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Allowances for additional transport costs

Tax Alert - July 2022

By Jess Wheeler & Liam Conaghan

Do you pay your employees a travel allowance or are considering paying one as a retention tool in this hot labour market? If so, make sure you read on to see whether this can be paid tax-free.

Inland Revenue generally regards any travel an employee makes between home and work as private travel, which means any cash payment to cover this expense is treated as being subject to PAYE. However, there are some limited exemptions to this rule and Inland Revenue has recently published a draft operational statement setting out when employee allowances for additional transport costs are exempt from tax.

The draft statement outlines a three-step approach to determining whether a transport allowance can be treated as exempt, as well as some handy examples throughout the statement. These steps are:

If none of the factors are present, then the additional transport costs tax exemption cannot apply.

a. the additional transport costs are due to the day or time of day when the work duties are performed. For example, where a staff member starts their shift in the late afternoon and finishes after public transport has stopped running for the day.

b. the need to transport any goods or material for use or disposal in the course of the employee’s work. For example, where an employee normally bikes into work and the employer needs them to pick up an item that requires a trailer.

c. the requirement to fulfil a statutory obligation. For example, where an employee is required to get a COVID-19 test at a drive-through station when the employee normally uses public transport.

d. a temporary change in the employee’s place of work while in the same employment. For example, providing an employee with a transport allowance while they are on a short term-secondment. Inland Revenue refers to a period of two years or less when referring to “short-term”.

e. any other condition of the employee’s work for the benefit of the employer. The “condition” would need to increase the employee’s cost of travelling between an employee’s home and their workplace by more than would ordinarily be expected.

f. the absence of an adequate public passenger transport service that operates fixed routes and a regular timetable for the employee’s place of work. The Commissioner considers that where the public transport services available do not neatly fit with an employee’s hours of work, that does not in itself mean the public transport service is inadequate. This factor will only apply when a workplace has no public transport service or no close stop from public transport, if the service doesn’t work for shift workers or the public transport can’t accommodate a large number of employees starting work at one time.

The Commissioner accepts that when the employee incurs additional transport costs because of one of the factors under step one, then those costs are incurred in connection with their employment (i.e., no longer considered a private cost of getting to work). It’s important that at this step we consider if the factors in step one arise from the nature of the employment, or a need/requirement of the employer and not as a benefit of convenience of the employee.

You will need to calculate the additional transport costs and compare them with the allowance paid. In terms of paying your staff a transport allowance, you will also need to be aware you can only exempt payments that are over and above what the employee would ordinarily incur for their travel, anything above this level will be taxable and subject to PAYE.

For example: Robyn works in the Wellington CBD. She is seconded to work in her employer’s Lower Hutt branch office for 12 months. Normally Robyn’s cost in getting to work involved a single bus trip each way with a weekly cost of $30. But this temporary change in work location requires her to take the train at the cost of an additional $43 a week. Her total temporary travel costs are $74 per week. The additional transport cost that can be paid tax free per week is $43.

It is worth noting that you can make a reasonable estimate of the additional transport costs an employee or group of employees is likely to incur, which will save you quizzing employees on their actual costs and ensures you can pay a standard estimate across a group to ensure it is kept fair amongst employees.

Where employees incur additional transport costs because of the lack of public transport services, the additional transport costs are the amount by which the costs are more than $5 for each day on which the employee attends work.

For example: There is no public transport service to Rosie’s workplace so factor (f) under step one applies. Rosie incurs transport costs of $60 a week getting to work for a five-day working week. In this example, the additional transport costs that can be paid tax free are $35 ($60 – (5 x $5)). Remember, if you are estimating additional transport costs involving the use of a motor vehicle, refer to the approach in OS 19/04b: Commissioner’s statement on using a kilometre rate for employee reimbursement of a motor vehicle to make a reasonable estimate of costs.

You are also prevented from taking into account the costs of travelling more than 70km per day in calculating the additional transport costs, except in special circumstances. The Commissioner states this covers exceptional, abnormal or unusual – but not extraordinary or unique cases. The special circumstances must arise from the location of the workplace rather than where the employee chooses to live.

For example: Barry works in a national park where there is no accommodation anywhere except the closest town, which is 50km away, gives a round trip of 100km. This is considered a special circumstance as no one (including Barry) could live any closer to his workplace.

Missed Opportunity

None of the new guidance provided by Inland Revenue is ground-breaking. Rather, Inland Revenue has summarised already known information and repackaged it into a single guidance document. We think there is a missed opportunity by Inland Revenue to provide both employers and tax professionals with strong guidance. This is especially true given the hot labour market and retention policies we are seeing employers implement. Within this document, Inland Revenue could have provided:

  • Guidance on working from home and transport costs. For example, where an employee normally works from home but is required to come in for meetings or activities on an ad hoc basis.
  • Guidance on the interaction between FBT and PAYE where employers provide transport rather than an allowance (e.g. having a work bus to a remote worksite).
  • An increase to the 70km travel limit, given more and more employees are living further away from the workplace.
  • Addressing the policy concern regarding the requirement the first $5 of additional public transport costs be treated as taxable for each day the employee attends work. The compliance costs of doing this are onerous compared to the $5 threshold.
  • Incorporating tables, pictures and diagrams into the document for ease of understanding.


If you pay or are considering paying your employees a travel allowance you should consider reaching out to your Deloitte advisor to ensure you are meeting your tax obligations. As Inland Revenue is collecting submissions on their guidance document until 22 July 2022, we would like to hear your thoughts on what practical matters Inland Revenue could include.

July 2022 - Tax Alerts

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