Mileage reimbursement rules for employers

UPDATED AUG 4, 2020 - 4 MIN READ

Whether your employees drive company cars or drive their personal vehicles for business, employees generally expect to be reimbursed for their work-related car expenses. Depending on if your employees are covered by certain enterprise agreements or modern awards, you might even have a legal obligation to.

There are also certain benefits to having an expense reimbursement program, namely that it can help keep your employees happy and even attract new ones. Reimbursing them is tax-free for you if done right (since reimbursements are deductible business expenses) so it also helps you pay less tax.

In this article, we'll go through the rules for employers and business owners with regards to mileage reimbursement and allowance, the choices you might have and best practices for a mileage reimbursement program. 

So, do I have to reimburse my employees?

Maybe. It depends on if your employees fall under a modern award or enterprise agreement that requires car expense and mileage reimbursement. Even if they don’t, it can be a tax benefit to do so, as your business can claim the expenses as a tax deduction at the end of the financial year. We suggest you check with your legal advisor, accountant, or HR advisor to be sure.

Does the ATO set a standard rate for reimbursing car expenses?

Each year, the ATO sets their standard rate for deducting work-related car expenses from a tax return - the “cents per kilometre” rate. It represents the highest that you can reimburse each kilometre driven for business and still get a full tax deduction. 

The same goes for your employees: If they are reimbursed at the standard cents per km rate, they do not pay tax off of the reimbursement. Other methods of covering employee car expenses may be treated as income and taxed.

Learn more about how the ATO cents per km rate for business is set and see current and historical rates here.

You can choose to use a different cents per km rate, but most companies consider the ATO rate the standard.

Are there alternatives to using the standard mileage rate?

Absolutely. In Australia, a common alternative to using a standard rate for reimbursement is a mileage allowance.

Mileage allowance

A mileage allowance is paid upfront, typically every month. You can give an allowance to make sure your employees have cash on hand to cover their expenses, such as lease payments on their car. 

The administrative burden of paying an allowance and accounting for expenses afterwards can be cumbersome if you don't have a streamlined payment process.

If you use an allowance, you and your employees need to be aware of the tax implications. An allowance is treated as income and needs to be reported as such when the employee completes their annual tax return. The employee will then be able to claim a deduction for their actual expenses (for example using the cents per km calculation).

Can my business claim a tax deduction for reimbursement of employee expenses?

In short, yes. If an employee is reimbursed for using their personal vehicle for work, your business can claim a deduction for any car allowances or reimbursements you pay.

If an employee is using a company car and they are also able to use that car for personal purposes, you might be asked to show how the reimbursed expenses are connected to your business, and you may need to pay a fringe benefit tax (which is also tax-deductible). 

Best practices for your mileage program

To keep things simple, many companies use an app for mileage tracking and most use the ATO’s standard cents per km rate. It saves time for employees who no longer have to manually keep mileage logs, and administratively it's the easiest solution. Using an app also helps your company avoid over-reported mileage claims, while making sure your employees get what they're entitled to.

While Driversnote is one such app, we recommend that you research options to automate mileage tracking and record keeping.

Of course, the best mileage reimbursement program is also compliant with ATO requirements. Read on to see what that means for you and your employees.

You need to record business mileage accurately

Whether your business is set up as a sole trader, a joint partnership, or a company, it is crucial to accurately record work mileage - and to be able to keep it separate from any personal travel using the same car or cars.

Depending on which method you use to calculate your work-related car expenses, you will generally need to keep the following records:

  • Details of the kilometres travelled for business and private use
  • Any fuel, oil, repair, servicing, or insurance receipts 
  • Registration papers
  • If relevant, any loan or lease documents
  • Any relevant tax invoices
  • Details of how you calculated your claim

This means that both you and your employees - at least, those who are being reimbursed for work-related car expenses - must keep records that are updated frequently to ensure their accuracy.

Can I reimburse all my employees the same way?

Not necessarily. If different employee roles are covered by different enterprise agreements or modern awards, the requirements may change. However, unless those agreements or awards require a higher rate of reimbursement, the ATO cents per km rate provides a standard method to reimburse work-related car expenses for all employees. To read more about things from an employee's perspective, take a look at our guide for employees.

 

That's it for our guide on the basics of reimbursing mileage for employers in Australia. We hope we've been of assistance :)

Happy tracking! 

 

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This material has been prepared for general informational purposes only, and should not be taken as professional advice from Driversnote. You should consider seeking independent legal, taxation, or financial advice from a professional to check how this information relates to your own circumstances. Relevant laws also change from time to time.