Managing employee expenses isn’t just about reimbursing costs – it’s about creating a process that’s fair, efficient, and most importantly, compliant with both legal and tax requirements. From ATO regulatins to Fair Work requirements and internal auditing, your business has a lot to navigate to avoid budget blowouts, disputes, penalties, or inadvertent financial mismanagement.
In this article, we’ll break down everything you need to know about employee expense management: from the legal requirements for expense management to best practice tips and how to simplify processing. We’ll also outline how you can easily navigate expense management to ensure transparency, accountability, and peace of mind for your whole team.
Employee expenses: the basics
Let’s start with a simple definition of an employee expense (usually referred to as a ‘reimbursement’). Put simply, a reimbursement is money that an employer pays to an employee for a business-related expense that the employee has already paid out of their own pocket.
There are four main categories of expenses that companies typically reimburse:
- Travel expenses – including flights, accommodation, and transportation for business purposes.
- Work-related expenses – typically for equipment, uniforms, and professional memberships.
- Vehicle expenses – including fuel, maintenance, and parking fees when using a personal vehicle for business purposes.
- Home office costs – include computers, telephones, and internet expenses incurred by employees outside of an office you’ve provided for them.
Reimbursements are payments made to an employee to compensate them for expenses already incurred and are, therefore, not generally considered taxable income. Additionally, a reimbursement must meet the required criteria for a legitimate business-related reimbursement:
- Have a direct connection to the business.
- Be adequately documented (receipts, invoices, etc).
- Be for the exact amount of the expense.
Now that we’ve defined what a reimbursement is, it’s time to understand the rules for managing reimbursements to stay compliant with your legal obligations.
Employee expenses: the rules
In Australia, employers need to comply with regulations enforced by:
- Australian Taxation Office (ATO) – which define standards for record-keeping for reimbursements, the differences between allowances and reimbursements when paying employees, as well as how reimbursements are treated for taxation purposes, and;
- Fair Work Commission (FWC) – which states what an employer can reasonably expect an employee to incur costs for and stipulates that reimbursements cannot be used instead of wages.
The ATO specifies rules for the payment of both allowances and reimbursements for employees here. Key ATO considerations for employers when managing reimbursements are:
- To be exempt from tax, reimbursements must be substantiated by receipts or other suitable evidence. This helps ensure reimbursements are made for legitimate business-related expenses only. More information about record-keeping and substantiating expenses can be found here.
- An employer may be required to pay Fringe Benefits Tax (FBT) on a reimbursement. More information about FBT can be found here.
- An employer may also be eligible for a GST credit for reimbursements. More information about GST credits for reimbursements can be found here.
ATO reimbursement requirements can be complex and change regularly because of policy updates or budget measures introduced each year. If you’re unsure about any of the key considerations above, you should seek further advice from a financial professional.
In general, the key FWC considerations for employers to keep in mind regarding reimbursements are:
- The FWC stipulates that reimbursements cannot be used instead of wages (Fair Work Act S332). Find out more about reimbursements and earnings here.
- Employees required to buy work-related items can’t be forced by their employer to use their wages to pay for these items if the requirement is unreasonable.
- Individual awards and enterprise agreements may have specific requirements for employers regarding which costs employees can be expected to incur, which kinds of expenses employees must receive an allowance for, and which types of expenses must be reimbursed. Check any awards or agreements that apply to your business for more information.
Compliance requirements change due to changes in laws, regulations, and industry standards. To ensure you’re always across the latest requirements, you should subscribe to both agencies for updates. Xemplo users can also check in-app updates for the latest compliance updates from our Employment Law team.
How to reimburse expenses
You've got the receipts, now it’s time to reimburse the money. The best option for your business will depend on which tools you currently have in place. There are multiple ways to process an employee reimbursement, from manually processing directly to an employee’s bank account to fully automated expense management systems common in high-volume processing environments.
Below, we’ll explore five methods for reimbursing expenses and address each option’s potential benefits/drawbacks.
1. Directly to an employee's bank account
Paying directly into a bank account is often the quickest way to get money back to your employees. This can make accounting easier, as salary and reimbursement payments are separate. However, this is also often the most manual option and requires the most administration and manual validation of information received from the employee – including the receipt or proof of expense – which must be uploaded and stored in your records.
