An employee buys supplies on their own card, or you give them a monthly amount for their phone or tools. Both feel like "covering expenses", but the ATO treats them differently.

Reimbursement

A reimbursement repays an employee for an actual cost they incurred for you. The ATO generally expects the employee to show receipts. Reimbursements are not reported through Single Touch Payroll, and you can claim a GST credit when the expense is work related and the employee provides a tax invoice.

Allowance

An allowance is a fixed amount for an estimated cost, and the employee keeps any unspent portion. You cannot claim GST credits on an allowance. It generally has to be reported separately through Single Touch Payroll, and you may need to withhold tax from it. Depending on the type of allowance, some are fully withheld, some partly withheld and some exempt up to a threshold.

The ATO looks at substance

Calling a payment a reimbursement does not make it one. The ATO's guidance points to two signs of a genuine reimbursement: the employee must substantiate the expense, and they must refund any unspent money.

What to do

  • Decide which one you intend and write it in your staff expense policy.
  • For reimbursements, collect the tax invoice before you pay, so you can support the GST credit.
  • For allowances, check the withholding rules and how to report the payment through payroll.
  • Check the exceptions. For example, car payments at the approved cents per kilometre rate, up to 5,000 business kilometres, are generally not withheld.
  • Review current payments. The ATO table notes that award transport payments are treated differently from 1 October 2026, so check any you pay.

Getting this right early avoids amended payroll reports and lost GST credits later.

This article is general information only and does not take your circumstances into account. Check the ATO website or speak to a registered tax professional about your situation.