What are the employment-related tax implications for employers and employees if an employer makes a once-off working from home allowance to an employee? What is the effect of making a reimbursement instead of an allowance?
During COVID-19, many employees are required to work from home and incur working from home expenses. Some employers are providing financial payments by way of either an allowance or reimbursement to their staff in recognition that employees will incur these expenses.
What are the employment-related tax implications for an employer and an employee if the employer makes a once-off working from home (WFH) allowance to the employee? What is the tax consequence of the employer reimbursing an employee instead of providing the employee with an allowance?
There is a distinction between allowance and reimbursement. An allowance is usually a predetermined amount irrespective of whether the recipient incurs the expected expenses. With a reimbursement, the recipient is compensated wholly or partly for the amount of expenses already incurred.
This article outlines various employment-related tax implications for employers and employees when a WFH allowance or a reimbursement is made to an employee by an employer in relation to working from home expenses incurred by employees during the COVID-19 ‘lockdown’.
Under s. 12-35 of the Taxation Administration Act 1935 (TAA 1935), an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).
When the payment is made as a WFH allowance, the employer is required to withhold PAYG from the WFH allowance.
Whilst the ATO has advised that employees who had their work hours cut back due to COVID-19 may apply for PAYGW variation, there is currently not a general PAYGW variation for employers for COVID-19 related allowances.
A reimbursement of an employee’s working from home expenses is tax deductible to the employer. The employer is not required to withhold PAYG from the reimbursement it makes to the employees on the basis that it is a reimbursement of business expenses incurred.
If an employee receives a WFH allowance, they need to include the gross amount of the allowance in their tax returns as assessable income. The employee will receive a credit for the amount of PAYGW tax withheld when their income tax return is processed. However, employees can claim work-related expenses as a tax deduction using one of the methods acceptable to the ATO.
It is expected employees will be able to claim work-related expenses due to the requirement to work from home. These expenses may equal or exceed the allowance. Each employee will need to consider which method to use, noting the ATO has confirmed a simplified claim method where WFH is a temporary COVID-19 related scenario. Employees should be directed to the ATO website (for example, the hyperlinks in this and the preceding paragraph provide useful starting points) or their tax agent for further information on how to claim work related expenses.
A reimbursement of working from home expenses is not treated as taxable income to the employee on the basis that it is a reimbursement of business expenses incurred. Employees will not be able to claim a deduction to the extent that it has been reimbursed by the employer.
Payroll tax Allowances are generally subject to payroll tax. Section 13(1) of the Payroll Tax Act 2007 (PTA 2007) provides that:
‘For the purpose of this Act, wages mean wages, remuneration, salary, commission, bonuses or allowances paid or payable to an employee, …’.
The only allowances that are not wholly taxable are motor vehicle allowances, accommodation allowances and living away from home allowances.
As a consequence, an employer is required to include the WFH allowance in its payroll tax calculation.
On the other hand, reimbursements are only taxable where they are subject to fringe benefits tax under the Fringe Benefit Tax Assessment Act 1986 . A reimbursement of an expenses is not subject to payroll tax if it has all the following characteristics:
- At the time of payment, the expense has already been incurred by the employee. If the payment was made in advance, the employee has provided the employer with a receipt relating to the expense and refunded any excess from the advance payment.
- The expenditure by the employee was incurred in the course of the employer’s business.
- The precise amount is reimbursed.
However, if a reimbursement is subject to FBT, it is subject to payroll tax regardless of whether the reimbursement has all the above characteristics.
Workers compensation insurance
The relevance of allowances and reimbursements in the calculation of worker compensation insurance premiums will need to be considered in the context of the legislation for the applicable State or Territory. For illustration, the following comments relate to the Victorian legislation.
WorkSafe Victoria specifies that remuneration is the gross amount employers pay to workers before tax and includes salaries, allowances, bonuses, annual leave and long service leave payments. Certain items are exempt from rateable remuneration for the purpose of workers compensation insurance premiums, such as motor vehicle allowance and accommodation allowance. However, WFH allowance is not one of the exempt items. In the context of the Victorian legislation, an employer will need to include the gross WFH allowance in its rateable remuneration for the calculation of its workers compensation insurance premiums.
On the other hand, in the Victorian context, reimbursement to employees for working from home expenses does not form part of the remuneration for the purpose of calculation of workers compensation insurance premiums. In the Victorian situation, employers will not need to include such reimbursements in the calculation of workers compensation insurance premiums.
Super guarantee obligation
Employers must use ordinary time earnings (OTE) to calculate the minimum super guarantee contributions for eligible employees. OTE is generally what the employees earn for their ordinary hours of work. Where an allowance is expected to be fully expended, it is not a reward for the services which the employee is providing as an employee of the employer.
A WFH allowance is paid to cover expenses the employees incur during working from home due to COVID-19. It is expected that the WFH allowance would be fully expended in the course of the employees’ work activities. As the allowance is not a reward for the employee’s services, employers would not have a super guarantee obligation for the payment of WFH allowance to its employees unless their employment contract/award requires superannuation to be provided on amounts paid to employees including allowances.
Similarly, reimbursement made to employees for expenditure incurred from working from home is not a reward for the employee’s services and therefore not OTE. No super guarantee obligation would arise from the reimbursement for employers.
Fringe Benefits Tax
The payment of a cash WFH allowance does not create an FBT liability for the employer.
The reimbursement of an employee’s working from home expenses is not subject to FBT under the ‘otherwise deductible’ rule to the extent that the employee would be able to claim a once only income tax deduction had the employee incurred the expenditure.
Employees are required to provide the employer with a declaration supported with receipts to substantiate that the expenses have been incurred and are work related.
This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. It is not intended to be, nor should it be relied upon as, a substitute for professional advice. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use.