Our employees award rate for cents per kilometre is 96 cents where as the ATO rate is 85 cents per kilometre should payg tax be withheld on the full amount paid to the employee as over the ATO rate
4,419 views
4,419 views8 replies
8 replies
4,419 views
8 replies
Hiya @velworthy 👋
This is still the most popular question asked by employers! Probably due to the poor ATO guidance on Withholding for Allowances 😵 (maybe they will update it one day so that payroll can get it right?)
First of all, all allowances are payments subject to withholding as per the tax tables. However, the Legislative Instrument identifies that specific deductible expense allowances, if the conditions are met, have the PAYGW varied to nil.
The conditions for c/km allowances are:
- Purpose - the ATO narrowly defines what it means by "business" purpose, as defined in TR 2021/1. If the purpose is not business, then it is fully taxed, as the condition is not met and it is reported in STP2 as Other Allowance > ND non-deductible. If it is for a business purpose, then check the next condition.
- Vehicle - the ATO defines the condition as a "car that is owned, leased or hired" by the employee. If it is not a car or not owned, leased (excludes novated lease) or hired, then it is fully taxed, as the condition is not met and it is reported in STP2 as Other Allowance > V1 private vehicle (if novated lease, > ND non-deductible). If it is for a car that is owned, leased or hired, then check the next condition.
- Measure - the ATO have two measures to determine PAYGW variations to nil:
- Rate - 85 c/km. If the prior conditions have been met (1-2) then the first 85 c/km of your rate has no PAYGW up to the limit (see b). If your rate exceeds this, as yours does, this means that 85c/km has no PAYGW and the additional 11c/km is taxed as per salary and wages. Up to the limit:
- Limit - capped at 5,000 business km PAID in the FY, no matter the rate paid, no matter the actual date of travel. This means that if your rate does not exceed the ATO reasonable rate and you vary the PAYGW to nil, that variation can only apply for 5,000 km. Thereafter, it is taxed as per salary and wages. If you pay in excess of the ATO reasonable rate, the variation of PAYGW on the part that doesn't exceed the ATO reasonable rate/km only applies for 5,000 km. All rates and limits (where the first 2 conditions are met) are reported in STP2 as CD Cents per Kilometre
When it comes to super guarantee, because you pay the rate stipulated in an Award (and not a higher rate), then the expense allowance is expected to be fully spent and is therefore not OTE and no super is payable. Refer to SGR 2009/2 P72.
By reporting it as income, your employees may claim (other than for ND) the deduction on their tax returns.
Deanne
All replies
Hiya @velworthy 👋
This is still the most popular question asked by employers! Probably due to the poor ATO guidance on Withholding for Allowances 😵 (maybe they will update it one day so that payroll can get it right?)
First of all, all allowances are payments subject to withholding as per the tax tables. However, the Legislative Instrument identifies that specific deductible expense allowances, if the conditions are met, have the PAYGW varied to nil.
The conditions for c/km allowances are:
- Purpose - the ATO narrowly defines what it means by "business" purpose, as defined in TR 2021/1. If the purpose is not business, then it is fully taxed, as the condition is not met and it is reported in STP2 as Other Allowance > ND non-deductible. If it is for a business purpose, then check the next condition.
- Vehicle - the ATO defines the condition as a "car that is owned, leased or hired" by the employee. If it is not a car or not owned, leased (excludes novated lease) or hired, then it is fully taxed, as the condition is not met and it is reported in STP2 as Other Allowance > V1 private vehicle (if novated lease, > ND non-deductible). If it is for a car that is owned, leased or hired, then check the next condition.
