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Allowances: balanced issues paper proposals blighted by accommodation bombshell

Since 2006 the tax treatment of allowances has been under review, with Inland Revenue’s public rulings team issuing exposure drafts on the topic in both 2006 and 2010.  The technical analysis being undertaken on the current tax legislation was leading Inland Revenue to conclude that a range of payments to employees had a sufficient private purpose to justify them being taxable, despite this being contrary to actual practice.  Such things being considered as potentially taxable included working lunches and meals while travelling on business.

The compliance costs that would have ensued from taxing such things would have been horrendous, and as such a policy review was undertaken, with the recent officials’ issues paper “Reviewing the tax treatment of employee allowances and other expenditure payments being the output.

The issues paper covers:

  • Meal payments
  • Accommodation payments
  • Communication payments
  • Clothing payments

While some aspects of the proposals will no doubt be subject to debate, overall our initial view is that Officials appear to have considered the policy issues in some detail, and generally have walked the fine line between minimising employer compliance costs through pragmatic solutions, and protecting the tax base by minimising the ability for taxpayers to salary sacrifice using allowances.

An important point to note about the proposals is that overall they are not intended to be revenue-gathering.  Instead, the focus is on creating fair rules which are easy to understand and apply.

The issues paper did, however, leave one piece of the puzzle missing which was to guide taxpayers as to what they should be doing in the here and now before new tax rules come into effect.  As noted above, Inland Revenue has reached technical conclusions that certain employee payments should be taxed when this has not been happening (see the table below) and where the law is proposed to be changed to more closely fit practice.  However, far from what many expected, Inland Revenue’s operational arm has declined to be pragmatic and instead of providing clarity, it has since issued a statement declaring it intends to play hard ball over the treatment of accommodation allowances (refer accommodation bombshell item below).  Inland Revenue has not provided any guidance over what action, if any, it intends to take in respect of meals employees have received that it thinks should have been taxed.

The issues paper provides a good high level summary of the proposals and how they differ from current law and practices in the table below (emphasis added).

Comparison of current and suggested treatment of key employee expenditure payments [1]


Type of payment

Current treatment 


Payment for employee’s meal expenses during work travel

The amount the employee saves on day-to-day meal costs during work travel may be taxable because meal costs are generally treated as private expenditure. In practice, employers do not tax payments regardless of duration of travel.  

Payment tax-free if duration of travel to particular work location is no more than 3 months.  Taxable in full for longer trips. 

Payment for work-related meals outside of work travel

As for work travel, the amount the employee saves on their meal costs is taxable because it is private expenditure. In practice, employers do not tax these payments. 

Payment tax-free if not regular payment for employee services.

Payment for employee’s accommodation expenses during work travel

While generally not taxable, there may be circumstances when the expenditure is of a private nature and therefore taxable. In practice, employers do not tax these payments.

Payment tax-free if duration of work travel to particular work location is no more than 12 months.  Taxable in full for longer trips. 

Payment for  accommodation costs outside of work travel

The payment is taxable because accommodation is a private cost. 

No change, the payment would be taxable. 

Employer provides accommodation at or near work place

The market value of accommodation is taxable. In practice this is interpreted to mean rental value and can take into account any contribution from the employee. 

Confirm the legislation to ensure taxable value is rental value, subject to any employee contribution.   

Payment for accommodation costs where more than one permanent work place

In some circumstances the payment may be taxable because accommodation is a private cost. 

Special rules to ensure that a payment to meet accommodation costs at one location is not taxable in certain circumstances.

Payment for  accommodation costs for employees seconded overseas who remain NZ tax resident

The payment is taxable, at a value based on market rent in the overseas location.

Special rules to limit tax value – for example, NZ equivalent rent. 

Payment for communications (including telephone and internet)

The value of any private expenditure is taxable and in practice this will mean an apportionment is required according to the private/work-related split.

Taxable in full except where private/work element able to be separately identified. 

Payment for work-related clothing

The payment is not taxable if the payment is for work uniform/specialist clothing. 

Confirm not taxable only when payment is for a work uniform/specialist clothing.

[1] Table is taken from Appendix A, Reviewing the tax treatment of employee allowances and other expenditure payments. An Officials’ issues paper.  November 2012.

Meal payments

The long standing approach when determining whether a receipt should be treated as income is to consider its quality in the hands of the recipient.  Given it is a basic human need to eat, one possible view is that any scenario where food is provided has sufficient private benefit to make it subject to tax in one way or another (in some instances this already occurs through the entertainment and FBT regimes). 

