Allowances¶

An allowance is an extra amount you pay an employee on top of their normal wage. It is paid to cover a cost the employee has, or to recognise a task, skill or condition of their work — for example using their own tools, travelling for the job, buying meals during overtime, or washing their own uniform.

Allowances are not a favour or a bonus. They usually come from the award or agreement that covers the job. Fair Work explains that awards set out which allowances apply and how they are paid.

In one line

An allowance is an extra amount paid to cover a cost or a working condition — and its tax and super treatment depends on the type of allowance.

Why this matters¶

If you employ people, you may be required to pay certain allowances, and you need to handle each one correctly on the payslip. Getting the type of allowance right also matters for reporting: the ATO treats different allowances in different ways, so labelling them correctly means your employee is not disadvantaged at tax time.

What you will learn¶

What an allowance is and where it comes from
The common types of allowance you might see
Why allowances can be treated differently for tax and super

Understanding the concept¶

An award is a document that sets the minimum pay and conditions for a type of job. Fair Work explains that allowances are extra payments for employees who do certain tasks, have a particular skill, use their own tools, work in unpleasant or hazardous conditions, or have to pay for something to do their job.

Common allowances include:

Tools and equipment — for using your own tools.
Travel, car and fares — for travelling or using your own vehicle for work.
Meals — often paid when an employee works a set amount of overtime.
Uniforms and laundry — for buying, washing or maintaining special clothing.
First aid, leading hand or supervisor — for a skill or extra responsibility.

The award that covers the job decides which allowances apply and how much they are. This lesson does not list dollar amounts because they change and vary by award — use the Fair Work Pay and Conditions Tool to find the right rates for your industry.

Allowances are not all the same when it comes to tax and super. Some are part of an employee's ordinary time earnings (OTE) — the amounts they earn for their ordinary hours of work, which super is generally based on — and some are not. The ATO explains that some allowances are OTE, while an allowance paid so the employee can cover an expense (like a tool allowance) is generally not OTE. Because of this, always check the correct treatment of each allowance with the ATO.

For accountants & bookkeepers

Under STP Phase 2, gross is disaggregated and allowances are reported separately against the ATO's set allowance categories rather than lumped into gross. Where an allowance does not fit a specific category, the ATO provides an "other" category with a description. Correct categorisation matters because the ATO, and agencies such as Services Australia, treat allowance types differently. Whether an allowance is OTE (and so attracts super) turns on its nature — a reimbursement of an actual expense is not OTE; an expense allowance that is expected to be fully spent is generally not OTE, whereas an allowance that is really a reward for ordinary hours can be. Confirm each case against the ATO's OTE guidance.

Example¶

A carpenter is covered by an award that includes a tool allowance and a travel allowance. Each week the employer pays the ordinary wage, plus a tool allowance for using the carpenter's own tools, plus a travel allowance for driving between sites. On the payslip, each allowance is shown as its own separate line, not rolled into the ordinary wage. The employer checks with the ATO how each allowance should be treated for tax and super, because the two allowances may not be treated the same way.

Common mistakes¶

Rolling allowances into the ordinary wage instead of showing them separately.
Assuming every allowance attracts super — some are OTE and some are not.
Confusing an allowance with a reimbursement — a reimbursement pays back an actual expense and is treated differently.
Guessing the allowance rate instead of checking the award with Fair Work.

How this works in myaccountant¶

In the app — you add an allowance as its own pay item on an employee's pay, choosing the allowance type so it is categorised correctly. When you run a pay run, the allowance appears as a separate line and is included in the gross pay. Super is worked out on ordinary time earnings, so whether a given allowance adds to super depends on how that pay item is set up. Each allowance shows on the payslip you can email to the employee.

Key points¶

An allowance is an extra amount paid to cover a cost or a working condition.
Allowances usually come from the award or agreement (Fair Work).
Common types include tools, travel, meals, laundry and first aid.
Each allowance should be shown separately, not hidden in the ordinary wage.
Some allowances are ordinary time earnings and some are not.
Check the correct tax and super treatment for each allowance with the ATO.

Learn next¶

General information only — not tax, super or financial advice.

Did this answer your question?