Government proposes changes to tax treatment of employee allowances

The Government has announced it will include changes to the tax treatment of employee allowances, reimbursements and employer-provided accommodation in a tax bill that will be introduced to Parliament later this month.

Revenue Minister Todd McClay said that a decision by Cabinet to include changes to the Income Tax Act as part of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill will bring clarity for taxpayers and minimise compliance and administration costs for many businesses and organisations.

“The current rules around allowances, other expenditure payments and employer-provided accommodation can leave businesses uncertain about the extent to which these payments and accommodation are taxable under different circumstances,” McClay said.

“Under the current legislation, when an employer makes a payment to meet an employee’s work expense, and there is no private benefit, then generally there will be no tax consequences. However there are occasions when the line between what is a private expense and what is solely a work expense is not straightforward. This has been a concern for employers.” 

The proposed changes include:

• When an employee is expected to work away from their normal workplace for up to two years, employer-provided accommodation will be tax-exempt.  The exemption would extend to up to three years for employees working on capital projects and up to five years for Canterbury earthquake recovery projects.

• Accommodation or accommodation payments for those working at more than one workplace on an on-going basis will be tax exempt without an upper time limit.

• When an accommodation benefit is taxable, it will generally be valued at its market rental value. However, for reasons of fairness, a specific valuation rule is proposed for ministers of religion, to reflect longstanding past practice.  In that case the taxable value will be capped at 10% of the minister’s remuneration, subject to the accommodation being commensurate with the minister’s position and ministry location. 

• A specific valuation rule is proposed for accommodation provided by the New Zealand Defence Forces to a number of its personnel, in recognition of the unique nature of the accommodation arrangement.  

• Meal payments linked to work-related travel will be exempt for up to three months.  Meal payments and light refreshments outside of work-related travel (such as conferences) will also be tax-exempt.

• A specific exemption for payments for distinctive work clothing (to match the outcome where clothing is provided directly by the employer).  Plain clothes allowances will also be exempt if paid to employees who are provided with a uniform but because of the nature of their current duties are required not to wear that uniform.

The move has been welcomed by businesses. BusinessNZ Chief Executive Phil O’Reilly said the changes had been well signalled prior to the announcement and “largely reflected an on-going and pragmatic approach to some of the day-to-day complexities of the tax system”. 

“Small business in particular should find the changes helpful,” O’Reilly said.

Dennis O’Callaghan, Manager Reward Consulting of remuneration and performance management company Strategic Pay, said while the changes would not affect a large number of employees, a number of his clients would welcome the changes.

“The changes seem to make sense, but where these and similar allowances apply employers are once again likely to have a mix of taxable and tax-exempt allowances which will need to be administered differently,” he added.

The proposed plain clothes allowance changes have also received backing with Police Minister Anne Tolley stating it will mean police officer will “not be unfairly penalised”.

He said around 2,100 police staff will not be liable for additional tax on their plain clothes allowance under the changes.