2. Using a corporate credit card
Corporate credit cards can make it easier to manage costs by tracking and recording transactions using credit card statements. This means less administration and fewer errors. Plus, financial strain on employees is reduced, so you can easily keep expenses in line with company policies. The downside? There are costs associated with supplying and managing credit cards for your team, and they have a poor reputation for exacerbating fraud and misuse issues when monitored incorrectly.
3. Through your HR or payroll system
Depending on your HR or payroll system, you can enter expense information for reimbursement into the system to automatically send to payroll processing during the next available pay run. Suppose your team can access your system using a self-service portal or app. In that case, this will further automate the process by optimising the collection of receipts and other reimbursement information, tracking reimbursement approval where needed, and sending it to payroll to disburse to an employee’s bank account without additional administrative effort. Though you will need to be able to categorise reimbursements separately from other payments to demonstrate that reimbursements were not treated as wages when required.
Your team can submit reimbursement requests (receipts and all) via the Xemplo web portal or mobile app. An authorised Manager can approve expense requests before they are automatically sent to payroll for processing.
4. Through your finance system
You can setup an employee as a creditor in your Finance system and send their reimbursement to their bank account using this method. This option simplifies your accounting processes as salary and reimbursement payments are completely separated, and all financial transactions are tracked in one system. Though there is the additional administrative effort to get employee information entered into your Finance system (and data privacy considerations).
5. Through an expense management system
If you’re processing a high volume of expense reimbursements, it might be worth investing in a specialised expense management solution for collecting and tracking expense activity across your workforce. A specialised solution will simplify the collection of reimbursement information, validate reimbursements based on legislative and business-specific requirements, along with tracking approval activity before automatically syncing all data to your finance system for processing.
While a specialised solution is recommended for high-volume reimbursement environments, you’ll generally be paying more for another system and spending extra time training your workforce to use it specifically for sending reimbursement requests. If your workforce is already using an HR or payroll self-service portal to interact with your team, simply getting acquainted with expense features in these tools is far easier.
Best practices for managing employee expenses
Now that you understand your employer obligations, it’s time to educate your team about your business’ policy for reimbursement and how they can request a reimbursement from you so you can efficiently manage requests and keep all required records for compliance.
Set realistic thresholds and limits for your business
Once you’ve determined which rules your business needs to abide by, it’s time to set any business-specific thresholds and spending limits, so your team always knows what’s expected of them.
With limits for the likes of daily expenditure while travelling, realistic targets should be set (consider the reasonable amount of money the employee is likely to spend in that location). Don’t forget to check where a travel or work-related expense should be an allowance (taxable as salary or wages) or a reimbursement for incurred expenses.
Create a policy and define your procedures
After you’ve determined which rules your business needs to follow and your business-specific preferences regarding spending limits and activities, it’s time to draft a policy that clearly outlines your business rules and employee obligations.
Your policy should explicitly require employees to substantiate reimbursement requests with evidence (i.e. receipts) and outline the process and timeframes for reimbursement within your business.
In Australia, you can get free policy creation tips and advice from resources like the business.gov.au website. If you’re a Xemplo customer, you can access our free compliance policy library featuring a customisable Expenses Policy template. You can find a complete list of all policy templates available in Xemplo here.
Educate your team
As soon as you have a policy in place, it’s time to distribute it to your team so they can refer to it when needed. For employees likely to incur expenses requiring reimbursement, share a copy of your expense policy on commencement with the business so they know what’s expected from the outset. You should also keep a copy of the policy in a location that all employees can access when needed.
If you’re a Xemplo customer, you can include your expense policy in the acknowledgement step of your onboarding document for all required roles.
Key all required records
It’s a requirement to keep all evidence of expenses for reimbursements to substantiate reimbursements for tax calculation and audit purposes. Ensure you securely store all receipts and other documentation received to access and easily refer to them when needed. If you’re collecting information directly from your team through your payroll, HR, Finance, or expense management system, your team should be able to scan or photograph the aforementioned to attach to their reimbursement request. In Xemplo, for example, an employee submitting an expense request must scan or take a photo before sending the request to be approved.
.webp)
