Kilometre Reimbursement for Employees Australia: ATO Rules 2026

Kilometre reimbursement for employees in Australia is one of the most straightforward ways to cover work-related driving costs — but it only stays tax-free if you follow the ATO rules. This guide covers the 2025-26 rate, what counts as a tax-free reimbursement, and what both employers and employees must do to stay compliant.

The ATO cents-per-kilometre rate for employee reimbursements

The ATO sets an annual cents-per-kilometre rate used for both employee tax deductions and employer reimbursements. For the 2025-26 financial year, the rate is 88 cents per kilometre.

This rate is designed to cover all vehicle running costs: fuel, oil, tyres, servicing, registration, insurance, and a depreciation allowance. Neither the employer nor the employee needs to track actual vehicle costs when using this rate.

The rate applies to standard passenger vehicles. Motorcycles use a different rate, and vehicles carrying more than one tonne or eight or more passengers use the logbook method instead.

How reimbursements work: tax-free vs taxable

A reimbursement paid at or below the ATO rate is not assessable income for the employee. It does not appear on their payment summary and does not affect their tax return. No PAYG withholding applies.

However, this only holds when:

• The kilometres are genuinely work-related (not commuting)
• The reimbursement is for the employee’s own vehicle
• The amount paid does not exceed the ATO rate × kilometres driven

If your employer pays you a flat monthly amount regardless of kilometres, that is a car allowance — not a reimbursement. The tax treatment is different: it is assessable income, and you claim deductions separately at tax time. See Car Allowance Australia for how that works.

Reimbursing above the ATO rate

Some employers pay above 88 cents/km — for example, 95 cents/km to recognise higher vehicle costs or to attract employees. Any amount above the ATO rate is generally:

• Taxable income for the employee on the excess (the amount over 88 cents/km)
• Subject to PAYG withholding on the excess

The employer should split the payment on the payslip: the ATO-rate portion as a tax-free reimbursement, and the excess as an allowance subject to PAYG.

Employees who receive an above-rate reimbursement may still be able to claim a deduction for actual vehicle costs if those costs exceed what was reimbursed — but good records are essential.

What employees need to submit for reimbursement

To claim a reimbursement, employees typically need to submit:

1. A trip log — date, start and end point, purpose of the trip, and kilometres travelled
2. Odometer evidence — some employers require start and end odometer readings for the period
3. Timesheet alignment — for field-based roles, reimbursements should match scheduled work days

The trip log does not need to be a formal logbook. A diary, a spreadsheet, or a report from a kilometre tracking app all satisfy the ATO’s requirement for a “reasonable basis.”

Tripbook lets you log each trip automatically using your iPhone’s location, categorise it as business or personal, and export a clean CSV or PDF report. Many employers accept Tripbook reports directly as reimbursement evidence.

Employer obligations and PAYG

When reimbursing at or below the ATO rate, employers:

• Do not withhold PAYG on that amount
• Do not pay FBT on the reimbursement
• Do not need to include it on the employee’s payment summary
• Can claim a GST credit on the reimbursement (one-eleventh of the total amount)

If your business pays above the ATO rate, or if you pay a flat allowance, PAYG withholding applies to the excess or the full allowance. This must flow through payroll correctly — misclassifying a taxable allowance as a tax-free reimbursement can trigger ATO penalties.

Setting up a reimbursement policy

A clear written policy protects both parties and makes the payroll process repeatable. Your policy should include:

Rate and frequency State the rate (recommend aligning with the ATO rate, currently 88 cents/km), and specify whether employees claim weekly, monthly, or per trip.

Eligible travel Define what counts. Typically: travel between work sites, visits to clients or customers, attending approved work-related training, and travel to a temporary workplace. Exclude ordinary commuting — home to usual workplace and back.

Submission process Specify what employees must provide. A trip log in any format (digital or paper) that captures date, destination, purpose, and kilometres is sufficient. A tool like Tripbook makes this easy for employees in the field.

Approval State who approves claims — typically the employee’s direct manager — and the turnaround time for payment.

Record retention Both the employer and employee should keep records for five years. The ATO can audit reimbursement arrangements, and consistent records across payroll, the employee’s log, and manager approvals make any audit straightforward.

For more on what employees can claim for car expenses, see: Work-Related Car Expenses Australia

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