Seven common mistakes when managing allowances and deductions

1. Confusing allowances with reimbursements
   Coding a genuine reimbursement (for example, an expense paid on behalf of the employee) as a taxable allowance, or vice versa, distorts PAYG withholding, superannuation, payroll tax and STP reporting.
2. Relying on out of date ATO reasonable amounts
   Travel, meal, cents per kilometre and living away from home allowance limits are reset on 1 July each year. Using last year’s figures creates underpayments for staff and exposes the organisation to tax errors.
3. Ignoring the superannuation guarantee rules
   Some allowances form part of Ordinary Time Earnings (such as a first-aid or leading-hand allowance), others do not (for example, the exempt portion of a travel allowance). Treating every allowance the same way leads to SG shortfalls and potential ATO penalties.
4. Using a single “other allowance” category in STP phase 2
   Single Touch Payroll phase 2 requires each allowance type to be mapped to its specific code (for example, KN for car, ND for nondeductible travel). Lumping everything into OT produces incorrect pre-fill for employees and may trigger ATO queries.
5. Withholding PAYG incorrectly
   Tax must only be withheld from the taxable component of an allowance. For instance, tax applies only to the portion of a cents per kilometre payment that exceeds the statutory rate. Blanket withholding, or no withholding at all, both create compliance risk.
6. Making deductions without valid written authority
   Under section 324 of the Fair Work Act, deductions for uniforms, overpayments, salary sacrifice or any other purpose must be authorised in writing, principally benefit the employee and never reduce net pay below the minimum wage. Missing any of these tests is unlawful.
7. Overlooking state payroll tax and workers compensation exposure
   Most recurring allowances are taxable wages for payroll tax and must be included in workers compensation declarations. Omitting them often surfaces in state revenue or insurer audits and can result in interest and penalties.

Need a refresher?
Australian Payroll Association’s one-day Payroll Essentials course covers “different pay components such as allowances” and “employer obligations for deductions” in depth .
For more complex issues like Living-Away-From-Home Allowances and salary packaging, the FBT & Salary Packaging course is ideal .