Your employee's payslip shows a $220 "allowance." Is it taxable? Does super apply? Is it STP Phase 2 compliant? Australian employers get these wrong constantly — and the consequences run from ATO underpayment notices to Fair Work compliance breaches that could have been avoided with three correctly itemised line items.
Under the Fair Work Act, allowances on a payslip in Australia cannot be folded into a gross pay figure. Each must appear separately. Every type carries distinct rules for PAYG withholding, superannuation, and Single Touch Payroll reporting. Get all three right and your payroll is bulletproof. Miss one and you're exposed on multiple fronts simultaneously.
- Fair Work requires every allowance to be itemised separately — no bundling into gross pay.
- Most allowances attract PAYG withholding, but car and travel allowances within ATO rates may be exempt.
- Not all allowances count as OTE for super — tool and first aid allowances generally do; overtime meals don't.
- STP Phase 2 mandates specific allowance codes — lumping them into a single gross figure is no longer acceptable.
Why Allowances Must Appear as Separate Line Items
The Fair Work Regulations are unambiguous: each allowance entitlement must be listed as its own line item on every payslip. Burying a tool allowance inside base pay isn't just sloppy — it's a breach. Full itemisation rules are covered in our guide to payslip requirements in Australia.
The most common Modern Award allowances Australian employers pay:
- Tool allowance — for tradespeople who supply their own equipment
- Car/vehicle allowance — reimbursement for using a personal vehicle on the job
- Meal allowance — paid when an employee works overtime or travels from base
- First aid allowance — for qualified first aiders with an appointed responsibility
- Uniform/laundry allowance — for maintaining required work clothing
- Travel allowance — for overnight work away from home base
A correctly itemised payslip for a site supervisor under the Building and Construction General On-site Award looks like this:
| Ordinary hours (38hrs) | $1,824.00 |
| Tool allowance | $47.55 |
| Travel allowance | $78.00 |
| Meal allowance (overtime) | $18.40 |
| Gross pay | $1,967.95 |
Which Allowances Are Taxable? The PAYG Withholding Rules
Most allowances are subject to PAYG withholding and land in an employee's taxable income. The exceptions are narrow — and precise. Cents-per-kilometre car allowances paid at or below the ATO rate, and bona fide travel allowances within ATO reasonable amounts for 2025/26, escape withholding at source. Everything else gets taxed.
Consider a building estimator in Brisbane receiving a $0.95/km car allowance. The ATO's 2025/26 rate is $0.88/km. The $0.07/km excess is taxable — the employer must withhold PAYG on the difference, not the whole amount. For the full mechanics of how withholding appears on a payslip, see our article on PAYG withholding on a payslip.
| Allowance Type | PAYG Withheld? | Notes |
|---|---|---|
| Tool allowance | Yes | Always taxable |
| Car allowance (within ATO rate) | No | $0.88/km for 2025/26 |
| Car allowance (above ATO rate) | Yes — on excess only | Withhold on amount above rate |
| Meal allowance (overtime) | No — within ATO reasonable amounts | Check ATO table annually |
| First aid allowance | Yes | Always taxable |
| Uniform/laundry allowance | Yes (unless exempt) | ATO sets laundry exemption thresholds |
| Travel allowance (bona fide) | No — within ATO reasonable amounts | Must be for genuine work travel |
“"Within ATO reasonable amounts" means no withholding obligation at source — not no tax, ever. The employee can still face a liability at year end. Employers who confuse these two things end up writing letters of explanation to the ATO.
Super and OTE: Which Allowances Count Toward Superannuation?
Ordinary Time Earnings (OTE) is the base on which employers calculate the super guarantee. Not every allowance qualifies — and the stakes run both ways. Underpay super on OTE-inclusive allowances and the ATO comes knocking. Overpay it on excluded allowances and you're bleeding cash unnecessarily. Our article on superannuation on a payslip has the full picture.
| Allowance | OTE? | Super Required? |
|---|---|---|
| Tool allowance | Yes | Yes |
| First aid allowance | Yes | Yes |
| Uniform/laundry allowance | Generally yes | Generally yes |
| Overtime meal allowance | No | No |
| Car/km allowance (reimbursement style) | No | No |
| Travel allowance (away from home) | No | No |
The ATO's OTE ruling (SGR 2009/2) is the definitive source. The practical test: is the allowance paid as a supplement to ordinary-hours work? If yes, super almost certainly applies.