- Measure - the ATO have two measures to determine PAYGW variations to nil:
- Rate - 85 c/km. If the prior conditions have been met (1-2) then the first 85 c/km of your rate has no PAYGW up to the limit (see b). If your rate exceeds this, as yours does, this means that 85c/km has no PAYGW and the additional 11c/km is taxed as per salary and wages. Up to the limit:
- Limit - capped at 5,000 business km PAID in the FY, no matter the rate paid, no matter the actual date of travel. This means that if your rate does not exceed the ATO reasonable rate and you vary the PAYGW to nil, that variation can only apply for 5,000 km. Thereafter, it is taxed as per salary and wages. If you pay in excess of the ATO reasonable rate, the variation of PAYGW on the part that doesn't exceed the ATO reasonable rate/km only applies for 5,000 km. All rates and limits (where the first 2 conditions are met) are reported in STP2 as CD Cents per Kilometre
When it comes to super guarantee, because you pay the rate stipulated in an Award (and not a higher rate), then the expense allowance is expected to be fully spent and is therefore not OTE and no super is payable. Refer to SGR 2009/2 P72.
By reporting it as income, your employees may claim (other than for ND) the deduction on their tax returns.
Deanne
What happens if the employer pays above ATO rate AND above Award rate? Is this component above the Award rate then considered to be a non-conditional extra payment and therefore is OTE and SGC will apply?
Hiya @Employee123 👋
I provided a link to SGR 2009/2 P72 in my original reply.
That paragraph states it is exempt salary and wages because the employer has a "reasonable expectation that the employee will fully expend the money".
In an Award, whatever the rate, arbitration with the Union to determine the amount means that an independent assessment has occurred to come up with that amount and will be fully spent.
Now let's imagine that an employer makes an Agreement or Policy that has a rate of, let's say, $5.00/km. What independent assessment has taken place to determine if the allowance amount approximates the assumed incurred expense? Either the assessment took place and found the amount to approximate the assumed expense amount (you'd want impressive evidence documented!) so it's not OTE; or the assessment took place and the amount was in excess (whole amount is OTE) or no assessment took place at all (whole amount is OTE).
I have never found any ATO guidance or documents to that effect (happy if someone can point it out if it does exist), but it was explained to me by an ATO senior subject matter expert on this topic when we were designing STP2.
Wouldn't it be wonderful if the ATO guidance on SG was relevant to Fair Work arrangements in payroll 😖
Deanne
Hi Deanne
Can I please answer a further question on this please? I have been paid $903 by my employer under ATO KM Reimbursement rate of 0.88 for 2023/24. My employer has reported this as Car Allowance or Allowance in STP and this is creating a tax liability when it shouldn't as first 5,000 km reimbursement is not taxable.
My employer doesn't know how to report this any differently in STP, so it does not generate a tax liability for me? My question is does this need to be reported in STP reporting at all and if yes, under what category / label this needs to be included to so it does not show as taxable income and hence does not create tax liability for the employee. My employer is currently reporting this as Car Allowance and ATO is asking me to pay tax on it. Appreciate any help.
Hiya @MK_S 👋
A couple of important factors to note:
- Employer action to vary withholding to nil when conditions are met (as per the Legislative Instrument) and reported via STP is only the first step in a two-step process.
- Second step is for the employee to claim a deduction for work-related expenses
This is because, if the conditions are met, the employer essentially is paying the "deductible expense" each payment in anticipation of the EOFY income tax return deduction. But you still need to claim! Otherwise, the ATO thinks that tax is owed.
This has always been the process, from as far back as Group Certificate days! Nothing changed with STP2 except which label to report it under.
Deanne
ok thanks so much for clarification.
Hi Deanne,
Your reply was great. So I assume the “approved rate” is the ATO rate and not the award rate? However, from your second reply/comment, if the award has stipulated an amount (which is more than the ATO rate as in the case of c/km in the real estate award), this is assumed to be fully expensed and therefore, no tax will apply as per Variation 38. Have I interpreted that correctly?
No 🤓 @DP1991
You're confusing tax and super obligations. They stand alone. Tax is hard and fast, no matter the industrial instrument. OTE is explained in my response 😉
Deanne
Featured articles
22 Apr 2024 · 6 min read time
15 Apr 2026 · 5 min read time
15 Apr 2026 · 4 min read time