Fortunately, Officials have identified that the compliance costs which would be associated with isolating the private element would be very difficult. For example, if you are travelling on business and need to have an evening meal at a restaurant costing $35, arguably the only amount which should be taxable would be the amount that you have “saved” by not cooking for yourself at home; with the remainder being a direct consequence of the requirement to be away for work.  This is clearly an impossibly subjective test which would vary for each employee depending on whether they ordinarily eat two minute noodles or fillet steak while at home.

The issues paper contemplates two main scenarios where an allowance or reimbursement is paid for meal outside of situations already covered by existing laws (e.g. overtime meal allowances), and these are when an employee is travelling on business and when an employee needs to work through a mealtime (e.g. a working lunch).  It is proposed that the starting position is that neither scenario gives rise to a taxable event.  That said, it is proposed to seek to impose tax if an employee is travelling on business and is provided with meals for over 3 months.  On the surface this approach seems reasonable, as after a three month period both the employee and employer are likely to want to cut back on eating out.  Practically it is unclear how the 3 month rule will work; for example whether it is a 3 month continuous period or if it is a cumulative 90 days over a certain time period.  One would assume the former, but it is a point to seek clarification on.

Accommodation payments

The tax treatment of accommodation has become a hot topic with examples of Inland Revenue challenging taxpayers following historic Inland Revenue guidance, a law change due to a rewrite issue and the release of a Commissioner’s statement on the topic last week (see below).  The law looks to change again to introduce a bright line test in work travel scenarios and to clarify the law in other scenarios.   

In a world of increased specialisation and high mobility it can be hard to find the right person for the job in the right place at the right time.  As a consequence of this some employers have been finding themselves needing to recruit outside of the job location or needing to have staff operate relocate or in multiple locations.  To the extent an employer provides or funds accommodation tax will need to be a consideration, with the starting proposition being that tax is payable. 

The issues paper contemplates 3 scenarios where accommodation should not be taxable or could be subject to tax at less than the full value:

  • Accommodation during temporary work travel: If an employee is temporarily away from their usual workplace, it is proposed to specifically exempt any accommodation payments for a 12-month period, with a power given to the Commissioner to extend the period in limited circumstances.

  • Accommodation provided because of the needs of the job:  There are a limited number of occupations where it is necessary for an employee to live in a particular location to better undertake their duties.  Examples include farm workers, rural police officers, diplomats and clergy.  In some situations this could result in an employee living in a more expensive suburb than might otherwise be the case and use of a market value rental could result in large tax bills and flow on impacts to social assistance etc.  A number of options are considered, albeit Officials recommend an approach of taxing on the basis of the full market value of the property
  • Other situations: There are a few other situations covered by the paper including employees with more than one permanent workplace and temporary transfers overseas.  The most common scenario touched on is home workers where it is sensibly suggested that there be an apportionment of costs such as heating and lighting based on floor area when an employer reimburses an employee for home office running costs.

Communication payments

There has been a long standing rule of thumb that an employer can treat 50% of payment towards home phone rental costs as not taxable to the employee; or of course the employer can incur compliance costs to justify a higher percentage.  There is now a view that use of phones, electronic devices and the internet is integral to most people’s private lives and accordingly, unless there is strong evidence to the contrary, any associated costs should be viewed as a private expense with any employer reimbursements or contributions being taxable in full.

While it is true that phones and internet are integral to many people, there needs to be recognition that there is a blurring of the lines between work and personal time and electronic communication is also vital to this – to tax the full amount is an overreach.  We think the proposal is unduly restrictive and a topic worthy of submitting on to try to see a more pragmatic outcome, such as a reinstatement of the 50% rule.

To the extent there are dedicated work facilities or where the employer directly incurs the expense (and private use is limited), a full tax exemption would be available.  The practicalities associated with effectively requiring employees to have separate phones for business and private use limit the usefulness of these concessions.

Clothing payments

Like food, clothing is an inherently private need in life and therefore the starting proposition is that any clothing or laundry allowances should be taxable.  It is proposed that there will be an exemption for expenditure on uniforms, protective clothing and other specialist work clothing that is not reasonably suitable for use outside work.  The tax treatment of any laundry allowance would also follow the treatment of the underlying item being laundered.     

Next steps

The comments above outline Officials’ preferred approach to these allowances but in many cases there are a number of options considered.  We recommend that employers providing allowances consider the full range of options put forward in the paper and consider making a submission.

