Allowance payments

Allowances can generally be separated in two broad categories namely, those which are intended to reimburse actual expenses incurred and those which relate in some way to the nature or location of the work itself.

 
 
 
Definition
 
Most modern awards prescribe monetary allowances to compensate for a number of different conditions and qualifications. These allowances are usually amounts paid to an employee in specified circumstances, for doing particular work or carrying certain responsibilities.
 
For those employees not covered by awards and agreements, their contracts of employment or company practice determines their level of entitlement.
 
Allowances can generally be separated in two broad categories; namely, those which are intended to reimburse actual expenses incurred (eg. tools, travelling, meals); and those which relate in some way to the nature or location of the work itself (eg disabilities, special skills, locality).
 
The reimbursement of expenses group of allowances are adjusted where appropriate in conformity with increases in actual costs, whereas the work-related group of allowances are generally adjusted proportionately with wage increases.

Any adjustment to allowances usually occurs as a consequence of the Fair Work Commission's decision in the Annual Wage Review. The operative date of the adjustment is generally the first pay period commencing on or after 1 July of each year.
 
 
Key issues
 
 
 
 
1. Types of allowance
 
 
 

A. All purpose allowance
 
It is a common provision in modern awards and enterprise agreements for an allowance to be deemed to be 'payable for all purposes. The effect of this is that the allowance is to be included in all calculations prescribed by the industrial agreement, such as overtime and penalty rates, and paid leave such as public holidays, annual leave and sick leave.
 
Allowances that are commonly of this nature include industry allowance, tool allowance, leading hand allowance, rostered shift allowance, qualification allowance and first-aid allowance, however, reference should be made to the relevant modern award or enterprise agreement to establish the nature of each allowance.
 
Work-related allowances are usually expressed in an industrial instrument as payable 'at the rate of $x etc', that is, payable at the same rate as the employee's ordinary weekly rate of pay. The allowance is therefore payable when the employee's ordinary weekly rate of pay is payable. (Expense-related allowances are generally not expressed this way.)
 
Allowances expressed as a percentage
 
Under modern awards, an allowance that could be classified as a ‘work-related’ allowance is usually expressed as a percentage of the prescribed ‘standard rate’ under the wages clause of the applicable award. This is a reference to a specific classification rate, rather than the particular classification that covers the employee’s duties.
Example
 
The ‘standard’ rate in the Manufacturing and Associated Industries and Occupations Award 2010 is the minimum hourly rate for the classification C10, which is currently $16.78 per hour. The first-aid allowance in the award is calculated on the basis of 75.6% of the standard rate per week extra, meaning the allowance is $12.69 per week. This amount is payable to an appointed first-aid attendant regardless of their classification under the modern award. This allowance is operative from 1 January 2010.
 
This means the amount of any allowance expressed as a percentage of a standard rate will increase when the standard rate is increased, usually consequent to the annual wage review which expected to operate from 1 July each year.
Reimbursement allowances — monetary figure
 
Most awards provide a category of allowance generally referred to as a reimbursement allowance. These allowances are usually expressed as a prescribed monetary amount rather than a percentage of the relevant standard rate in the award. However, at the time of any adjustment to the ‘standard rate’, each expense-related allowance must be increased by the relevant adjustment factor. The relevant adjustment factor for this purpose is the percentage movement in the applicable index figure most recently published by the Australian Bureau of Statistics since the allowance was last adjusted. The applicable index figure is the relevant Eight Capitals Consumer Price Index.
Example
 
The applicable consumer price index figure for meal allowance is the ‘take away and fast foods sub-group’, while for tool allowance it is the ‘tools’ component of the ‘household appliances, utensils and tools’ sub-group.
 
B. Call out allowance (work-related)
 
A call-out allowance is payable to employees who are rostered for call-out standby. Refer to the relevant award/agreement for the amount of the allowance. If no industrial instrument is in place, anecdotally a common amount is between $50-$70 per week. In addition, a kilometre allowance for use of private motor vehicle is also often paid for employees who are rostered on call-out. See the award/agreement rate, otherwise, again, anecdotally a rate of $0.50-$0.60 per km is common.
 
The pay office should keep a copy of the call-out roster to enable payment of the call-out allowance to be made.
 
