Withholding on allowance

 Author: PayrollDeanne(Taxicorn)Taxicorn

ATO Certified Response9 Aug 2023

Hiya @Olivia_82 👋

MA000100 SCHADS Clause 20.7(a) does state the rate as 0.96/km but is read in conjunction with Clause 20.1 that states the expense allowances are adjusted periodically as per the ABS CPI for the Private motoring sub-group. The CPI-adjusted figure for June 2023 is now 0.92/km. Refer to the FWC Modern Awards Pay Database for easy reference, using the Expense-related allowances file. Payroll is complex!

Now to your core issue about how to manage the tax, super and reporting requirements for c/km allowance. I agree that the ATO Withholding for Allowances guidance is not helpful. 🥴 Hopefully, one day soon, they will fix it.

In the meantime, let me summarise the employer process to pay c/km allowance like this:

1. Clauses in industrial instruments define when and how much to pay. In your case the 0.96 --> now 0.92 per km traveled
2. How to tax that payment is defined by the ATO, as there are certain conditions that, if met, will enable the PAYGW to be varied on this allowance:
   1. Purpose - the PAYGW may be varied if the purpose of the travel is for "business" purposes, where they explicitly define what they mean by that. If the purpose is not "business", typically such as travelling between home and work, then the payment is fully taxed and no need to check the other conditions. If it is business, then check the next condition:
   2. Vehicle - the PAYGW may be varied if the business travel is in a car that is owned, leased or hired by the employee. For example, if they are traveling in a 1T ute, that's not a car, then the payment is fully taxed and no need to check the other conditions. If it is a car owned, leased or hired, then check the next condition:
   3. Rate - the PAYGW may be varied on the amount of the rate that doesn't exceed the ATO reasonable rate. For example, if you pay 0.96 --> 0.92/km, then for the first 0.85 (2023/2024), no PAYG is withheld, but for the remaining 0.11 --> 0.07/km is taxed up to the limit:
   4. Limit - the PAYGW variations identified above in c. only apply for 5,000 business km PAID in the FY (1 July to 30 June), regardless of the date of travel. That is, you apply the PAYGW variations only up to 5,000 km, thereafter all payments are fully taxed. This acts like a cap to the tax concessions.
3. Super guarantee is based on OTE. Therefore, the considerations are:
   1. Ordinary Hours - is the payment in respect of ordinary hours of work? If not, it's not OTE and not superable. If it is, then the next consideration:
   2. Fully Expended - as you are paying a rate as stipulated in the Award, the allowance amount has been assessed as being fully expended, therefore it's not OTE and not superable.

These are now and have always been the ATO requirements on how to tax c/km allowances. Not easy, or simple and their guidance is lacking, but this is the obligation to withhold. Yes, you must follow these ATO instructions about how to tax these payments. Yes, you must track the km paid per FY in order to correctly tax the payments.

Most employers use the claim form where the employee claims the c/km allowance, to ask the questions that define if the condition is met or not. That will inform which pay codes to use, and those pay codes are set up correctly for tax, super and reporting purposes. Those pay codes also track the km against the limit for those pay codes that satisfy the conditions to vary the PAGYW. Check with your payroll product provider to determine how to do that in their product.

For STP2, those conditions inform how to report the payments, as there are three possible places to report c/km allowances, depending on the outcome of those conditions.

Payroll is COMPLEX! 😵

#ckm

Deanne