Setting up KM Allowance

The below guide will show you how to setup and process a motor vehicle allowance paid on the cents per kilometre basis outlined by the ATO. As of July 1st 2022, the rate is 78 cents per kilometre up to a maximum of 5,000 km per year. Most awards pay above this rate and most awards pay 80 cents per kilometre in total. The difference is considered in excess of the approved rate.

Essentially, taking the Clerks - Private Sector Award 2020 as an example, which pays 91 cents per kilometre, we will have to withhold from $0.13 but not $0.78. For the ATO's guidance on how to deal with payments made in excess of their approved rate;  the ATO's guidance on how to deal with payments made in excess of their approved rate, see here.

For distances travelled up to 5,000 business kilometres:

Are you required to withhold?
No.

Is the allowance included on the income statement? 
Yes (show total allowance separately).

Does super guarantee apply? 
No.

For distances travelled over 5,000 business kilometres:

Are you required to withhold?
Yes - from the amount which relates to the excess over the approved rate.

Is the allowance included on the income statement?
Yes (show total allowance separately).

Does super guarantee apply? 
No.

Setting up the Pay Categories

1. Go to 'Payroll Settings' > 'Pay Categories' and click the 'Add' button
2. Enter in the name of the pay category (KM Allowance up to ATO Limit) and click 'Add'
3. Select the 'Fixed' rate unit for the new pay category
4. Select the relevant Payment Classification to report the allowance separately on the income statement
5. External ID, if using (if an external id is used that has been used before you won't be able to save it if the 'unique external Id' setting is switched on. This setting is located on the Payroll settings > Advanced settings page)
6. Select 'PAYG Exempt' and 'Payroll Tax Exempt', and enter the Super Rate as 0, then 'Save'.

1. Go to 'Payroll Settings' > 'Pay Categories' and click the 'Add' button
2. Enter in the name of the pay category (KM Allowance Over ATO Limit) and click 'Add'
3. Select the 'Fixed' rate unit for the new pay category
4. Select the relevant Payment Classification to report the allowance separately on the income statement
5. External ID, if using (if an external id is used that has been used before you won't be able to save it if the 'unique external Id' setting is switched on. This setting is located on the Payroll settings > Advanced settings page)
6. Enter the Super Rate as 0, then 'Save'

Setting up the Work Type

Our next step is to create a work type so employees can enter the number of kilometres when they submit their timesheets.

1. Go to 'Payroll Settings' > 'Work Types' and select 'Add'
2. Enter the name (Kilometres Travelled)
3. External ID, if using (if an external id is used that has been used before you won't be able to save it if the 'unique external Id' setting is switched on. This setting is located on the Payroll settings > Advanced settings page)
4. Automatically enabled for (select the employee types you would like to auto enable the work type for)
5. Work Maps to the pay category we have just created, KM Allowance up to ATO Limit, then 'Save'

Creating the rule to pay the allowance

The final step is to create a rule set and rule. When the employee enters the number of kilometres travelled, we also want to pay them the 'above ATO rate' for each kilometre.

1. Go to 'Payroll Settings' > 'Rule Sets'. If creating a new Rule Set, click the green 'Add' button, give the Rule Set a name then 'Save'. Click 'Create rules' and click to add your first rule. If you have an existing rule set, you can add this rule to your rule set as well
2. Give the rule a name (KM Allowance). This rule will say when the work type 'Kilometre Allowance' is chosen, add 1 unit of the allowance called 'KM Allowance above ATO limit' per unit on timesheet. When you've finished, save the rule and select 'Activate draft rules'. Now go and assign this Rule Set to each employee who needs it by going to their employee details > Pay Run Defaults and selecting the new rule set. 
3. 3. Update the employees' Pay Rates to assign $0.72 to KM Allowance up to ATO Limit and $0.08 to KM Allowance above ATO limit and 'Save' (employee details > Pay Rates). If you are using pay rate templates, update these as well.

This rule will add an additional allowance to the one already being paid on the timesheet (KM Allowance up to ATO Limit) when the employee selects the Work Type.

If you have any questions or feedback please let us know via support@yourpayroll.com.au