C. Camping allowance (expense-related)
 
Where employees are required to reside away from home at places where accommodation is not available, camping facilities must usually be provided by the employer, and provision is usually made in such cases for the payment of a camping allowance of a specified sum.
 
D. Car allowance (expense-related)
 
Employees whose duties may require them to use a motor vehicle are frequently prescribed an allowance to compensate those who make their own vehicles available. Most commonly these allowances are expressed on a flat rate basis, but the actual amount prescribed differs considerably under different awards, agreements and contracts.
 
Issues which may arise where a car allowance is involved include the unfair dismissal salary cap and whether a car allowance is included in the definition of 'ordinary pay'.
 
Unfair dismissal salary cap
 
Two situations may occur:
 
Allowance is not 'remuneration'
 
A mileage or per kilometre allowance paid to an employee for the use of the employee's own private motor vehicle in the course of employment is not considered to be ''remuneration'. The federal, NSW and Queensland unfair dismissal jurisdictions impose a salary cap, so that an employee earning in excess of that limit is unable to bring an unfair dismissal action.
 
Provided that the extent of business use can be demonstrated with reasonable accuracy, an employee's remuneration is the relevant salary package less the amount referable to business use of the employee's motor vehicle.
 
Allowance is 'remuneration'
 
However, if the allowance is not reimbursement of expenses, then it will be considered to be 'remuneration'. Indicators of this situation are if the employee is not required to account for any of the expenses associated with the vehicle and is paid the same amount on a regular basis, regardless of vehicle usage or whether or not he or she is on leave.
 
In this circumstance, some of the car allowance will be counted as work-related and some will be considered to be private vehicle use (and therefore counted as remuneration). The proportion should be calculated as follows:
 
1. Determine the annual distance travelled by the vehicle.
 
2. Determine the percentage of the annual distance travelled which was for the employee’s private purposes.
 
3. Multiply the figures from 1. and 2. to provide the annual distance travelled for private purposes.
 
4. Estimate the cost per kilometre for a vehicle of the type used (obtain from motoring organisations).
 
5. Multiply the annual distance travelled for private purposes by the estimated cost per kilometre. The result is the value of the motor vehicle component of the applicant's remuneration.
 
 
Included in 'ordinary pay'?
 
'Ordinary pay' is an important concept as it is the basis for a number of other payments - especially various forms of leave. A car allowance is an 'expense allowance' and is generally excluded from ordinary pay under an industrial instrument, unless otherwise specified. Consult the individual award, agreement or contract to determine whether the car allowance is included for leave purposes.
 
Amount varies
 
Most commonly a car allowance is expressed on a flat rate basis, but the actual amount prescribed differs considerably under different awards and agreements. Generally, the term 'car allowance' means an allowance to meet whatever expense is incurred by the employee in providing a car and using it in the performance of his/her duties for the employer.
 
'Standing charges' and 'locomotion charges'
 
Some awards prescribe two kinds of car allowances, fixed 'standing charges' and 'locomotion charges' related to mileage. 'Locomotion charges' relate to the cost of petrol, tyres, greasing, lubricating oil and repairs. Standing charges represent the full cost to the travellers of registration, third party insurance, repainting and replacement of battery, a percentage of the cost of comprehensive insurance and a percentage of depreciation, spread over four years in diminishing amounts for cars under 20hp and over five years for cars over 20 hp. This is a common provision in all state travellers and related awards.
 
Tax issues
 
As with other allowances, car allowances are taxed as income for the employee, with a deduction being claimed for the business use of the car. As long as the business use can be substantiated by appropriate documentation, the allowance may be tax-free.
 
Reimbursement by an employer of an employee's car expenses would similarly be exempt from FBT to the extent that the expenses are business-related and have been documented.
 
If an employee is reimbursed on a cents per kilometre basis for the cost of using a car, such a benefit is exempt from fringe benefits tax but is taxed in the hands of the employee.
 
E. Climatic and zone allowance (work-related)
 
Awards regulating the employment of persons who may be required to work in remote localities frequently prescribe what are referred to as 'climatic allowances'. Whilst in some cases the climatic factor might be considered to warrant the payment of a special allowance, it is more common to find that disabilities such as the absence of various amenities (eg schooling, medical facilities) are the factors which are responsible for prescription of additional payments.
 
