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Taxation of accommodation allowances
The Commissioner of Inland Revenue (CIR) has issued a special statement setting out Inland Revenue’s current operational approach to the income tax treatment of accommodation or allowances provided or funded by employers for employees working away from home.
The CIR considers the gross market value of accommodation provided or funded by employers is generally taxable income for employees and subject to Pay As You Earn (PAYE) withholding tax. The only exception is overnight or other short-term stays while employees are performing their employment duties away from their home location.
If employers have taken incorrect positions on employee accommodation or allowances, the statement seeks to encourage voluntary disclosure by proposing to limit re-assessment in some circumstances to two prior years, with no penalty or interest charges, if voluntary disclosures are made now.
- The CIR’s position – gross v net benefit
The CIR’s position that the gross market value of accommodation is generally taxable under the existing legislation is contrary to long-established practice. It had been accepted for many years that employees should be taxed on accommodation provided or funded by their employers only to the extent there was a net benefit. Various changes to the legislation have caused some uncertainty and confusion in recent years but the CIR had not previously published any statement explicitly stating that the long-accepted approach was incorrect. The CIR’s statement, however, maintains a gross market value approach is contemplated.
- The way accommodation is provided or funded
The statement distinguishes between situations where employers provide employees with accommodation directly or pay cash accommodation allowances and ‘expenditure on account’ situations. The latter may arise, for example, where employees secure accommodation arrangements by entering into leases, but employers pay the rental or other costs on their behalf. The statement contends there has never been any scope for applying a net benefit approach in relation to ’expenditure on account’ situations.
- Retrospective application
The statement acknowledges there has been uncertainty and inconsistent practices yet the CIR contends its newly published approach should apply to previous periods as well as for the future, subject to any legislative change which may occur. The statement suggests taxpayers should consider making voluntary disclosures if they have taken incorrect positions in the past.
It seeks to encourage that course of action by stating:
- Taxpayers will only be required to account for PAYE for up to two years before 6 December 2012, when the statement was released. Taxpayers will not be subject to interest or penalties if they make voluntary disclosures now in relation to incorrect treatment where employers provide the actual accommodation or pay cash accommodation allowances.
- Taxpayers will not be taxed for past periods in relation to accommodation provided or cash accommodation allowances paid if they have acted on the basis of explicit current advice given to them by Inland Revenue in writing.
- If employers have made payments in ’expenditure on account’ situations, the CIR will re-assess up to four years before 6 December 2012 and will impose interest and penalties.
- Overnight and temporary accommodation exception
The CIR acknowledges there is no taxable, private element where accommodation is provided or funded (whether by way of cash allowance or in ’expenditure on account’ situations) for overnight or other short term stays by employees temporarily away from their home locations while performing their employment duties. Dispute is likely as to what constitutes a short term or temporary situation. The particular facts in each case will be critical.
- Items covered by specific ‘work-related relocation’ provisions
The statement does not alter the treatment of accommodation provided or funded which is exempt from income tax and fringe benefit tax (FBT) because it falls within the specific ’work-related relocation’ provisions.
- Additional costs and implications
Taxable accommodation and allowances are treated as employee income and subject to PAYE. Unlike other benefits which are taxed through FBT borne by employers, additional amounts of taxable income may result in further costs and other implications. This may include increases for both employers and employees of Accident Compensation Corporation (ACC) premiums (unless employee earnings already exceed the annual maximum), possible increases in employees’ holiday leave entitlements and corresponding employer obligations and possible reductions in employees’ entitlements to Working for Families or other social assistance.
- Cuts across current consultation processes
Issue of the CIR’s statement is useful in that it puts Inland Revenue’s intended operational position clearly into the public arena. The timing is unfortunate, however, in that it appears to cut across the consultation processes which are currently under way in relation to officials’ issues papers on salary trade-offs and a review of the tax treatment of employee allowances and other expenditure generally. EY made submissions on the salary trade-offs paper and is also planning to submit on the more general review of employee allowances and other expenditure.
We consider Inland Revenue is not necessarily correct in its technical position but clients need to be aware of the risks and potential costs of disputing the CIR’s approach in practice. The particular facts and circumstances in each situation need to be considered.
Employers should review current practices and historical positions adopted on employee accommodation benefits and allowances to determine any potential exposure under the special statement guidelines.
If employers have taken incorrect positions, consider whether a voluntary disclosure is appropriate.
For more information, please contact your local EY advisor or one of the contacts listed below:
Tel: +64 9 300 7058
Senior Manager, Tax
Tel: +64 9 377 4790
Tel: + +64 4 470 8609
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