Per diems, Allowances, and Reimbursements
Are you spending money and getting it covered by your employer?
It may be one of these 3 forms:
- Reimbursements
- Per diems
- Allowances
These are all important forms of compensation for creatives in Australia. These payments help to cover expenses that may be incurred while on the job, such as travel, lodging, and equipment costs. These forms of compensation can be helpful, so it's important to understand the tax implications associated with them.
While the terms seem interchangeable, they do have specific meanings and each has different tax treatments.
When do I include the income in my return?
Can I still claim for the actual expenses as deductions in my tax return?
What if I am a sole trader?
REIMBURSEMENTS
I pay for something, and you pay me back the exact amount.
Reimbursements are payments made by employers to their employees to cover expenses that were incurred while performing their job duties. If you spend money on something, like props for a photoshoot or meals while traveling for work, and then those exact expenses are repaid to you by your employer, then you have received a reimbursement. In Australia, reimbursements are an important part of many employment arrangements and can have important tax implications.
Some common types of expenses that may be reimbursed include:
- Travel expenses, such as airfare, lodging, and meals
- Business-related expenses, such as office supplies or equipment
- Professional development expenses, such as conference fees or training courses
Reimbursements are typically made after an employee has already incurred the expense and submitted a claim for reimbursement to their employer.
How are Reimbursements Taxed?
The tax treatment of reimbursements in Australia can be complex and depends on a variety of factors, including the type of expense, the amount of the reimbursement, and the circumstances in which it is paid.
In general, reimbursements received are not considered taxable income and are not subject to income tax or the Medicare Levy. However, there are some exceptions to this rule. Of course - tax is always complex! So, if you (the employee) receive a reimbursement for an expense that could have been claimed as a tax deduction, the reimbursement may be considered taxable income.
But, if you had an expense for say, an office chair that was $100 and otherwise deductible, you could include the $100 expense as a deduction and then report the $100 reimbursement received as income… and since $100 minus $100 = $0, there is no net impact on your actual tax bill/refund result.
It is important for both employers and employees to keep accurate records of any reimbursements made or received. This information will be needed when completing tax returns and may be required to substantiate any claims for deductions. ALWAYS keep receipts!!
Reimbursements and Fringe Benefits Tax
In some cases, reimbursements may be subject to fringe benefits tax (FBT) but this is really something for employers to worry about. We have another blog on FBT here covering it in more depth.
FBT is a tax paid by employers on certain benefits provided to their employees, including reimbursements for certain types of expenses. For example, if an employer provides a reimbursement for entertainment expenses, such as a business lunch or dinner, the reimbursement may be subject to FBT. The amount of FBT payable will depend on the type of expense and the circumstances in which it was incurred.
Employers are responsible for determining whether a reimbursement is subject to FBT and for paying any FBT that is owed. So, if you are an employee there is not much for you to do here.
How to Ensure Compliance?
Both employers and employees should be aware of the rules and regulations around reimbursements… which is probably why you are reading this.
- Employers should establish clear policies and procedures for reimbursing expenses and should keep accurate records of any reimbursements made. They should also ensure that any reimbursements subject to FBT are properly accounted for and paid.
Employees should keep accurate records (receipts) of any expenses incurred and submit claims to their employers for reimbursement in a timely manner. They should also keep track of these expenses and reimbursements, and keep photos of receipts, in case their accountant needs them for reporting any taxable income on their tax returns.
Case Study: Reimbursement
Lolly is employed by Amazing Actors Pty Ltd. She goes to Officeworks and picks up stationary supplies from there for her office/employer. It cost $30.
She has a photo of the receipt and gives it to her employer, and they repay her $30.
Neither the $30 reimbursement income nor the $30 expense should be reported in Lolly’s tax return. The employer will include the reimbursement expense as a deduction in its tax return, as ultimately, this was their expense.
Freelance Graphic Designer:
An employer may reimburse a freelance graphic designer for expenses related to the design work they perform for the company. This may include software subscriptions, hardware purchases such as a new laptop or printer, or any other expenses directly related to the design work.
Photographer:
An employer may reimburse a photographer for expenses related to their photography services, such as travel costs, equipment rentals, and printing costs for photos. The reimbursement would need to be directly related to the services provided to the employer.
Copywriter:
An employer may reimburse a copywriter for expenses related to writing work, such as subscriptions to industry publications, conference fees, and any other expenses that directly relate to the work performed for the employer.
Web Developer:
An employer may reimburse a web developer for expenses related to web development work, such as software subscriptions, hardware purchases, and any other expenses directly related to the development work.
PER DIEMS & ALLOWANCES
You give me a bit of money, I spend it on stuff (that it is intended to help cover).
Per diems are a fixed, usually daily, amount of compensation paid up front by employer to employee, designed to cover the costs the employee then incurs while traveling for business (like maintenance, dining, and lodging). These are almost exactly the same/interchangeable with ‘allowances’.