F. District allowance (work-related)
 
An award may prescribe an allowance where work is performed within certain areas of a State or Territory, that is added to the relevant weekly award rate.
 
G. First aid allowance (work-related)
 
Awards generally prescribe that where an employee is required by the employer to act as a first aid attendant an additional allowance is payable to such employee. However, the allowance is not generally payable to an employee who possesses a first-aid certificate but has not been appointed to perform first-aid by the employer.
 
H. Follow The Job allowance (work-related)
 
In occupations in which employees have normally no fixed place of employment, or where they are frequently required to change their usual place of working (eg in the building and construction industry), payment of fares and travelling time is usually prescribed apart from any provision for payment for distant work in the normal sense. Generally, such an allowance is prescribed as a formula, usually by multiplying the appropriate weekly rate by 52 and divided by 48.8.
 
I. Industry allowance (work-related)
 
This allowance usually applies in the building and construction industry (or other industries the nature of which involves work outside or non-factory work) because work in that industry has special features.
It is usually regarded as forming part of an employee’s ordinary pay for the purposes of that industrial instrument, unless provided for otherwise.

 
J. Leading Hand allowance (work-related)
 
An employee appointed as a leading hand or charge hand is generally an employee who, though not appointed as a foreperson/supervisor and not usually ‘on staff’, supervises (or assists in supervision) the work of a number of employees. The amount of the allowance usually varies depending on the number of employees supervised. Because the allowance is based on the employee’s additional responsibilities, it is usually payable for all purposes of the award although the modern award will usually specify the nature of the allowance. (See All-purpose allowances commentary above.)
 
 
K. Living Away From Home allowance (expense-related)
 
Many awards make special provision to compensate employees who may be required to spend time away from their normal place of residence due to work commitments. This may mean the employer paying reasonable board and lodging expenses incurred whilst the employee is away, or a 'living away from home' or 'distant work' allowance, where prescribed by the relevant award.
 
L. Meal allowance (expense-related)
 
Most awards provide that employees that are required to work overtime in excess of specified periods, in some cases without being notified the previous day or earlier, shall be supplied with a meal by the employer or paid a meal allowance. Provision is also made in some cases for the payment of additional allowances if the overtime extends into any subsequent meal time.
 
M. Shift allowance (work-related)
 
Where an industrial instrument provides for the working of shifts, compensation for doing so will be prescribed in the form of a shift allowance. These vary among industrial instruments and the type of shifts worked. A common provision in awards prescribes 15% (or alternatively a flat rate) for permanent or rotating afternoon shift, and 30% for permanent night shift. Employees on continuous shift work may receive only one rate for working all shifts or may receive a rate for working afternoon and night shift, eg 15%, but no loading for the day shift.
 
Normally, a shift allowance is not payable for any shift not worked, eg sick leave, public holidays, bereavement leave, workers compensation, etc unless otherwise specified by the relevant industrial instrument. This is because industrial tribunals regard a shift allowance as a penalty or disability payment which does not form part of ordinary pay, despite being payable for work performed during an employee's ordinary hours. Therefore, in the absence of a specific provision in the relevant industrial instrument, overtime is calculated on the employee's ordinary rate, exclusive of the shift allowance.
 
Under most awards shift allowances only apply during ordinary hours - they do not apply during overtime hours.
 
N. Site allowance (work-related)
 
In the building industry, industrial tribunals may award a specific allowance to apply on a particular building site. If such an allowance is awarded, it will usually apply in lieu of any disability allowances contained in the award.
 
O. Special rates (work-related)
 
To provide for cases where work is performed under unusually disagreeable or dangerous conditions, awards usually contain special or extra rates clauses prescribing additional allowances to meet such cases. These special rates are most commonly payable where work is performed in places unusually hot, cold, wet, dirty, unpleasant or unsafe, in confined spaces, in high places or underground.
 
When an employee performs work which may attract two or more special rates, the industrial instrument will normally provide that the highest rate applies to the work to the exclusion of the other rates. In addition, these special rates are not ordinarily taken into account when applying penalty rates for work such as overtime or public holiday work. The result is the special rates are added to the total after the penalty rate has been calculated.
 
P. Tool allowance (work-related)
 
It is customary in most trades for each tradesperson (and, in some cases, apprentices) to possess a kit of tools necessary to carry out most classes of work, but excepting those tools which are so unwieldy or heavy that they are difficult to carry about. The tool allowance is generally prescribed by an award to compensate for wear and tear on tools.
 
