Allowances and payroll tax
All allowances paid to employees are generally liable for payroll tax in New South Wales. An exemption is available on some allowances up to specified amounts.
What are allowances?
Allowances are paid by employers to:
- compensate employees for unfavourable working conditions, or
- cover an employee’s work-related expenses.
Allowances are often paid to comply with award requirements and are paid for a wide range of items. Some common examples of allowances are:
- motor vehicle
- accommodation
- tools
- meals
- travel
- dirt, and
- first aid.
Please note
References to an employee include a person taken or deemed to be an employee, such as a contractor under a relevant contract.
How allowances are treated for payroll tax
All allowances paid or payable to an employee are generally liable for payroll tax. See section 13 of the Payroll Tax Act 2007 (PTA).
However, an exemption is available for some allowances up to specific amounts. See sections 29 and 30 of the PTA.
Allowances with exemptions
Allowances with an exemption are not subject to payroll tax if the amount paid or payable is less than or equal to the exempt component.
Payroll tax only applies to the amount exceeding the exempt component.
The main allowances that have an exemption are accommodation allowances and motor vehicle allowances.
Reimbursements
Reimbursements paid or payable to an employee are not usually liable for payroll tax.
However, if a reimbursement is a fringe benefit, the taxable component of that fringe benefit, if any, is liable for payroll tax.
What you need to do
Calculate the exempt component
You will need to use specific formulas and refer to rates published by the Australian Taxation Office.
The calculation method varies depending on the allowance.
Read accommodation allowances or motor vehicle allowances for more details on how to calculate the exempt component.
Declare allowances
Add the total taxable amount of all allowances paid to workers to the “Allowances” field in your payroll tax returns.
It is important that you correctly include all liable allowances in your returns. Errors may result in the underpayment of payroll tax, which is also known as a tax default.
Interest will be imposed on any underpayments. Your business may also be liable for penalty tax. Read the interest and penalty tax page for more details.
Always maintain relevant records and working papers showing how your allowances were calculated. Records and working papers must be:
- retained for at least 5 years
- sufficient for a payroll tax liability to be properly assessed
- in English, or a form easily translated to English, and
- readily available to us if requested, for example as part of a payroll tax audit.
Voluntary disclosure
Contact us to make a voluntary disclosure if you have not declared all liable amounts in your monthly and/or annual returns, including previous financial years.
Voluntary disclosures attract a reduced level of penalty tax compared to cases where we identify an underpayment. Interest will still be imposed.
Non-compliance identified through our data matching activities will result in penalty tax and interest charges, in addition to any underpayments detected.
Common errors with allowances
Payroll tax audits have found most common errors relate to motor vehicle allowances, accommodation allowances, and living away from home allowances.
Read accommodation allowances or motor vehicle allowances for more details on these errors.