Here are the usual expenses included under Per diems:
- overtime meal expenses – for food and drink when working overtime
- domestic travel expenses – for accommodation, food and drink, and incidentals when staying overnight away from home for work
- travel costs abroad for meals, beverages, and other incidentals traveling for work purposes abroad.
If per diems are kept within the ATO's maximum limits, they are not regarded as a component of an employee's income and are therefore tax-free. Reasonable amount for the ATO varies from year to year. For example, in the 2022–23 income year, the reasonable amount for overtime meal expenses is $33.25.
If the per diem income is not declared, then the matching/related expenses the per diem is designed to compensate for is also not included as deductions, by the employee. These upper limits represent what the ATO considers to be reasonable. At the beginning of each income year, these rates are reassessed (1 July).
There is a win here for employees, because they might receive a $50 per diem and only spend $40 on their meal (and they get to keep the rest, tax free basically - as long as the per diem amount is under the ATO thresholds).
Reasonable amounts for domestic travel expenses
The reasonable amounts for domestic travel expenses in Australia can vary depending on the location, duration, and purpose of the trip. However, the Australian Taxation Office (ATO) sets daily allowance rates for domestic travel expenses for employees, which can be used as a guide for reasonable amounts.
As of the 2021-2022 financial year, the daily allowance rates are:
- $24 for breakfast
- $28 for lunch
- $48 for dinner
- $55 for overnight accommodation
Always check the rate for each year on the ATO website or with your accountant.
These rates are for meals and incidental expenses only and do not include transportation or other expenses like conferences or training courses. It's important to note that these rates are not a legal requirement, and employers and employees can agree on different amounts as long as they are reasonable and based on actual expenses incurred.
The ATO has made a guide for the reasonable amounts to be reported in each taxpayer's tax return. Here is a link to a reference from the ATO (2023).
If you are self-employed (sole trader) then you should just track actual expenses and claim those (because you are not an employee, no one is paying you a per diem anyway generally…). If you are a sole trader receiving a per diem, then chat to your accountant. It is likely you should apply the rules as above, however you must be able to substantiate expenses claimed. So, keep receipts.
ALLOWANCES
Allowances are a common form of compensation that many employers provide to their employees to cover expenses related to their job. For example, a camera operator may receive an allowance to cover the cost of renting or purchasing equipment. While allowances can be a great way to offset the costs of things like travel, meals, and equipment, they can also have important tax implications.
Some common types of allowances include:
- Travel allowance: paid to cover expenses associated with travel for work, such as accommodation, meals, and transportation.
- Meal allowance: paid to cover the cost of meals while an employee is away from their usual place of work.
- Equipment allowance: paid to cover the cost of equipment or tools required to perform job duties.
- Uniform allowance: paid to cover the cost of purchasing and maintaining work-related uniforms.
It is important to note that allowances are not considered part of an employee's salary or wages (but they may be paid to employees in their usual pay run). They are not your salary though, they are treated as a separate payment made to cover specific expenses.
How are Allowances Taxed?
In general, allowances are considered taxable income and must be included on an employee's tax return. However, there are certain circumstances in which an allowance may be tax-free. For example, if an employee receives a travel allowance to cover the cost of meals and accommodation while on a work trip, the allowance may be tax-free if the amount paid does not exceed the reasonable allowance rate set by the Australian Taxation Office (ATO).
If an allowance is considered taxable income, it will be subject to both income tax and the Medicare Levy. Employers are required to withhold the appropriate amount of tax from the allowance and remit it to the ATO on behalf of their employees. Failure to withhold the correct amount of tax can result in penalties for the employer.
It is also important to note that some allowances may be subject to fringe benefits tax (FBT). FBT is a tax paid by employers on certain benefits provided to their employees, including allowances that are not considered taxable income. For example, if an employer provides a meal allowance that is not considered taxable income, they may still be required to pay FBT on the amount paid.
How to Ensure Compliance?
To ensure compliance with the tax code, both employers and employees should be aware of the tax implications of allowances. Employers should ensure that they are withholding the correct amount of tax from allowances and are complying with any FBT obligations.
Employees should keep accurate records of any allowances received and the expenses they were intended to cover. This information will be needed when completing their tax return and may be required to substantiate any claims for deductions.
In conclusion, allowances are an important form of compensation that can help offset the costs of work-related expenses. However, it is important to understand the tax implications of allowances in order to ensure compliance with the tax code. Employers and employees should work together to ensure that allowances are paid and taxed correctly to avoid penalties and other issues.
Case Study: Per Diem under ATO ‘reasonableness’ threshold, but expense is over
Lolly is employed by Amazing Actors Pty Ltd and works overtime. She is given a per diem for meals of $15. This is under the threshold set by the ATO of $33.25 (check each year the value for this!).
Lolly buys her dinner for $50.
