Tax treatment of employee allowances and accommodation
Tax Watch: Edition 1, 2014
Tax legislation currently before parliament includes clarification of the tax treatment of employee allowances, reimbursements and accommodation benefits. The main proposal is to exempt accommodation benefits provided to an employee working away from their normal workplace for up to two years (or longer in certain cases). No time limit will apply to accommodation provided to employees who have more than one workplace on an ongoing basis. The new rules will generally apply from 1 April 2015.
Employers may choose to provide accommodation or make an accommodation payment to an employee working away from home. Previously, an accommodation benefit was treated as exempt from tax if the employee worked away from their normal workplace but continued to maintain a home elsewhere (the “net benefit” approach).
Inland Revenue released Commissioner’s statement CS 12/01 in December 2012 arguing that the net benefit approach is not supported by tax law. Instead, their view was that the gross market value of accommodation is generally taxable to the employee except if provided in relation to overnight or temporary stays. Inland Revenue suggested employers make a voluntary disclosure in respect of any tax shortfall on past accommodation benefits.
Inland Revenue also released for public consultation an issues paper in November 2012 which proposed a number of policy changes to the taxation of employee allowances, including accommodation payments. The paper suggested that accommodation would be exempt if paid in relation to travel for up to 12-months away from an employee’s normal workplace. Accommodation near the employee’s normal workplace would be taxable. The taxation of other allowances was also raised, including a proposed exemption for meal expenses incurred while on travel for up to three months, and for clothing allowances to purchase distinctive work clothing.
The revised proposals contained in the bill before parliament are largely consistent with those canvassed in the issues paper, although the time limit for the exemption for accommodation benefits applying to employees working away from their normal workplace has been extended from one year to two years. The time limit will be three years for employees working on capital projects and up to five years for projects relating to the Canterbury earthquake recovery (reducing to three years over time).
Employees working at two separate workplaces on an on-going basis will not be taxed on accommodation provided by their employer. There will be no upper time limit.
In situations where accommodation is taxable, including when the two-year time limit is exceeded, the taxable benefit will be the rent otherwise payable at market rates. Special valuation rules will apply for ministers of religion and members of the New Zealand Defence Force.
The tax treatment of meal and clothing payments is also being clarified. The Government announced that payments to employees for meals incurred on work-related travel for up to three months will be exempt. Similarly, the provision of light refreshments and meal payments outside of work travel, such as to attend a conference, will also be exempt without an upper time limit.
An allowance paid to an employee for the purchase of clothing specific to their employment will be exempt. The clothing must be distinctive and particular to their employment, such as a uniform or necessary safety gear. An allowance for plain clothes will be exempt if paid to an employee with a uniform but who is not required to wear the uniform in their current duties. Other clothing allowances would be taxable on the basis that an employee can wear plain (i.e. non-distinctive) clothes away from their workplace and thus would gain a private benefit from the allowance.
The new rules will generally apply from 1 April 2015, with earlier application dates for accommodation provided to ministers of religion (1 July 2013), members of the New Zealand Defence Force (6 December 2012) and Canterbury earthquake recovery projects (4 September 2010).
Implications for clients
This is much-needed clarity to the tax rules applying to accommodation benefits following years of debate and uncertainty. It is also a welcome change to Inland Revenue’s current position following their rejection of the net benefit approach.
These changes will enable employers who treated an accommodation benefit as taxable based on the Commissioner’s statement of 6 December 2012 to revisit that tax position. They may instead apply the proposed new rules to that benefit and treat the accommodation as exempt if it meets the two-year time limit. This applies to accommodation arrangements put in place on or after 1 January 2011.
Alternatively, taxpayers may have taken a position prior to 6 December 2012 that an accommodation benefit was taxable. That is, the benefit was treated as taxable under the net benefit approach rather than the Commissioner’s statement. In such a situation, the employer will not be able to revisit that tax position.
This distinction is clearly aimed at protecting tax positions taken under the net benefit approach while allowing taxpayers who relied on the Commissioner’s statement to reconsider their tax liability. It will effectively make the Commissioner’s statement redundant if the legislation is enacted in its current form. It also implies that voluntary disclosures for prior tax shortfalls, as suggested in the Commissioner’s statement, are no longer necessary.
Please contact your usual EY tax advisor for assistance if you have any queries about the proposed new rules or prior tax positions taken.
Partner, Human Capital
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Senior Manager, Human Capital
Tel: +64 274 899 096