When it comes to managing your business, there is one important aspect you need to get straightened out: your finances. Aside from the salary that your employees receive, they are also entitled to receive allowances for work-related travels and other duties they need to fulfill. However, it is easy to commit mistakes when important details are missed. For instance, a bookkeeper can confuse reimbursements for allowances when these are two different things. In order to avoid misclassifications, you need to make sure that everything is classified correctly. It should start with familiarizing yourself with allowances and how they should be given to your employees.
When are employees entitled for allowances?
The allowances are intended for giving employees extra spending money for work-related expenses. These are referred to as separately identified payments.
• Employees receive allowances for traveling away from home in the course of their duties.
• The allowances will also be given due to working conditions.
• The employee has special duties.
• Expenses have been classified as an employee’s tax deduction.
It is easy to confuse allowances for reimbursements but they differ in more ways than one. The employee will receive allowances for covering anticipated expenses. Whether or not the employee has incurred these expenses, the allowances will still be given. Once given, the employee can claim a deduction for the expenses and this is also considered as an assessable income.
Reimbursements are given to employees to cover expenses that have already been incurred. The fringe benefits tax (FBT) will also be shouldered by the employer. Once the reimbursement has been found to be an assessable income, it will be covered by FBT. Claiming a deduction will not be allowed for this type of expenses.
Paying allowances: what are the super obligations?
• When employees spent money on tax deductible items, they will receive expense allowances.
• Expense allowances and reimbursements are not part of the employee’s wages or salary. Hence, they should not be considered as ordinary time earnings. However, they can still be included in ordinary time earnings.
• Once employees work during non-working hours, they are automatically excluded from ordinary time earnings.
When do employees receive travel allowance?
• Employees who travel receive allowance to cover expenses for accommodation, food and drink.
• Employees are entitled for travel allowance for the expenses they incur on work-related travels.
The rates for travel allowance
The expenses that are covered by travel allowances are meals, accommodation and deductible expenses incurred during travel. The rates are only applicable for commercial establishments such as hotels, motels and serviced apartments if it was a domestic travel. If the employee has opted for another accommodation, the rates will not apply.
The employee’s summary report must show the amount that has been expended and these are part of the gross earnings. When it comes to claims, the amount that the employee receives will be based on the deductible expense. When preparing summary reporting, following the Tax Office tables can prevent serious errors. You should also gain a better understanding on the difference between allowances and reimbursements, which usually bring confusions to employers. Allowances and reimbursements are not one and the same. You just need to understand how each of them works to prevent misclassification.