For employers who have been providing allowances or reimbursements for meal expenses while employees have been travelling, it may be well worth submitting that there needs to be a law change to retrospectively protect prior positions that no tax was payable.

Submissions can be made until 1 February 2013. 

After considering submissions Officials’ will make recommendations to the Government and legislative change will follow in due course.

Accommodation Bombshell

On 6 December Inland Revenue’s new Commissioner Naomi Ferguson made her presence felt by releasing a statement setting out a hard-line stance on the income tax treatment of accommodation payments, employer provided accommodation and accommodation allowances.

In summary, the Commissioner’s position on the current and past taxation of accommodation is as follows:

  • Where an employer has provided accommodation or an accommodation allowance the amount is taxable and the employer must deduct PAYE.  Taxpayers who make voluntary disclosures will only be required to account for PAYE for the two year period prior to the date of the issue of the statement.  Use of money interest and shortfall penalties will not apply.
  • Where accommodation payments have been made by an employer relating to expenditure incurred by an employee (expenditure on account) the amount is taxable and the employer must deduct PAYE.  If a voluntary disclosure is made the taxpayer will only be required to account for PAYE for the four year period prior to the date of the issue of the statement.  Use of money interest and shortfall penalties will apply.
  • Accommodation may not be taxable when it is overnight or relates to a short term stay by an employee to another location in the performance of their employment duties (however no guidance is provided on what constitutes “short term”).

The approach being adopted by the Inland Revenue comes as a surprise because the position understood and applied by taxpayers and advisors for quite some time has been that where an employee is maintaining a home in another location, the market value of the benefit of any employer funded accommodation is nil, as there is no ‘net benefit’ - and therefore no tax is payable.  In respect of this position the statement notes:


“The Commissioner does not agree with this view. The law does not support a net-benefit approach.  The Commissioner acknowledges there has been some uncertainty and inconsistent practice, by both Inland Revenue and taxpayers, regarding the taxation of employer-provided accommodation and accommodation allowances. The Inland Revenue Technical Rulings Manual paragraph 57.11 reflected a net-benefit approach to determining the value of employer-provided accommodation and accommodation allowances. However, taxpayers were advised in September 1998 that the Technical Rulings Manual was being discontinued and that Technical Rulings should not be relied upon as representing Inland Revenue’s views or practice. In addition, the legislation has changed considerably since the relevant Technical Rulings chapter was written.”


Despite the discontinuation of the Technical Rulings Manual, until as recently as 2010, the Inland Revenue website stated that the following applied in respect of the screen production industry if you have accommodation expenses and you maintain your own home in your home town at your own expense, any accommodation allowance you receive while you are away is not considered income and is not taxable


This generally understood position was also confirmed by a Government initiated Rewrite Panel that examines legislation re-writes to ensure they do not inadvertently change the law when it was not intended.  In 2010 the relevant legislation was amended to ensure it referred to the “market value of the benefit of accommodation”.  When an employee is using their after-tax income to maintain a home elsewhere while they are working away from home it is hard to see what the benefit is that Inland Revenue want to tax.  

Clearly the issuing of this statement now clarifies the Commissioner’s position in terms of the taxability of accommodation from this point onwards, and it would be prudent for employers to consider treating the costs associated with funding or providing accommodation to employees as taxable going forward, unless incurred as a result of a temporary change of workplace, or relating to the first three months of a permanent relocation. It may be noted that this is more onerous than the proposed treatment of accommodation payments outlined in the recently released Officials’ Issues Paper on employee allowances

Of significantly more concern is the indication that this newly released statement serves to confirm a position retrospectively, thus giving rise, in the Commissioner’s view, to a need for employers to consider voluntarily disclosing any prior accommodation costs that have been treated as not being subject to tax.  The flow on consequences of reopening prior year income tax assessments for employees and the likelihood of employers being able to recoup the tax from the relevant employees (if they are still employees) are not addressed by the statement.


Coming up:


On 29 November 2012, the Taxation (Livestock Valuation, Asset Expenditure, and Remedial Matters) Bill passed its first reading in Parliament.  In his first reading speech, Minister of Revenue Hon Peter Dunne announced he intends to add a supplementary order paper to the Bill which will contain new tax laws for leases and FBT on car parks. 

The Bill has been referred to the Finance and Expenditure Committee which has called for submissions by 7 February 2013.


Tax Alert December 2012 Contents

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