How To Classify Your Allowances Correctly?

For employers, getting bookkeepers to ensure that financial activities including handling allowances are kept in check is a difficult responsibility to fulfill. In fact, it is one of the most complex areas that both employers and bookkeepers are trying to decipher. When you misclassify an amount, the impact on your business and your employees are going to be serious. There will be some corrections that need to be done so you can put your finances the way they should be. Why are there misclassifications on allowances and how can they be avoided? Misclassifications take place when the amount that employees expended are not identified correctly.

When are allowances given to employees?

Allowances are separately identified payments and they are given to employees for:

• Expenses that are work related such as traveling between work sites.
• Working conditions
• Expenses that are not considered as an employee’s tax deduction.
• Special duties or qualifications.

Allowances should not be mistaken or confused for reimbursements. Allowances are intended for covering anticipated costs and these are given whether or not the employee incurs these expenses. These are also considered an assessable income and they are already included in the employee’s tax return. The employee has the right to claim a deduction for the expense.

On the other hand, reimbursements are given to employees for the expenses they have already incurred. The employer may also shoulder the fringe benefits tax (FBT). The reimbursement is not considered an assessable income if it is covered by FBT. The employee cannot claim a deduction for this type of expenses.

Super obligations for paying allowances:

• Reimbursements and expense allowances are not considered wages or salary. They are not ordinary time earnings as well but can be included in ordinary time earnings.
• Employees will only be granted expense allowances if they have fully expended the money on items that are tax deductible.
• When employees are required to work during non-working hours, they will be excluded from ordinary time earnings.

Travel Allowance

• The expenses incurred when employees travel in the course of their duties.
• The expenses for food, drink accommodation and incidental while employees travel.

Reasonable rates for travel allowance

The travel allowances given to employees must also be compliant to the reasonable travel allowance rate for the following expenses:

• Meals
• Deductible expenses which are related to travel
• Accommodation

For domestic travel, the rates only apply in commercial establishments such as serviced apartments, motels and hotels. If another type of accommodation is used other than these commercial establishments, the rates will not apply.

In the event the allowance has not been fully expended, the amount must be recorded on the employee’s summary report and this should be part of the gross earnings. The employee must also show the allowance received as assessable income in their tax return. The claim will only be the amount of the deductible expense that the employee incurred. Tax Office tables can also be used for ensuring that the summary reporting for payment is error-free. Gaining a deeper understanding of how allowances should be handled can save you from committing some errors. You just need to be keen on details and be able to tell the difference between reimbursements and allowances.

Andrew Donnelly

Written by : Andrew Donnelly

Andrew Donnelly is a degree qualified accountant and registered tax agent. He is the principal of Brisbane Bookkeepers, which provides bookkeeping services to small businesses in Brisbane and its immediate surrounds.

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­ Questions? Give Andrew a call 0450 605 592