Table of content
- Navigating Additional Payments in Australian Payroll
- Bonuses: Discretionary vs. Contractual & Tax Treatment
- Commissions: When Does Super Apply?
- Common Allowances: From Travel to Tools
- What Counts as Ordinary Time Earnings (OTE)?
- PAYG Withholding: Calculating Tax on Bonuses & Allowances
- Salary Sacrifice Considerations
- Key Takeaways & How to Ensure Compliance
- Bonuses, Allowances & Superannuation: FAQ for Australian Employers
- Payroll & HR Tools
- Australian HR & Payroll Glossary
- Australian HR & Payroll Insights
- Public Holidays & Leave Planning
- HR Automation & Compliance
Navigating Additional Payments in Australian Payroll
Additional payments like bonuses, commissions, and allowances are powerful tools for rewarding and compensating employees. However, they introduce complexity into Australian payroll, with specific rules governing their tax treatment, superannuation (super) obligations, and reporting requirements. Misclassifying or miscalculating these payments can lead to significant underpayment risks, ATO penalties, and compliance issues.
This guide explains how to correctly process various additional payments under Australian law, ensuring your business remains compliant and transparent.
Bonuses: Discretionary vs. Contractual & Tax Treatment
A bonus is a payment made to an employee in addition to their base salary, typically as a reward for performance, achievement, or loyalty.
Key Distinction: Discretionary vs. Contractual
| Feature | Discretionary Bonus |
Contractual Bonus |
| Definition | Paid at the employer’s sole discretion with no prior promise or agreement. |
Promised in an employment contract, award, or agreement (e.g., a sales target bonus). |
| Employee Expectation | No legal entitlement. |
Creates a legal entitlement; failure to pay can breach the contract. |
| Common Examples | Year-end “thank you” bonus, spot award. |
Commission, performance bonus tied to KPIs, sign-on bonus. |
Tax Treatment: How Are Bonuses Taxed?
Bonuses are treated as ordinary income and are subject to Pay As You Go (PAYG) withholding. The ATO does not tax them at a separate, higher “bonus tax rate.” Instead, they are added to the employee’s regular earnings for the pay period.
- Tax Calculation: The total payment (regular wage + bonus) is applied to the standard tax withholding tables, which can result in a higher marginal rate for that period.
- ATO Schedule 5: For back payments, commissions, bonuses, and similar payments, the ATO provides *Schedule 5 – tax table for back payments, commissions, bonuses and similar payments*. This schedule can sometimes result in a lower withholding rate for large, lump-sum bonus payments to prevent excessive tax being withheld in a single period. However, the total annual tax liability is reconciled when the employee lodges their income tax return.
Example: An employee earning AU$5,000 monthly receives a AU$10,000 annual bonus in June. The total payment for June is AU$15,000. Tax is withheld based on the AU$15,000 amount using the applicable withholding schedule.
Commissions: When Does Super Apply?
Commissions are payments calculated as a percentage of sales or revenue generated by an employee. Their treatment for superannuation is crucial.
Superannuation on Commissions
Whether super is payable on commissions depends entirely on whether the commission is considered part of the employee’s Ordinary Time Earnings (OTE).
- Commissions for Ordinary Hours: If commissions are earned for work performed during ordinary hours, they are almost certainly part of OTE and subject to the 11.5% super guarantee.
- Commissions as Over-Achievement: Even if considered “extra,” if they are directly related to the employee’s ordinary duties and form part of their expected remuneration, the ATO typically views them as OTE.
Key Takeaway: Treat commissions as OTE and pay super unless you have a clear, documented basis (and potentially professional advice) stating otherwise. The ATO’s view is generally inclusive.
Common Allowances: From Travel to Tools
An allowance is a separate payment to cover estimated expenses an employee might incur in performing their job. They can be taxable or tax-exempt.
| Allowance Type | Description | Taxable? |
Super on OTE Component? |
| Travel Allowance | Covers food, drink, and accommodation while traveling for work. | Partially. ATO publishes reasonable daily amounts that are tax-free. Amounts above this are taxable. |
No, if it is a genuine reimbursement of estimated costs. |
| Car Allowance | Covers the costs of using a personal car for work. | Yes, the entire amount is generally assessable income. |
Yes, the car allowance forms part of OTE, so super is payable. |
| Meal Allowance | Paid for overtime work requiring an extra meal. | Often tax-free up to a reasonable amount if overtime criteria are met. |
Usually not part of OTE. |
| Tool Allowance | Compensates for providing and maintaining tools. | Taxable as income. |
Yes, tool allowances are generally part of OTE. |
| Uniform/Laundry Allowance | Covers the cost of buying/cleaning compulsory uniforms. | Often tax-free if for compulsory, occupation-specific clothing. |
Usually not part of OTE. |
Golden Rule: If the allowance is a reimbursement for a likely work-related expense (like travel), it’s often tax-free. If it’s compensation for a condition of employment (like using your own tools), it’s usually taxable and often counts for super.