It is also common that this type of allowance is payable 'for all purposes of the award'. This means that the allowance is usually taken into account when applying any calculation contained in the award such as penalty rates, overtime, during periods of paid leave such as sick leave, public holidays, annual leave, etc.
 
 

2. Annual Leave — Payment when on leave
 
When taking annual leave, an employee is to be paid at their ‘base rate of pay’. This is defined by the National Employment Standards to mean an employee’s pay for their ordinary hours of work, excluding incentive-based payments and bonuses, monetary allowances, overtime or penalty rates, or any other separately identifiable amounts. Where an employee is covered by an award or agreement, you should refer to this to determine an employee’s rate of pay for the period of the annual leave (see below).
 
Modern awards
 
A modern award may provide annual leave conditions more favourable to an employee than the NES, including the ordinary pay an employee receives for a period of annual leave. This would override the NES provision of ‘base rate’ of pay.The ‘standard’ clause in modern awards usually defines ordinary pay to mean the employee’s wages for their ordinary hours, including allowances and loadings and penalties payable for all purposes of the award, first aid allowance, and any other wages payable under the employee’s contract of employment, including any over award payment.
 
Annual leave loading
 
Annual leave loading is a common provision in modern awards but is not provided for under the NES. The ‘standard’ annual leave loading provision in modern awards usually provides a 17 ½ per cent loading for day workers, calculated on the employee’s ordinary wage, including allowances, loadings and penalties, etc.  
 
All purpose allowances: where an industrial instrument describes an allowance as 'payable for all purposes of the award/agreement', this means the allowance is payable for, among other entitlements, a period of annual leave.
 
 

3. Long Service Leave — Payment when on
 
The critical issue concerning allowances when paying long service leave is whether they come under the definition of ordinary pay. Refer to the following checklist (summarising the ordinary pay definitions within federal awards and state/territory statutes):
 
Statute Definition
Federal awards (which provide for long service leave): Paid at the actual rate of pay, but would not generally include disability allowances, shift allowances, special rates, fares and travelling time allowances, and any other extraneous payments of a like nature
New South Wales: Long Service Leave Act 1955 [NSW] Include 'work-related allowances' which are skill-related, such as 'leading hand' etc
Victoria: Long Service Leave Act 1992 [Vic] Ordinary pay does not include shift allowances, disability allowances, height money, dirt money, etc.
Queensland: Industrial Relations Act 1999 [Qld] Ordinary pay does not include shift allowances, disability allowances, height money, dirt money, etc., but does include skill-related allowances, eg leading hand
South Australia: Long Service Leave Act 1987 [SA] Ordinary pay does not include shift allowances, disability allowances, height money, dirt money, etc., but does include skill-related allowances, eg leading hand
Western Australia: Long Service Leave Act 1958 [WA] Paid at the actual rate of pay excluding shift penalties and other loadings
Tasmania: Long Service Leave Act 1976 [Tas] Ordinary excludes disability allowance, meal allowance, fares and travelling allowance
Australian Capital Territory Long Service Leave Act 1976 [ACT] Ordinary pay includes any allowances paid in respect of skill, but excludes allowances which are not taken into account when calculating overtime.
Northern Territory Paid at the actual rate of pay, but would not generally include disability allowances, shift allowances, special rates, fares and travelling time allowances, and any other extraneous payments of a like nature
 
 
 
4. Redundancy — Payment when made redundant
 
Generally, redundancy pay is paid at the rate of a certain number of 'weeks' pay' for each completed year of service. This is usually defined as the ordinary rate of pay excluding overtime, penalty rates, disability allowances, shift allowances, special rates, fares and travelling time allowances, bonuses and any other ancillary payments.

5. 'All-in' payment of allowances
 
The practice of all-in payments is most common in the building industry to simplify a situation where employers would otherwise have to account for not only the hourly award rate, but for additional entitlements such as meal allowances, fares and travelling allowances, multi-storey allowances, location and discomfort allowances, not to mention weekend, holiday, and over time payments.
 
It essentially involves paying employees or subcontractors a fixed amount per day without adhering to the detail of the award and identifying the full range of award entitlements. (See Application by BWIU for variation re prohibition of alternative arrangements, NSWIRC No. 5406 of 1996).

