IRD plans allowances tax change
Inland Revenue last week released an issues paper proposing changes to the tax treatment of employee allowances.
The paper deals with allowances paid for meals, accommodation, clothing and communication costs.
Revenue Minister Peter Dunne said the current rules that taxed employee allowances were unclear and created uncertainty for business.
The new rules propose to treat meal allowances as tax-free where they are paid to an employee for working away from their normal workplace.
The tax exemption will be subject to a three-month time limit.
Payments made to meet the cost of an employee's working lunch will also be tax-free as long as the lunch allowance is not salary or wages in disguise.
The taxation of accommodation allowances has recently been the subject of much debate between Inland Revenue and taxpayers.
To clarify the treatment, it is proposed that accommodation allowances will be tax-free where the employee is away from their normal workplace for up to 12 months.
There is discretion for Inland Revenue to extend the time limit in exceptional circumstances.
Many expatriates are provided with accommodation near their workplace.
These allowances will remain taxable based on the market value of the property.
The contribution, if any, paid by the ex-pat employee will be taken into account to reduce the taxable component of the allowance.
Clothing allowances will be taxable except where they relate to employer uniforms, protective and specialist clothing that is necessary for the employee's role.
Payments to meet internet and other electronic communication costs are proposed to be taxed in full when used for both work and private and there is not a separately identifiable work and private element. This is a change from the current practice which treats 50 per cent of communication costs as tax-free.
With legislation of this nature there is always the risk that compliance costs outweigh the benefits.
The paper addresses that point by allowing low-value private expenditure to be treated as tax-free when it is incidental to work or hard to measure and there is little risk of part of an employee's salary or wages being disguised as a low-level private expenditure allowance.
The proposals are a positive step to minimise compliance costs on employers, provide greater certainty to business and protect New Zealand's tax base.
Submissions on the new proposals can be made by 1 February 2013.
Greg Harris is a specialist tax partner in the Hamilton office of Deloitte.