An allowance is a payment made to an employee as part of a pay run. There are various types of allowances either to compensate them for unfavourable working conditions or to cover estimated expenses.
For ATO reporting purposes, there are nine allowance classifications:
Cents per kilometre allowance
Overtime Meal allowance
Award Transport Payments allowance
Travel & Accommodation Allowance
The Tool, Task, and Qualification allowances are new as part of Single Touch Payroll Phase 2.
To prepare for STP Phase 2, you’ll need to transition the allowances that fall into the three categories above:
For any existing Tool allowances, change the type from Other to Tools.
For any Task or Qualification allowances being paid as Ordinary Time earnings:
Create a new allowance pay item with the type Task or Qualification.
Mark the old pay item as inactive.
Remove any old pay items from pay templates and replace them with the new allowances created.
How to create a new allowance / assign the category to the allowance?
Step 1 - Click on "Settings" > "Payroll" > "Allowances"
Step 2 - Scroll down and navigate to the last page.
Step 3 - Click on "Add New"
Step 4 - Enter the name of the allowance and select the type "ATO Category" of the allowance, and add amount.
Check the box "Taxable ", if the allowances are Taxable
Check the box "Super", if super is calculated on the allowance amount
Check the box "Exclude from STP" if you wish the allowances to not be included in STP
Step 5 - Click on "Save" to save the changes.
We recommend that you check all your allowances to make sure the most relevant category is selected.
Below is a brief description of what each allowance includes. For more detailed information about each allowance type and what should and shouldn’t be included in each, you can refer to the ATO website.
Cents per kilometre allowance – This applies to expense allowances paid to employees using their own car at a set rate for each kilometre travelled for business purposes. This allowance represents the vehicle running costs including registration, fuel, servicing, insurance and depreciation.
Laundry allowance – This is an allowance paid to employees for washing, drying and ironing uniforms required for business purposes. Clothing must fall into one of the following categories:
Compulsory uniform – unique and distinctive to identify the employer with a strictly enforced policy that makes it compulsory for the uniform to be worn at work.
Non-compulsory uniform – only if the design of the uniform has been entered on the Register of Approved Occupational Clothing.
Occupation-specific clothing – that isn't every day in nature and allows the public to easily recognise the occupation.
Protective clothing and footwear – to protect against the risk of illness or injury posed by the activities undertaken to earn the income.
Overtime Meal allowance – This applies to allowances paid to compensate the employee for meals consumed during meal breaks connected with overtime worked.
Award and Transport payments allowance – This is an allowance for the total rate specified to cover the cost of transport for business purposes. ‘Total rate’ refers to a fixed dollar amount per unit of time (such as per day or per week), to cover the cost of transport, excluding travel or cents per kilometre reported as other separately itemised allowances. This is similar to the travel allowance, except that the transport payment measures time (per day or week) rather than the distance travelled (per kilometre).
Travel & Accommodation allowance – This applies to allowances that are paid for domestic or overseas meals and incidentals and domestic accommodation, undertaken for business purposes, which is intended to compensate employees who are required to sleep away from home.
This allowance isn’t a reimbursement of actual expenses, but a reasonable estimate to cover costs including meals, accommodation and incidental expenses.
Tool allowance – This applies to allowances to compensate an employee who is required to provide their own tools or equipment for business purposes.
Task allowance – This applies to the allowance of a service that’s paid to compensate an employee for specific tasks or activities performed that involve additional responsibilities, inconvenience or circumstances above the base rate of pay. This includes allowances such as first aid, height, danger, wet weather, confined spaces, and other similar tasks.
Qualification allowance – This applies to allowances that are paid for obtaining or maintaining a qualification that is required to perform the work or services. For example, registration fees, insurance, or license fees, are expected to be expended to maintain a requirement of the job.
It doesn't include allowances paid for performing additional duties just because those duties require a qualification or certificate. It also doesn’t include a direct reimbursement of the cost.
Other allowance – These are other allowances that are not otherwise separately itemised. These can either be deductible or non-deductible expenses.
Anything you report as Other allowance needs to have a description for the category of expense. These categories help the ATO assist your employees to complete their individual income tax returns.
The descriptions available are:
H1 (Home office)
V1 (Private vehicle)
For details about what can and can’t be included in each description, you can find out more here (ATO website).