PAYG Withholding Tax Free Allowances

Certain allowances are effectively tax-free and are not required to have PAYG instalments deducted from employer payments. They are generally allowances of a kind which are matched by tax-deductible expenditure, or for which any tax is otherwise covered off.

Regulations made under the Taxation Administration Act 1953 provide that there is no requirement to deduct tax from the following allowances (when the allowance amount is up to specified limits):

  • Cents per kilometre car expense payments using the approved rates (to a maximum of 5,000 business kilometres)
  • Award transport payments for deductible transport expenses. An award transport payment is a transport payment paid under an industrial instrument (i.e. an award, order, determination or industrial agreement) that was in force under Australian law on 29 October 1986.
  • Laundry (not dry cleaning) allowance for deductible clothing up to the threshold allowable amount (currently $150).
  • Award overtime meal allowances up to the reasonable amounts published in an annual ATO Determination. The allowance must be paid under an industrial instrument in connection with overtime worked.
  • Domestic or overseas travel allowance (excluding overseas accommodation allowance) involving an overnight stay away from home, up to the reasonable allowances amount published in annual ATO Determinations.

Necessary conditions for the application of the reduced-PAYG tax withholding rules are:

  1. the payee (i.e. employee)  is expected to be eligible for a tax deduction for at least the amount of the allowance
  2. the amount and nature of the allowance is shown separately in the accounting records of the payer (i.e. employer)

Amounts paid in excess of approved limits (eg cents per km for more than 5,000 kms, or at a rate higher than the approved cents-per-kilometre rate) are generally required to have tax withheld, and certain payments may also be subject to super guarantee obligations.

Checklist of allowances and withholding requirements

For a schedule of various allowances and how to treat them see here:Withholding for allowances

PAYG ‘nil’ rate payments

Certain payments have a ‘nil’ or special rate specified by regulation, including:

  • Directors Fees payable to a related entity – PAYG tax is varied to nil – F2016L00222
  • Religious Practitioners – when equivalent tax deductible expenditure is incurred and/or payments are under specified low-payment thresholds, the PAYG tax rate is varied to nil – F2016L00107
  • Performing Artists – special 20% rate for certain promotional activities – F2016L01639
  • Certain insurance and compensation claims payments – the PAYG tax rate is varied to nil – F2016L00433
  • Labour Hire reimbursements and allowances of otherwise tax deductible amounts – the PAYG tax rate is varied to nil – F2016L01580
  • PAYG Withholding variation for foreign resident capital gains withholding payments – acquisitions from multiple entities – F2017L00390
  • PAYG Withholding variation for foreign resident capital gains withholding payments — marriage or relationship breakdowns – F2016L01642
  • PAYG Withholding Variation: Donations to deductible gift recipients – F2016L01641 – withholding payment reduced by the amount paid to a deductible gift recipient on a payee’s behalf
  • PAYG Withholding Variation: Body Corporates – F2016L01640 – varies the rate to NIL
  • payments to foreign resident support staff for entertainment and sports activities who are normally resident in countries with an international tax agreement with Australia – the PAYG rate is varied to nil – F2019L00407
  • PAYG Withholding Variation: Certain superannuation beneficiaries who have not quoted a tax file number – The amount to withhold is varied to nil for that portion of the payment which is non-assessable non-exempt income of the payee – F2017L01280
  • Non-exempt earnings of individuals engaged in foreign service – withholding calculations (Variation 60)

Further Information:

 

This page was last modified 2019-10-02