6. Annualised salaries
 
This salary arrangement provides that an employee takes home a pre-determined and generally unvarying weekly proportion of a fixed annual salary, which has been calculated by projecting existing weekly wage rates, penalty payments and allowances set-out in the industrial instrument.
 
A key payroll question is: is the entire salary paid when the employee takes annual leave or long service leave? The employer should define in the industrial instrument the components of total salary that are included and excluded in calculating the leave payment. If there is no specific provision in the industrial instrument instrument, the total salary must be included for the purposes of calculating any entitlement based on ordinary pay, including annual leave and long service leave.
 
 
 

Tax issues
 
 
1. PAYG withholding
 
Generally, if an employer pays an allowance to an employee, tax must be withheld at the rate set out in the PAYG Withholding Schedules. The amount of the allowance must be reported on the employee's payment summary.
 
There are two important exceptions:
  • if the employer pays the employee a living-away-from-home allowance, this is a fringe benefit on which fringe benefits tax may be payable by the employer, and
  • if the employer pays a meal or travel allowance to an employee up to the 'reasonable amount' set by the Tax Office for the year, tax amounts do not have to be withheld and neither is the allowance reported on the employee's payment summary.
Allowances received by employees are treated as salary or wages for PAYG purposes and are taxed at marginal rates in the same way as salary or wages.

2. 'Allowance' versus 'reimbursement'
 
The Tax Office distinguishes between an 'allowance' and a 'reimbursement':
  • an allowance is when an employee is paid a definite predetermined amount to cover an estimated expense, even if the employee does not incur that expense - an allowance is generally taxable to the employee, but a deduction can be claimed for related expenses that are work related and that can be documented;
  • a reimbursement is when the employee is compensated exactly for an expense already incurred (or in some cases to be incurred in the future) - the employer may be liable to fringe benefits tax on a reimbursement, although the taxable value will be reduced if the reimbursement relates to work or business expenses.

If an employee is reimbursed by an employer on a cents per kilometre basis for the cost of using a car, the reimbursement is not a fringe benefit but is instead generally taxable to the employee.

Taxable allowances include the following:
  • cash allowances such as overtime payments, travel allowances and uniform allowances,
  • a housing allowance subsidy paid for the employee's principal residence,
  • a location allowance paid to attract employees to live and work in remote areas, and
  • overtime meal allowances.
Caution on reimbursement allowances
 
While an allowance may appear as a reimbursement allowance in an industrial instrument, the Australian Tax Office’s (ATO) treatment of an allowance depends on its actual usage.

For example, some years ago a dispute happened between the ATO and building unions over the taxation treatment of the ‘fares and travelling’ allowance prescribed in various building and construction industry industrial instruments. The problem involved the nature of the allowance — it was payable regardless of whether an employee travelled at their own expense to a building site. Indeed, the only instance when the allowance was not payable to an employee was where the employee was ‘chauffeured’ to and from the building site, at no cost to the employee.

The ATO determined the allowance formed part of an employee’s ordinary pay, because the nature of the allowance was not recompensing an employee for expenses incurred during the course of their employment.
 
Because of this, payroll officers should be careful in identifying the nature of each particular allowance payable under an employee’s industrial instrument or contract of employment to avoid issues with the ATO.
 
3. Allowances and superannuation guarantee obligations
 
The difference in the nature of allowances is important in that reimbursement allowances are generally not subject to income tax and are not included in the 9% employer contribution under the Superannuation Guarantee (SG). Work-related allowances however, are usually regarded as ‘ordinary time earnings’ for the purposes of calculating an employee’s income tax and SG. Note that employer contributions are increasing from 1 July 2013  - see details on these increases.
 
If an employer fails to contribute the required amount, work-related allowances are also taken into account when calculating the SG charge payable.
 
4. Taxation Rulings
 
The ATO releases information on what are reasonable amounts for work-related allowances (eg meal allowance when working overtime and travel allowances) for the current tax year.

The reasonable amounts for 2011/12 are set out in Taxation Determination TD 2011/17 and in Taxation Determination TD 2012/17 for 2012/13. An allowance up to the reasonable amount does not have to be included in the taxpayer’s tax return provided it is fully spent and no deduction is claimed.
 
 

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