Chasing receipts every time a team member travels gets old fast – especially if travel is a regular part of your business. A travel allowance, sometimes called a per diem, is a cleaner alternative. Instead of reimbursing actual expenses after the fact, you pay a set daily amount upfront to cover meals, accommodation and incidentals.
But the simplicity only holds if you stay within the ATO’s rules. Here’s how it works for both employers and employees.
What Counts as a Travel Allowance?
A travel allowance is a payment to an employee to cover expenses they incur when travelling away from home overnight for work. The key word is overnight – day trips don’t qualify. If your employee is flying to Melbourne for the day and back, that’s a different arrangement. If they’re staying for two nights, a travel allowance applies.
The allowance typically covers meals, accommodation and incidental expenses like laundry or transport. It can cover all three or just some of them, depending on what your business pays for separately.
The ATO Reasonable Allowance Threshold
The ATO publishes what it calls “reasonable amounts” for travel allowances each financial year through an annual Taxation Determination. These amounts vary based on your employee’s salary band and the location they’re travelling to – figures are higher for cities with a higher cost of living, and higher still for overseas destinations.
Staying within the reasonable amount matters for two reasons. First, if the allowance you pay doesn’t exceed the ATO’s reasonable figure, you don’t need to withhold PAYG tax from it or pay super on it. Second, it doesn’t need to appear on the employee’s income statement. It’s administratively clean.
You can find the current reasonable amounts in the ATO’s latest travel allowance Taxation Determination on ato.gov.au.
What Happens If You Exceed the Reasonable Amount?
If you pay more than the reasonable allowance, the excess is subject to PAYG withholding. The full amount will also need to appear on the employee’s income statement. From a Fringe Benefits Tax perspective, travel allowances paid to employees for work-related travel are generally exempt from FBT – but this depends on the nature of the travel and the arrangement, so it’s worth confirming with your accountant.
How to Handle It in Your Accounting Software
For record-keeping purposes, travel allowances are typically processed outside payroll as a separate supplier bill, where the employee is treated as the supplier. Include the destination in the description and the number of days in the quantity field. GST doesn’t apply to travel allowances.
Processing it this way keeps it off the payroll run and avoids the allowance appearing on the income statement – which is exactly what you want when you’re within the reasonable amount.
The Employee’s Perspective
If your employer pays your travel allowance outside of payroll and it doesn’t appear on your income statement, and you’re not claiming a different amount for travel deductions in your tax return, there’s nothing more for you to do.
If the allowance does appear on your income statement – because it was paid through payroll – you’ll need to declare it as income. You can then claim it as a deduction for the same amount, which nets to zero. If you want to claim actual travel expenses instead, you’ll need to substantiate those costs with records.
Record-Keeping Requirements
You don’t need to keep a travel diary for domestic travel if you’re within the reasonable allowance and not claiming a different deduction amount. However, you do need to keep overseas accommodation records regardless. It’s also good practice to hold onto itineraries and boarding passes as evidence of travel in case the ATO ever queries the arrangement.
Travel Allowance vs Expense Reimbursement: Which Is Better?
For businesses with frequent travellers, travel allowances generally win on admin. You set a rate, pay it upfront and you’re done – no receipt collection, no reimbursement claims and no end-of-month scramble. The trade-off is that you need to stay within the ATO’s reasonable amounts; if your employee travels to a high-cost destination and the per diem isn’t enough to cover actual costs, they either top it up themselves or you need a different arrangement.
For occasional travellers or trips with highly variable costs, direct reimbursement against receipts may make more sense.
Getting your payroll and expense processes set up correctly from the start saves a lot of headaches at tax time. If you want to make sure your travel allowance arrangements are compliant and running smoothly, our bookkeeping and payroll team can help.
