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Running a small or medium-sized business comes with more than enough challenges, managing staff allowances and deductions shouldn’t be one of them. However, businesses often unintentionally slip up, resulting in tax errors, underpayments, and exposure to substantial penalties.
Here are seven of the most common mistakes SMEs make, and what you can do to stay compliant and confident:
1. Mixing Up Allowances and Reimbursements
This is one of the most frequent (and costly) payroll mistakes we see. Reimbursement occurs when an employer pays an employee back for an expense they’ve covered on behalf of the business. An allowance is extra money spent on top of their wages for specific duties or expenses.
Why it matters: Confusing the two affects PAYG tax, super, payroll tax, and Single Touch Payroll (STP) reporting, and can throw your entire compliance off track.
What you should do: Train your bookkeeper or payroll staff to categorise payments correctly in your system; it makes a huge difference.
2. Using Outdated ATO Rates
Did you know the ATO updates its “reasonable amounts” for allowances like travel, meals, and cents-per-kilometre every year on 1 July?
Why it matters: Using last year’s rates can underpay staff and lead to payroll errors that attract scrutiny from the tax office.
What you should do: Mark your calendar for the ATO’s annual updates and adjust your payroll settings every July.
3. Forgetting Superannuation Rules
Not all allowances are treated equally when it comes to superannuation. Some must be included in your Ordinary Time Earnings (OTE), and others are exempt.
Included: First aid allowance, leading hand allowance
Excluded: Travel allowance (when within ATO limits)
Why it matters: Getting this wrong could mean you’re underpaying super and that can lead to ATO penalties.
What you should do: When in doubt, check with your accountant to confirm which allowances are superable.
4. Using Just “Other” in STP Phase 2
Under STP Phase 2, each allowance must be reported under its correct category, like KN for car allowance or ND for non-deductible travel.
Why it matters: Using a catch-all “Other” code leads to incorrect data for employees and may trigger follow-ups from the ATO.
What you should do: Make sure your payroll software is set up to match STP Phase 2 codes correctly.
5. Incorrect PAYG Withholding on Allowances
PAYG tax is only required on the taxable portion of an allowance. For example, only the portion of a cents-per-kilometre payment that exceeds the ATO rate is taxable.
Why it matters: Over-withholding upsets employees; under-withholding exposes your business to tax liabilities.
What you should do: Review each type of allowance, and only withhold tax where it’s due.
6. Deducting from Wages Without Written Permission
Planning to deduct money for uniforms, overpayments, or salary packaging? It’s not as simple as just taking it out of their pay.
The rules under the Fair Work Act (Section 324) are clear:
- There must be written consent
- The deduction must benefit the employee
- It must not reduce their net pay below minimum wage
Why it matters: Failing any one of these conditions makes the deduction unlawful, and could land your business in hot water.
What you should do: Use a simple, signed deduction form for every case. Keep it on file.
7. Overlooking Payroll Tax and Workers’ Comp Reporting
Recurring allowances are usually considered taxable wages for state payroll tax and must also be included in your workers’ compensation calculations.
Why it matters: These oversights are often picked up during audits by state revenue offices or insurers, and they can result in backpay, interest, and penalties.
What you should do: Work with your accountant or payroll provider to ensure all applicable allowances are correctly reported at the state level.
Final Thoughts
Payroll mistakes can be costly, not just financially, but in terms of employee trust and compliance risk. As an SME, staying on top of the details might feel overwhelming, but getting these basics right helps you avoid stress and surprises down the line.
A quick annual payroll check-up with your accountant or bookkeeper could save your business thousands.
