Trans-Tasman companies caught in tax sting

JO DOOLAN AND ROHINI RAM

Last updated 10:29 12/12/2012

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OPINION: Trans-Tasman companies with expats in top management positions are likely to be the biggest losers in the IRD's latest tax grab as it moves to retrospectively tax accommodation allowances.

But politicians' living-away-from-home accommodation allowances will not be impacted.

The IRD issued its decree on December 6, although a consultation document on the matter was already in the market, with submissions not due to close until February 1 next year.

This rides rough-shod over any perception of taxpayer fairness or consultation. Without waiting to hear their views, the IRD has issued an edict with the threat of penalties and interest added to the mix.

While the issue of fairness and equity will continue to be debated, the key message is clear: companies caught up in this debacle must act quickly and decisively to minimise economic cost and the potential for reputational damage.

Two scenarios are being targeted. 

The first covers situations where an employee is provided with a rental property by the employer (rental paid direct to the landlord) or an accommodation allowance (paid to the employee). Commonly, this would be an expat working in New Zealand. 

In circumstances where the individual also maintains a property at home (even if this is overseas), it has been standard practice to treat at least part, and often all, of the New Zealand rental costs as a tax-free reimbursing allowance. 

The commissioner no longer accepts this position. A concessionary window is provided for taxpayers in this situation to make a voluntary disclosure of Paye returns for the two years prior to the date of the IRD's statement. Disclosures made on this basis won't attract use-of-money interest and shortfall penalties.

The key consideration for taxpayers in deciding whether to voluntarily disclose and adjust is the cost benefit of disputing the commissioner's new stance, along with the potential reputational damage if her invitation is not taken up.

The second scenario under attack concerns accommodation payments made by an employer for a tenancy taken by the employee - that is, the employer pays the landlord on behalf of the employee.  

The IRD clearly takes the view that payments made directly by the employer, where the tenancy agreement has been entered into by the employee, are, and always have been, subject to Paye. So any voluntary disclosures must cover the previous four years, with penalties and interest applying.

Australia has recently tightened its rules around accommodation and other allowances. But the major difference is the time frame allowed for Australian businesses to adapt to the changes. This date was extended after a burst of taxpayer yelping.

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The squeeze to get every last tax dollar is clear. But while politically appealing because the biggest impact is likely to be on higher income earners, the proposed changes will see accommodation allowances taxed for almost all employees, irrespective of their income levels

Compare this with our MPs, who will still receive their tax-free Wellington accommodation allowance of up to $24,000, rising to $37,000 for members of the executive. These allowances are specifically exempted from our tax legislation.

Taxing MPs' accommodation allowances would be akin to robbing Peter to pay Paul. It is easier to tighten the rules for corporates which can afford to pay.

But the process of implementing the changes must be seriously questioned.

One can only hope the Minister of Revenue steps in and provides some Christmas goodwill by ensuring that tax changes by decree apply prospectively not retrospectively.

- Joanna Doolan is a tax partner and Rohini Ram a human capital partner at Ernst & Young

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