Expenses and benefits-in-kind in Australian payroll
Reviewed by Mellow Editorial Team, HR & payroll content team
Expenses and benefits provided to employees outside of cash salary are treated differently depending on whether they fall under Fringe Benefits Tax or can be reimbursed tax-free. Getting the distinction right protects you from unexpected tax liabilities and keeps your payroll reporting clean.
The difference between reimbursements and benefits-in-kind
A reimbursement is when you pay back an employee for a work-related expense they incurred — for example, repaying the exact cost of a client lunch or a work trip. Done correctly, a reimbursement is not income in the employee's hands and does not attract PAYG withholding. The payment should match the actual expense and be substantiated with receipts.
A benefit-in-kind is different. It is when you provide something of value to an employee that is not cash — a company car, gym membership, private health insurance, a laptop used partly for personal purposes, or discounted goods. These benefits attract Fringe Benefits Tax (FBT), which is a separate tax obligation from income tax and sits outside the PAYG withholding system.
How Fringe Benefits Tax works
FBT is paid by you, the employer — not the employee. The FBT year runs from 1 April to 31 March, which is separate from the income tax year. You calculate the taxable value of each benefit provided, gross it up to reflect the pre-tax equivalent, and apply the FBT rate to that grossed-up figure.
The ATO categorises benefits into different types — car benefits, loan benefits, expense payment benefits, property benefits, and residual benefits, among others — and each type has its own valuation rules. A car benefit, for instance, is generally valued under the statutory formula or operating cost method.
Certain benefits are exempt from FBT. Minor benefits (irregular and infrequent benefits with a notional taxable value below the minor benefit threshold) are exempt. Work-related items such as laptops, tablets, and portable tools provided primarily for work use are also generally exempt, as is work-related training. You should confirm current exemption conditions with the ATO or your tax adviser, as the specifics matter.
FBT and its interaction with payroll
FBT is reported and paid directly to the ATO through your FBT return, not through payroll. However, there is an important payroll interaction: if you provide reportable fringe benefits to an employee, you are required to record the reportable fringe benefits amount (RFBA) on their income statement through Single Touch Payroll.
The RFBA applies when the taxable value of benefits provided to an individual exceeds a threshold in an FBT year. The grossed-up amount is reported on the employee's income statement and, while it is not included in their assessable income for income tax purposes, it does count toward income tests for things like Medicare levy surcharge, HECS/HELP repayment thresholds, and some government benefits.
This is where the HECS/HELP interaction becomes relevant. Employees with a study debt repay it through payroll based on their repayment income, which includes the RFBA. If your employee's reportable fringe benefits push their repayment income above a HECS/HELP repayment band, their compulsory repayment amount increases. You need to withhold accordingly when you are aware of this.
Salary sacrifice and packaging
Salary sacrifice is a common arrangement where an employee agrees to forgo part of their cash salary in exchange for benefits. Common examples include additional superannuation contributions, novated car leases, and electronic devices.
From a payroll perspective, salary sacrifice reduces the employee's gross taxable salary — which in turn reduces PAYG withholding and affects the Superannuation Guarantee calculation. Superannuation contributions under a salary sacrifice arrangement are employer contributions for super purposes, but the Superannuation Guarantee is calculated on ordinary time earnings, which may or may not include the sacrificed amount depending on the specific arrangement and any applicable industrial instrument. Getting this wrong is a common payroll error, so it is worth reviewing the base on which you calculate the 12% Superannuation Guarantee for any employee who salary sacrifices.
Keeping your records straight
For reimbursements, maintain receipts or expense claims that demonstrate the payment is directly connected to a work purpose. For FBT-liable benefits, keep records that support your chosen valuation method — travel logs for cars, for instance, if you use the operating cost method.
Under Single Touch Payroll, you report each pay event to the ATO at the time of payment, and you must finalise income statements by 14 July after the end of the income year. The RFBA for any employee receiving reportable fringe benefits needs to be included in that finalisation. If you are using a payroll platform, check that it has a clear process for capturing and reporting RFBAs at year-end, not just regular pay items. Missing this step means employees will have incorrect income statements, which affects their tax returns and can trigger ATO queries.
---
Run HR and payroll in Australia with Mellow
Mellow brings HR, payroll and 12 AI agents into one platform — built to handle Australia properly, with payroll included, from £4 per employee per month. The AI agents don't just answer questions; they generate contracts, run cost estimates and draft letters for you.
[Start a free trial →](/register)