Allowances in Single Touch Payroll: STP Phase 2 Codes
STP Phase 2 ended the era of bundling allowances into gross income. Every allowance must now be reported under a specific ATO income type or allowance code. The detail on how this flows through to your payslip is in our article on Single Touch Payroll and your payslip.
The key STP Phase 2 allowance codes:
- CD — Car/travel (award transport payments)
- AD — Award transport (public transport reimbursement)
- TD — Travel allowance
- MD — Meals and entertainment
- LD — Laundry/uniform
- OD — Other (tool allowances and miscellaneous)
This is where small employers come unstuck. A tradesperson under the Building and Construction General On-site Award might receive a tool allowance ($47.55, coded OD), a travel allowance ($78.00, coded TD), and an overtime meal allowance ($18.40, coded MD). All three must hit the ATO as separate disaggregated items in every STP pay event submission. Lump them into gross and you've flagged non-compliance — potentially triggering an ATO review even when the dollar amounts are correct.
STP Phase 2 reporting cross-checks allowance codes against employees' tax file declarations. Mismatched codes generate automated ATO queries — even if every dollar figure is correct.
Every allowance on an Australian payslip carries three separate compliance questions: Is it separately itemised? Is PAYG withheld correctly? Is super calculated on the right OTE base? Nail all three and your STP Phase 2 reporting flows cleanly. Miss one and you're exposed to Fair Work, the ATO, or both. Payroll records must reflect actual wages paid — falsifying any component, including allowances, is illegal.
Frequently Asked Questions
Are allowances taxed in Australia?
Most allowances are subject to PAYG withholding and form part of an employee's taxable income. Exceptions exist — cents-per-km car allowances paid at or below the ATO rate ($0.88/km for 2025/26), and genuine travel allowances within ATO reasonable amounts, are exempt from withholding at source. Your employer must itemise each allowance on your payslip so you can verify the correct treatment.
Is superannuation paid on allowances?
It depends entirely on whether the allowance forms part of Ordinary Time Earnings (OTE). Tool allowances and first aid allowances paid as a supplement to ordinary hours are generally OTE — the 11.5% super guarantee applies. Overtime meal allowances and reimbursement-style travel or km payments are typically excluded from OTE and attract no super obligation.
Must allowances be shown separately on an Australian payslip?
Yes. Under the Fair Work Regulations, every allowance entitlement must appear as a separate line item — it cannot be absorbed into a single gross pay figure. This applies to all national system employers and is reinforced by the STP Phase 2 disaggregation requirement.
What are the ATO cents-per-km rates for 2025/26?
The ATO set the rate at $0.88 per kilometre for the 2025/26 income year. Employers paying car allowances at or below this rate are not required to withhold PAYG. Any payment above this rate is taxable — withholding applies to the excess only, not the total.
Handle allowances correctly — every time.
PayslipMate automatically disaggregates and codes allowances for STP Phase 2 compliance, calculates PAYG withholding correctly on car and travel allowances, and flags OTE super obligations — so nothing falls through the cracks.
Generate a Compliant PayslipThe Bottom Line
- Every allowance must appear as a separate line item on an Australian payslip — no bundling into gross pay.
- Tax treatment hinges on the allowance type: reimbursement-style and ATO-rate car payments are generally exempt from PAYG; above-rate or unconditional allowances are fully taxable.
- Super applies to allowances that form part of Ordinary Time Earnings — tool and first aid allowances usually qualify; overtime meal and km reimbursements typically do not.
- STP Phase 2 disaggregation means misclassified allowances flow directly into ATO pre-fill data — errors are visible to the regulator in real time.
Shawn Martinez, CPA
Senior Tax Accountant
Shawn Martinez is a Certified Public Accountant with over 12 years of experience in Australian taxation and payroll compliance. He specializes in PAYG withholding, superannuation regulations, and ATO compliance for small to medium businesses.
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