What Counts as Ordinary Time Earnings (OTE)?
Ordinary Time Earnings (OTE) is the cornerstone of superannuation calculation. The super guarantee (currently 11.5% for 2024-25) must be paid on an employee’s OTE.
Definition (ATO):
OTE is generally what an employee earns for their ordinary hours of work, including:
- Base salary/wages
- Most allowances (car, tool, etc.)
- Bonuses and commissions (related to ordinary hours)
- Annual leave and sick leave payments
- Paid parental leave (from July 2025)
What is NOT included in OTE?
- Payments for overtime hours (unless the overtime is part of the employee’s regular, guaranteed hours).
- Reimbursements for work expenses (e.g., petrol reimbursement based on a logbook).
- Leave Without Pay payments.
Why it matters: Underpaying super by incorrectly excluding an OTE component (like a car allowance) results in Super Guarantee Charge (SGC) liability, which includes the shortfall, interest, and administrative penalties.
PAYG Withholding: Calculating Tax on Bonuses & Allowances
The PAYG withholding process ensures tax is deducted from additional payments.
Steps for Correct Withholding:
- Classify the Payment: Is it a bonus, commission, or allowance? Is the allowance taxable?
- Determine the Withholding Method:
- Standard Method: Add the bonus to the regular earnings for the pay period and use the standard tax withholding tables. This is most common.
- Schedule 5 Method: For large, irregular bonuses, commissions, or back payments, you may optionally use ATO Schedule 5. This can smooth the withholding but requires careful application.
- Withhold and Report: Deduct the calculated amount, include it in the employee’s payment summary, and report it through Single Touch Payroll (STP).
Salary Sacrifice Considerations
A salary sacrifice arrangement is an agreement where an employee gives up part of their future pre-tax salary in return for benefits of similar value (often super).
Impact on Bonus Calculations:
- Pre-Tax Nature: Salary sacrifice is arranged before tax is calculated, reducing the employee’s taxable income.
- Timing is Critical: The sacrifice agreement must be in place before the employee earns the bonus. You cannot retrospectively salary sacrifice a bonus that has already been accrued and earned.
- Effect on OTE: Amounts salary sacrificed into super are still part of OTE. The employer must calculate the 11.5% super on the original OTE amount (including the sacrificed portion).
Key Takeaways & How to Ensure Compliance
- There’s no special “bonus tax.” Bonuses are income taxed via PAYG withholding, sometimes using Schedule 5 for large lump sums.
- Super applies to OTE. Most bonuses, commissions, and compensation-style allowances (car, tool) form part of OTE and require the 11.5% super guarantee.
- Know your allowances. Distinguish between tax-free reimbursements and taxable compensation payments.
- Document everything. Clearly define discretionary vs. contractual bonuses in agreements. Keep records of allowance policies and salary sacrifice agreements.
- Salary sacrifice must be prospective. Arrange it before the income is earned, not after.
Automate Complex Calculations with Workstem
Manually classifying payments, calculating OTE, applying correct tax withholding, and ensuring super compliance is a high-risk, time-consuming task.
Workstem’s integrated payroll platform automates this complexity:
- Automated OTE Identification: Systematically identifies which payments (bonuses, commissions, allowances) form part of OTE for super calculations.
- Correct Tax Withholding: Applies the correct PAYG withholding method (standard tables or Schedule 5) automatically.
- Allowance Management: Configures taxable vs. non-taxable allowances and applies correct treatment.
- Guaranteed Compliance: Updates with the latest ATO rulings and super guarantee rates to protect your business from SGC charges.
Bonuses, Allowances & Superannuation: FAQ for Australian Employers
Q1: What is the difference between a discretionary and a non-discretionary (contractual) bonus?
