The IRD has recently established a pattern of plugging perceived tax loopholes in existing legislation and established case law.
OPINION: The changes have not been well received as they inherently put taxpayers in a worse position. The most recent example has just been announced by the IRD.
A long established practice exists which allows an employee to receive an accommodation allowance tax free if they are required to live away from home for work purposes.
The approach is based on the rationale that if the employee is already meeting the costs of maintaining their primary home, the additional amount they receive does nothing more than put them in the same position they would otherwise be in, ie it provides no additional benefit.
This rationale has always been seen as fair and reasonable and has been confirmed by IRD in its own historical commentary.
The IRD has now changed their view and consider the correct interpretation of the current legislation is that these types of payments are in fact taxable. While the IRD is entitled to change their view, it should be done on a principled forward looking basis.
The New Zealand Government normally follows a modern approach to tax policy formulation by issuing public discussion documents to generate debate and seek feedback before draft legislation is introduced and then debated.
In this case, without warning or public consultation, the IRD has parked that processto one side and stated the current approach adopted by the majority of taxpayers is wrong based on its interpretation of existing legislation.
While that may be acceptable if there was a concession that the IRD would only apply their new interpretation on a go forward basis, this is not the case.
The IRD also announced that it will be looking to taxpayers to voluntarily pay tax on allowances previously paid for up to four years. If they do, no penalties or interest will be charged. If appropriate disclosure isnot made and an allowance is discovered during an audit, the inference is interest and penalties will applyand more years may be assessed.
Given IRD, through its audit process, has known taxpayers have adopted the current interpretation with good technical arguments and precedent to support the position taken, this move could be interpretedas a clear tax grab.
In reality, it is more likely the IRD being unwilling to take a pragmatic approach to a subjective area on a go forward basis.
Irrespective of the reason, it is unfortunate that the issue had not been debated first to flesh out the issues in a fair and reasonable way.
In the end this change will just add cost to businesses which need to have a mobile workforce to meet the demands of the markets they operate in.
- Michael Bignell is a partner at PwC Hamilton