Reimbursements, Allowances and the GST Implications

Are you an employer that is registered for GST? You may be entitled to a GST credit when you make a payment to an employee to compensate for expenses they have or will incur.

Payments made to employees for expenses which they incur can be considered reimbursements or allowances. It is important to correctly distinguish between the two as you can claim a GST credit for a reimbursement but not an allowance.

Allowances
Allowances are paid based on an estimated value of an expense. You make an allowance when you pay an employee an estimated or notional amount to compensate for an expense that they have or will incur. For example, one of your employees is traveling interstate to attend a work-related conference and you pay them $500 to cover their travel expenses. This is considered an allowance provided the employee is not expected to repay any amount that they do not spend, as you have estimated the cost of their travel. This also applies to notional expenses such as paying an employee for travel on a cents per kilometer basis. If the payment to the employee is considered an allowance you are not entitled to claim a GST Credit.

Reimbursements
Reimbursements are made based on the actual value of an expense. You make a reimbursement when you pay the whole or part of the amount of a purchase that an employee makes that is directly related to your business activities. For example, if an employee purchases an item for $100 then you pay that employee $100 or even a portion of this amount, this payment is considered a reimbursement. If you pay your employee in advance for an expense that they have not yet made, this is also considered to be a reimbursement.

In order to be entitled to a GST credit for a reimbursement, the following criteria must be met;

  • The employee’s expense is a taxable expense and is directly related to the activities of the business
  • Any unpaid advances must be repaid by the employee
  • Your employee is not entitled to or does not claim a GST credit for the same expense
  • The employee provides a receipt or tax invoice for the expense if the GST inclusive amount of the expense is greater than $82.50

You are not entitled to a GST credit in the following circumstances;

  • If you reimburse an employee for expenses that are non-deductible such as expenses relating to entertaining clients
  • If you reimburse an employee for making a purchase from your own business

To claim the GST credit simply include the amount of GST paid, as a result of the reimbursement, at 1B on your business activity statement for the period in which the reimbursement occurred.

It is also important to note that some reimbursements may attract fringe benefits tax, which is a more complex area. Rogerson Kenny Business Accountants can assist you with identifying if such a liability exists.

Author

Daniel Seymour

Accountant – Rogerson Kenny Business Accountants.

If you would like to discuss this topic further, please contact Rogerson Kenny Business Accountants on (03) 9802 2533.

Contact

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Phone: (03) 9802 2533

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Postal Address: PO Box 323, Mount Waverley, Victoria 3149

Email: mail@rogersonkenny.com.au

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