Neither the $15 of income nor the $50 expense should be reported in Lolly’s tax return.
The employer will declare the $15 per diems as an expense.
In each of these scenarios, it's essential to document the expenses accurately and to provide evidence that the expense is related to the employee's work. Additionally, it's important to consult with a tax professional to ensure compliance with the ATO guidelines and to avoid any unexpected tax implications.
Photographer - High-Cost Destination:
If a photographer is required to travel to a high-cost destination for work, such as a remote location, the actual cost of accommodation and meals may exceed the ATO's set per diem allowance. In such cases, the employer may provide a per diem allowance that is reasonable and reflective of the actual costs incurred.
Web Designer - Long-Term Travel:
If a web designer is required to stay at a destination for an extended period for work, the actual cost of accommodation and meals may exceed the ATO's set per diem allowance. In such cases, the employer may provide a per diem allowance that is reasonable and reflective of the actual costs incurred over the extended period.
Graphic Designer - High-Cost Activities:
If a graphic designer is required to engage in high-cost activities while on a work-related trip, such as attending a conference or business event, the actual cost of meals and incidental expenses may exceed the ATO's set per diem allowance. In such cases, the employer may provide a per diem allowance that is reasonable and reflective of the actual costs incurred.
Copywriter - Special Dietary Requirements:
If a copywriter has special dietary requirements and requires specific food items or meals while on a work-related trip, the actual cost of meals may exceed the ATO's set per diem allowance. In such cases, the employer may provide a per diem allowance that is reasonable and reflective of the actual costs incurred for the specific dietary needs.
Case Study: Per Diem over ATO ‘reasonableness’ threshold
Film Crew - Remote Location:
If a film crew is required to work in a remote location where the cost of living is significantly higher than the ATO's set per diem allowance, the actual cost of meals and accommodation may exceed the reasonable threshold. In such cases, the employer may provide a higher per diem allowance that is reasonable and reflective of the actual costs incurred.
Event Planner - High-End Event:
If an event planner is required to organise a high-end corporate event, the actual cost of meals and incidental expenses may exceed the ATO's set per diem allowance. In such cases, the employer may provide a higher per diem allowance that is reasonable and reflective of the actual costs incurred for the high-end event.
Fashion Designer - International Travel:
If a fashion designer is required to travel internationally for work, the actual cost of meals and accommodation in some destinations may exceed the ATO's set per diem allowance. In such cases, the employer may provide a higher per diem allowance that is reasonable and reflective of the actual costs incurred for the international travel.
Marketing Consultant - High-End Client Meetings:
If a marketing consultant is required to attend high-end client meetings, the actual cost of meals and incidental expenses may exceed the ATO's set per diem allowance. In such cases, the employer may provide a higher per diem allowance that is reasonable and reflective of the actual costs incurred for the high-end client meetings.
Here’s a more detailed instance where employer’s per diem allowance exceeds the ATO ‘reasonableness’ threshold:
Lolly is employed by Amazing Actors Pty Ltd and works overtime. She is given a per diem for meals of $50. This is above the threshold set by the ATO of $33.25 (check each year the value for this!).
Lolly buys her dinner for $40.
The $50 received is above the threshold, so Lolly should declare this as taxable income, and then can include a deduction for her meal of up to the amount of the reasonable level set by the ATO.
The employer will declare the $50 per diems as an expense, and will likely have FBT to report as well.
Case Study: Car expenses allowances
Photographer - Own Car:
A photographer who uses their own car to travel to photoshoots or other work-related locations may be eligible for a car expense allowance. The allowance can cover expenses such as fuel, servicing, repairs, and depreciation. To calculate the allowance, the employer may use the ATO's reasonable rates per kilometer.
Graphic Designer - Company Car:
If a graphic designer is provided with a company car by their employer, the employer may provide a car expense allowance to cover any costs associated with the use of the car, such as fuel, servicing, and insurance. The allowance can be based on the actual expenses incurred by the employee or may be a fixed amount per month.
Event Manager - Travel for Work:
An event manager who is required to travel for work may be eligible for a car expense allowance to cover the cost of using their own car for work-related travel. The allowance can cover expenses such as fuel, servicing, and depreciation. Again, the employer may use the ATO's reasonable rates per kilometer to calculate the allowance.
Film Crew - Equipment Transport:
If a film crew is required to transport equipment using their own cars for work-related purposes, the employer may provide a car expense allowance to cover the associated costs. The allowance can cover expenses such as fuel, servicing, and depreciation, and can be calculated based on the ATO's reasonable rates per kilometer.
Each case can be unique and you might need help from your accountant to clarify what will be best and more accurate for you to do. We suggest that you keep receipts and clear records of these income types and the related expenses, just to be safe. Then we can sort it all out at the end of the year with you.
You might also like our FREE Bills & Expenses Tracking PDF here.
Sources and further reading:
ATO - Allowances and reimbursements
