No
Award overtime meal allowances over a reasonable allowances amount	Yes (from the excess over the reasonable allowances amount)
Domestic or overseas travel allowance involving an overnight absence from employee’s ordinary place of residence – up to a reasonable amount	No
Domestic or overseas travel allowance involving an overnight absence from employee’s ordinary place of residence – over a reasonable allowance amount	Yes (from the excess over the reasonable allowances amount)
Overseas accommodation	Yes

If an allowance is absorbed into the salary or wages of an employee, then withholding applies to that allowance irrespective of the rules set out in the above table unless an exception applies, such as:

the employer expects the employee to spend all of the travel allowance paid on accommodation, food, drink or incidental expenses
the employer shows the amount and nature of the travel allowance separately in accounting records
the travel allowance is not for overseas accommodation
the amount of travel allowance amount is less than, or equal to the reasonable travel allowance rate.

A brief note on motor vehicle reimbursements. Obviously, it is impossible for an employer to determine the exact cost to an employee for use of their personal vehicle. As a result, it is accepted that a payment will be a reimbursement where it matches the expense to the employee by reference to the statutory formula e.g. the cents per kilometre method. Put another way, the payment towards an employee of a number of cents per km (in respect of an employee’ use of their motor vehicle) will be treated as a reimbursement where it aligns with the statutory formulas (e.g. the cents per km method) which are designed to estimate expenses for car travel. That is, the statutory formulas provide the most appropriate indication of costs which must be repaid for there to be a reimbursement.

Take the example of an employer who pays an employee $880 for 1,000km of travel (based on the 2024/25 income year rate which is which is 88c per km). That payment will be treated as a reimbursement as it accords with the statutory method for valuing costs expended by the employee for use of their vehicle.

FBT

Allowance payments are not fringe benefits. However, an employer may be liable for fringe benefits tax on reimbursement payments as these have the potential to constitute an expense payment fringe benefit. This is where an employee incurs an expense and the employer reimburses the employee or directly pays a third party.

FBT may not be applicable where the expense payment is for an exempt benefit. For example, where an expense is for a minor benefit, or relates to the purchase of certain work-related items such as a laptop, trade tools or protective clothing.

In addition, the taxable value of the expense payment fringe benefit – generally the amount reimbursed or paid – may be reduced to the extent the employee could have claimed a deduction for the expense if they had not been reimbursed. This is referred to as the otherwise deductible rule. Take the example of an employer that reimburses an employee for an expense incurred. The expense incurred would have been entirely deductible to the employee. Here, the taxable value of the expense payment fringe benefit is reduced to nil. Thus, no FBT liability arises in relation to the reimbursement. Let’s instead assume that 40% of the reimbursed expense was deductible on the basis that the purchased item was to be used 40% for work use and 60% for private use. Here, the taxable value of the expense payment fringe benefit would be $600 ($1,000 – $400).

The taxable value of a fringe benefit can also be reduced if the employee incurred the expense to acquire goods or services from the employer’s business or where other concessions apply, such as:

remote area reductions
transport reductions
relocation reductions.

GST

Generally, there is no GST on an allowance paid to an employee. However, the employer, if registered for GST, may be entitled to claim input tax credits for reimbursements where GST is included in the price of the good or service. The credit typically arises in the BAS period in which the employee provides a tax invoice (or receipt) over the expense.

Take the example of an employee who acquires an item for $550 with a GST component of $50. The employee produces a tax invoice for the employer who subsequently reimburses the employee the full $550. Here, the employer may claim $50 as an input tax credit on the relevant BAS.

However, the employer may not claim an input tax credit where any of the following apply:

the expense has a non-deductible purpose, such a non-deductible entertainment
the reimbursed expense relates to input tax sales made in carrying on the business and the financial purchases threshold is exceeded
the expense is a notional expense such as a reimbursement to cover an employee’s work-related use of their car where the expense is estimated by reference to kms travelled.

Super Guarantee Contributions

Generally, an employer is not required to make superannuation guarantee contributions to employees on reimbursements as these are not considered a reward for service which is a requisite for a payment to qualify as salary or wages and thus qualify as ordinary time earnings. Remember that superannuation guarantee contributions are only required in respect of ordinary time earnings.

On the other hand, allowances are generally recognised as a reward for service and therefore fall within the extended definition of salary or wages and the definition of ordinary time earnings. That said, the following types of allowances will tend not to attract superannuation contribution obligations:

expense allowances which are allowances paid with a reasonable expectation that the employee will fully expend the money in the course of providing services;
allowances that are fringe benefits;
allowances that are wholly attributable to work performed outside of ordinary hours e.g. allowances for being on-call outside of ordinary hours.

Also note that an employer may make a payment in advance to an employee to enable them to expend an amount of money. If the employee is required to account for any unspent monies, the payment is neither an allowance nor a reimbursement (at least for super guarantee purposes). Instead, the employee expends the money as an agent for the employer and the relevant amount does not constitute ordinary time earnings.

Refer to SGR 2009/2 for further information on SG obligations in the context of reimbursements and allowances.

This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.