A:
- Discretionary Bonus: The employer has full discretion on whether to pay it, how much to pay, and the criteria. The employee has no legal entitlement. Example: An unexpected year-end “thank you” payment.
- Non-discretionary/Contractual Bonus: The employee has a legal entitlement based on a prior agreement, contract, or established practice. Example: A sales commission outlined in an employment contract or a performance bonus tied to published KPIs.
Why it matters: Contractual bonuses form part of an employee’s ordinary earnings and can affect entitlements like leave loading and redundancy pay calculations.
Q2: Does the 11.5% Super Guarantee apply to all bonuses?
A: Generally, yes. Superannuation is payable on an employee’s Ordinary Time Earnings (OTE). Bonuses paid for work performed during ordinary hours are part of OTE. This includes both discretionary and contractual bonuses. The main exception is if a bonus is clearly paid for work performed entirely outside of ordinary hours (e.g., a one-off project completed on weekends).
Safe approach: Unless you have a definitive reason to exclude it, pay super on bonuses to avoid Super Guarantee Charge (SGC) liabilities.
Q3: Is a “gift voucher” considered a bonus for tax purposes?
A: Yes. The ATO considers non-cash benefits, including gift cards and vouchers, to be fringe benefits (FB) if provided in respect of employment. They are subject to Fringe Benefits Tax (FBT) for the employer, not PAYG withholding. There are minor exemptions (e.g., infrequent and irregular minor benefits under AU$300), but these have strict conditions.
Recommendation: For anything beyond a trivial token, assume FBT applies and seek advice or use an FBT-compliant gifting platform.
Q4: How do I handle allowances for employees who work from home?
A:
- Reimbursement Method: You can reimburse the employee for additional, work-related running expenses (like electricity) based on actual costs or the ATO’s fixed 67 cents per hour rate (for 2023-24). This method requires records but payments are not taxable and do not require super.
- Allowance Method: You can pay a set allowance. If it exceeds the ATO’s reasonable amount (the 67c rate), the excess is taxable and may be considered part of OTE for super.
Simpler option: Encourage employees to claim the ATO’s deduction directly; you don’t need to process anything.
Q5: Are overtime payments included in Ordinary Time Earnings (OTE) for super?
A: Usually, no. OTE is defined as earnings for an employee’s ordinary hours of work. Payments for hours worked beyond ordinary hours are typically excluded from OTE. However, if an employee has a guaranteed contractual arrangement for regular overtime (it is “ordinary” for them), those payments may be included. This is a complex area—when in doubt, seek specific advice.
Q6: We paid a bonus late. What are the implications for super?
A: Super must be calculated on the OTE in the quarter it is paid, not earned. If you pay a bonus in the next quarter, the super liability attaches to that later quarter. Crucially, you must pay the super by the quarterly due date (28 days after the quarter ends) to avoid the SGC. Late payment of the bonus itself could also have implications under workplace laws if it was a contractual entitlement.
Q7: Does salary sacrifice affect how much super we have to pay?
A: No, it does not reduce your super obligation. The employer’s 11.5% Super Guarantee contribution must be calculated on the employee’s OTE before salary sacrifice is applied. An employee can sacrifice part of their bonus into super, but you must still calculate your 11.5% on the full pre-sacrifice OTE amount.
Q8: Can an employee salary sacrifice a bonus?
A: Yes, but only if a valid salary sacrifice agreement is in place before the bonus is earned (i.e., before they have a legal entitlement to it). You cannot retrospectively sacrifice income that has already accrued. The agreement should clearly state that it covers “potential bonus payments” or similar.
Q9: What is the tax treatment of a “sign-on” or “retention” bonus?
A: These are fully taxable as ordinary income to the employee via PAYG withholding. For super, they are part of OTE if they are considered remuneration for the employee’s services over the ordinary hours of the employment period.
Q10: Is a travel allowance paid as a daily rate fully taxable?
A: Not necessarily. The ATO publishes “reasonable travel allowance amounts” for domestic travel (food, drink, accommodation). If the daily allowance paid is at or below the ATO’s reasonable rate for that location, the employee does not need to keep receipts and the allowance is tax-free. Amounts exceeding the reasonable rate are taxable, and the employee must keep receipts to claim a deduction for the work-related portion.
Book a free demo with our payroll experts and experience how Workstem can streamline your payroll and workforce operations.
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