Calculating “market rental value” on employee accommodation – guidance finally released
Tax Alert - December 2016
By Jayesh Dahya and Brad Bowman
The Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 included amendments relating to the taxation of employer-provided accommodation that came into effect on 1 April 2015.
Please refer to our July 2014 Tax Alert article for a discussion of these changes.
The market rental value (“MRV”) of employer provided accommodation is taxable to the employee, if there are no exclusions or exemptions.
Inland Revenue has recently released Commissioner’s Statement CS 16/02 – Determining “Market Rental Value” of Employer-Provided Accommodation (“the Statement”), which sets out the Commissioner’s approach for working out the MRV of accommodation provided by an employer to employees in New Zealand, in most situations.
Overall, the guidance provided in the statement is sensible and provides taxpayers with a methodology that can be applied to establish a MRV that meets the reasonable care standard.
If the employer has rented accommodation from a third party on an arm’s-length basis, then the market rental value will usually be the rent that is paid by the employer. However, where the accommodation is owned by the employer or is rented on a non-arm’s length basis, it will be necessary for the employer to establish a MRV.
When seeking to establish a MRV, Inland Revenue has noted that “absolute accuracy” is not expected. What they expect is that a “reasonable and appropriate process” is followed in determining the MRV. Part of this will include having a documented process that can be made available for review, if requested. Importantly, it is not essential to obtain an assessment from a registered valuer.
Where this process is followed, the value adopted is unlikely to be questioned by Inland Revenue and would not result in shortfall penalties. Any MRV adopted should also be reviewed from time to time and Inland Revenue has suggested that at a minimum, MRVs should be reviewed every three years.
What is not covered?
The Statement only applies to accommodation provided in New Zealand and separate guidelines will be issued for accommodation provided to employees outside New Zealand.
For overseas provided accommodation, the taxable value provided to New Zealand tax resident employees is capped at the average or median rental value for accommodation in the vicinity where the employee would live if in New Zealand. Given this, it is difficult to see what material differences there could be in arriving at a New Zealand dollar equivalent value in these instances.
The Statement does not provide guidance in relation to staff provided accommodation at boarding schools, which is disappointing given that it has been over two years since the enactment of this legislation. The Statement does note that further guidance will be issued but the timeframes for this are not clear.
What is considered reasonable when establishing a MRV?
The Statement notes that the phrase market rental value “refers to the amount that would be arrived at by two non-associated parties, an arm’s length basis”.
Employers can adopt any reasonable basis for determining the MRV of the accommodation, including a valuation from a registered valuer; an estimate from a real estate agent, property manager, or other suitably experienced person; and a review of comparable properties on internet sites that advertise rental property (for example, TradeMe).
Inland Revenue is silent on the use of Ministry of Business, Innovation and Employment (“MBIE”) market rent data to calculate market rental value where the data is available.
In our view, there are no reasons as to why MBIE data cannot be used to establish the initial market rental value of accommodation as a proxy of the market rental value of accommodation in a particular area, which can then be adjusted for unique factors attributable to the property. In reality, this data is already used by landlords to establish rental values, and is commonly referred to by registered valuers and real estate agents.
Factors to be taken into account in assessing a MRV
The Statement notes that the following factors should be considered in arriving at a MRV:
- The location of the accommodation – including desirability, access to amenities, etc;
- The specific functional characteristics of the accommodation – including the number of bedrooms, size, parking, etc;
- The condition of the accommodation;
- Accessibility – i.e. the ease of travel to and from places of work, schools, shopping, public transports, etc; and
- Restrictions of use.
However, conditions that arise out of, or are particular to the employment relationship itself cannot be taken into account in estimating the MRV; for example, a farm worker who is on-call or a live-in nanny who has a relative lack of privacy. These factors should be addressed in the remuneration provided to the employee.
The Statement also considers the following other points.
- The MRV of multiple dwellings owned by an employer cannot be averaged amongst employees, however the MRV of a shared dwelling can be averaged between employees.
- When an employee contributes to the cost of the accommodation, the income attributed to the employee will be the MRV of the accommodation less any contribution.
- Any contractual conditions requiring an employee to reside at a specific dwelling are not to be taken into account in assessing the MRV.
- The income attributed to the employee in relation to the accommodation will be taken into account for child support, student loans and Working for Families Tax Credits. The employee therefore has an interest in the accommodation being properly and correctly valued.
The Statement includes 13 examples to assist taxpayers and has effect from 1 April 2015 (i.e. when the original amendments were introduced).
If you are providing employer provided accommodation to your employees, you should ensure that you have a documented process to justify the values that have been adopted as this is an area that Inland Revenue is monitoring.
If you have any questions in relation to the Statement, please don’t hesitate to contact your usual Deloitte advisor.
December 2016 Tax Alert contents
- Timely revised guidance on deductibility of certain earthquake related costs
- Closely held companies bill reported back with significant changes
- Charitable change to the FBT rules? Depends on your facts
- Business tax simplification measures are a step closer
- Calculating “market rental value” on employee accommodation – guidance finally released
- R&D tax credits – our experience to date
- IR’s Operational Guidelines: Pre-Litigation Settlements
- What’s on the Tax Policy Agenda?
- A snapshot of recent developments