Allowance or reimbursement... What's the difference for GST purposes?

If you are registered for GST, you may be entitled to a GST credit when you make a payment to an employee to compensate them for expenses they have or will incur. Payments made to employees for expenses which they incur will be classified as either 1) reimbursements or 2) allowances.

It is important to correctly distinguish between the two as the GST implications for your business vary under both scenarios.

Allowances

Allowances are payments made which are based on an estimated value of an expense. You make an allowance when you pay an employee an estimated or notional amount to compensate them for an expense that they have or will incur.

For example, one of your employees is travelling interstate to attend a conference and you pay them $450 to cover travel expenditure. This is considered an allowance provided the employee is not expected to repay any amount that they do not spend. This also applies to other notional expenses such as paying an employee for travel on a cents per kilometre 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 $200 then you pay that employee $200 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 your 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

However, 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

It is also important to note that some reimbursements may attract fringe benefits tax.

Always seek your accountants help if you are unsure!

 

Vanessa Bell