COVID-19 Tax considerations for a locked down workforce
Tax Alert - September 2021
By Jess Wheeler & Aaron Mitchell
With the current Alert Level 4 nationwide lockdown potentially millions of New Zealanders are back to working from home. We thought now would be an opportune time to remind employers of the key employment tax issues which can arise when employees are working from home, as well as shed some light on the new Inland Revenue guidance surrounding this.
Employers might again be grappling with questions such as:
- If employees take home equipment from the office or are reimbursed for purchasing home office equipment, does this create any issues?
- If an allowance is paid to employees for working from home, is this taxable?
- If an allowance has been paid to employees to cover the cost of using their own telecommunication devices, is this taxable?
- If an employee has been provided with a motor vehicle but is no longer travelling to work, is there a fringe benefit being provided?
On 25 August 2021, Inland Revenue issued Determination EE003: Payments provided to employees that work from home; Employee use of telecommunications tools and usage plans in their employment. Determination EE003 effectively combines and replaces Inland Revenue’s two previous determinations (Determination EE001: Employee use of telecommunications tools and usage plans in their employment and Determination EE002: Payments to employees for working from home costs during the COVID-19 pandemic, including the two extensions to EE002).
Determination EE003 aims to reduce compliance costs for businesses who are paying - or who are intending to pay - an allowance or reimbursement to employees for furniture and/or equipment, telecommunication usage plan costs and other expenditure.
We note that Determination EE003 is only valid on payments made to employees from now up until 31 March 2023. Inland Revenue are doing some further work in this area and hope to have something more permanently in place by this time.
Home office set ups
For many employees, working from home meant having to set up a home office. Practically, this may have happened in one or more of the following ways:
- The employee may have taken home office equipment belonging to the employer; or
- The employee may be reimbursed for the cost of buying new office equipment which will belong to the employer; or
- The employee may be reimbursed for the cost of buying new office equipment which will belong to the employee; or
- The employee may use existing home office equipment they already own.
Under the first two options, where the employer owns the office equipment, no adverse tax implications should arise. Reimbursement by the employer for the cost of new office equipment can be made tax free to the employee. GST can be claimed by the employer in the usual way provided a valid tax invoice is provided by the employee. This is because the employee has acted as an agent of the employer in incurring the cost. It is acceptable for the tax invoice to be made out in the employee’s name.
The cost to the employer will be deductible up front if the value is under the low value asset threshold, which from 17 March 2021 is $1,000. Incidental private use of the office equipment by the employee will not be subject to FBT provided the assets are business tools used primarily for work purposes and cost less than $5,000 including GST.
Reimbursement of the cost of new or existing office equipment (including telecommunications equipment) that is owned by the employee is not so straightforward. The tax treatment may vary depending on the level of work versus private use of the assets, the cost of the assets and the date they are/were acquired. Recognising that employers could face significant compliance costs in making such assessments, Determination EE003 provides some safe harbour options for employers. It is important to note that applying Determination EE003 is optional - employers can use other methods to determine the tax-free amount of payments to employees provided they are reasonable and supported with evidence.
The 'safe harbour' option allows employers to treat an amount of up to $400 paid to an employee for all furniture and/or equipment costs as exempt income. It is important to note there is an additional $400 that employers can pay as exempt income to also cover all telecommunications equipment. This essentially gives you a total of $800 if needed, provided you can show the split between the two.
No evidence is required to be kept regarding the payment, what was purchased or the expected degree of personal use of the equipment. Inland Revenue has also clarified that this is a one off payment and does not refresh on a regular or annual basis, once you have made this payment you cannot treat any future allowance or reimbursement payment for subsequent furniture/equipment (including telecommunications equipment) made by the employee as exempt income.
Under the 'reimbursement' option, an amount paid by an employer will be either wholly or partially exempt income where it is for new or existing furniture or equipment purchased by the employee, provided it is equal to, or less than, the deduction the employee could have claimed for the depreciation loss on the asset (but for the employment limitation).
How much of this payment is exempt income under the reimbursement option will depend on the extent to which the employee uses the asset as part of their employment. If the asset is used exclusively for employment purposes, reimbursement of up to 100% of the depreciation loss of the asset (or cost if it is a low-value asset) will be exempt income of the employee. If the asset is used principally for employment purposes, only reimbursement of up to 75% of the depreciation loss or cost will be exempt income. Finally, where the asset is not principally used for employment purposes, only reimbursement of up to 25% of the depreciation loss or cost is exempt income.
Where the reimbursement option is selected, employers will need to know the cost of the asset and/or the relevant depreciation rate (depreciation rates can be found here). They will also need determine the extent to which the asset is used for employment purposes. A written statement such as an email or expense claim from the employee will be sufficient evidence of the level of employment use.
In these scenarios, no GST should be claimed by the employer as the employee has not acted as agent for the employer, even if the employee provides a tax invoice in support of their expense claim.
Reimbursing employees for using their own telecommunication devices
Determination EE003 sets out guidance relating to telecommunication reimbursements paid to employees for using their own devices or usage plans, again you don’t need to follow this if you don’t want to providing you keep supporting evidence to justify treating the payments you are making as tax free. It is important to note that Determination EE003 applies regardless of whether employees are working from home or not. The Commissioner has noted that although EE003 replaces EE001, the guidance contained in EE001 is still relevant with the only difference being that EE003 now has an end date, which EE001 did not.
The starting point is that if the reimbursement only covers the business use of the device, then the payment will be fully exempt. If employee uses their telecommunications device for both business and personal use the Determination sets out three categories for allocating the reimbursement payments between business and private use:
- The principally busines use category: employers can treat any reimbursement of up to 75% of the amount of the affected employee’s total usage plan bill as exempt income of the employee.
- The principally private use category: employers can treat any reimbursement of up to 25% of the amount of the affected employee’s total usage plan bill as exempt income of the employee;
- De minimis category: 100% exempt where the amount reimbursed is $5 a week, noting the Commissioner has clarified this amount includes any amount of depreciation loss on existing depreciable telecommunications assets the employee may use.
Under the first two categories an amount of depreciation loss on existing telecommunications assets can be reimbursed to the employee tax free (see the above guidance for employee owned new assets for either ‘safe harbour’ or reimbursement options).
The Commissioner allows you to make a reasonable estimate to determine what category of use an employee falls within, noting that businesses need to demonstrate reasonable judgement in determining whether the principal use is for employment and recommend this be based on time spent or signed declarations from employees confirming principal use. Additionally, the Commissioner expects any estimate to be reviewed periodically to check the level of use is consistent. With periodically meaning a review every two years is adequate, unless you have a signed declaration from an employee that telecommunication tools will be principally used for employment purposes, in which case you only need to review if there has been a material change to the employee’s circumstances.
As with payments for employee owned equipment, no GST should be claimed by the employer on reimbursements or allowances for telecommunication or other working from costs as the employee has not acted as agent for the employer, even if the employee provides a tax invoice in support of their expense claim.
Reimbursing employees or paying an allowance to cover household expenses
With employees home throughout the day working, it is expected that many will see an increase in their utility bills from running heating and lighting during the day when they would normally be at work. Employees may also experience other additional costs, such as tea and coffee, light snacks & soap and toilet paper that would ordinarily be provided at work. As a result of this employers may look to pay their employees an allowance to assist with the increase in their household expenses while working from home.
Under Determination EE003, an employer can pay its employees up to $15 per week to cover these expenses, and this will be treated as exempt income. Employers will not be required to collect any evidence as to what the employees use these payments for; albeit an allowance can only be paid tax free if an employee is actually working from home on a more than minor basis (which happens during lockdowns). The payments do not have to be paid weekly, and can instead be made fortnightly or monthly to align with the employees’ regular payday (i.e. $30 per fortnight).
These payments can be combined with payments made under the telecommunications tools and/or usage plan payments outlined above as well.
The determination will cease to apply to these reimbursements (other than telecommunication costs) when an employee stops working from home.
Fringe Benefit Tax on motor vehicles
A common question we were asked in the level 4 lockdown last year was what effect the lockdown would have on the FBT payable on motor vehicles provided to employees. Inland Revenue have since confirmed that the normal FBT treatment of motor vehicles will apply during level 4 lockdown periods, i.e. vehicles are still available for private use even though opportunities for the employee to privately use the vehicle are restricted under Level 4 lockdown by the government.
For employers, this means that unless you have a specific arrangement with your employees to make the vehicles unavailable for private use during the Level 4 lockdown period (i.e. employers have issued letters restricting private use of motor vehicles during the period, or employers have required company cars to be left onsite for lockdown) FBT will continue to be calculated on the taxable value of motor vehicles as normal. When issuing such letters, employers should also be aware of any employment law matters. i.e. if the employees contract allows them to have a motor vehicle for full private use then there may be issues in trying to restrict its use.
Pool vehicles and employees working from home
For completeness, we also note that Inland Revenue released specific guidance in respect to the treatment of pool vehicles, home as a place of work and other available exemptions. An overview in respect of these positions is below:
- Pool vehicles – If the vehicle was ‘subject to a genuine private use restriction’ during lockdown, no FBT will need to be paid. However, FBT is required to be paid on the day the vehicle was brought home and the day it was returned to work, other than where the employee’s home is also a workplace.
- Home as a place of work – Given that many people’s place of work has been their home during the level four lockdown (and beyond), the Commissioner has stated that she will accept that home to work travel ‘such as driving a pool vehicle home before level 4 and returning it when the employee can go back to work’ is not subject to FBT. She has stated however that there needs to be a genuine private use restriction in place for this to apply.
- Exemptions – An FBT liability may not arise if one of the normal exemptions applies, e.g. emergency calls.
In the current environment it is particularly important for businesses to be considering their tax costs and taking advantage of available exemptions from FBT and considering how their FBT liability is calculated (since the last Level 4 lockdown the default rate of FBT has increased from 49.25% to 63.93%). For example:
- Ensure your employees are claiming all available exempt days for all motor vehicles provided - don’t just pay FBT on 90 days every quarter if there was not actually full availability for private use;
- Review your motor vehicle policies; are there any options here to reduce the availability of vehicles for private use?
- Are there any vehicles being provided which could be work related vehicles (and exempt from FBT) but are not currently being treated as such?
- Ensure you are structuring your employees’ arrangements correctly to fall within FBT rather than PAYE if there is a possible exemption in the FBT regime which is not replicated for PAYE purposes;
- Consider the application of the de minimis rule (which allows unclassified fringe benefits of up to $300 per employee per quarter and $22,500 to all employees over the current and previous three quarters to be exempt from FBT) - can you manage your fringe benefits to fall within these rules? Remember that the $22,500 threshold must be assessed at a group level;
- Are you looking at undertaking an attribution calculation in the 4th Quarter (quarter ended 31 March 2022) which attributes fringe benefits to your employees? If so, FBT can be paid at an alternate rate of 49.25% for Quarters One to Three. While undertaking an FBT attribution calculation in Quarter Four is more time consuming than paying FBT at a flat rate of 63.93%, there are potentially tax savings to be made.
If you are considering paying an allowance or reimbursement to your employees, or have any questions relating to FBT on motor vehicles during lockdown or FBT in general we recommend getting in touch with your usual Deloitte tax advisor.
September 2021 Tax Alert contents
- COVID-19: What government support is available for businesses
- Objective and subjective factors to consider before claiming a wage subsidy
- Managing tax filings, payments and cashflow in light of COVID-19
- Running a business with ongoing border uncertainty
- COVID-19 Tax considerations for a locked down workforce
- How confident are you in your transfer pricing?
- Snapshot of recent developments