Plan some overseas travel - but plan for tax as well
Tax Alert - July 2022
By Emma Marr & Jayesh Dahya
Opening the borders has released a wave of Kiwi entrepreneurs who have been champing at the bit to get overseas for two long years. Our LinkedIn feeds are full of happy business owners touring the world meeting their customers, drumming up sales, and connecting with employees and business partners they’ve never met before, or haven’t seen for a long time. As you tuck your boarding pass into your carry-on, (or farewell your employees as they head for the door), you might want to think about giving your accountant a call when you get back – or better still, before you leave home – to make sure you’ve got any tax issues sorted as well.
When a business owner or its employees travel for work, they’ll incur a range of costs including airfares, taxis and rental cars, hotels, meals, and incidental expenses. They might also decide to add on a holiday during a work trip or take their partner or family with them.
When it comes to working out which costs are deductible to the business, and which are not, you’ll need to be clear about what the costs relate to, and check that you’re treating them correctly. Inland Revenue has recently released a draft Questions We’ve Been Asked, Deductibility of overseas expenses, which sets out some guidelines on what is deductible and what isn’t. This is intended to replace a previous policy statement that date back to 1995.
Travel costs: Income tax deductions can be claimed for overseas travel costs to the extent that they have a connection with deriving assessable income or carrying on a business. A business can’t deduct any part of the travel costs that are of a private or domestic nature, of a capital nature, or incurred in deriving exempt income or income from employment.
If the costs relate to both a business and a private expense (for example an employee adds a holiday to the business trip), you’ll need to apportion the costs between deductible and non-deductible amounts and keep a record showing that you’ve done this on a reasonable basis.
As a company isn’t a person, the private/domestic limitation doesn’t apply, but a company will need to be careful if it covers an employee’s private costs (for example, adding a holiday to the end of the trip or covering the costs of an employee’s partner or family). If an employer does pay costs that are not related to the business, the employer would need to consider if the payment is subject to PAYE or fringe benefit tax.
The draft statement does not apply to meal costs as Inland Revenue have extensive other guidance on meal expenses; that guidance does confirm meal expenses paid by an employer are deductible to the employer, but different rules apply for self-employed travellers (which we comment on below).
Companion expenses: If you take your partner or another travel companion with you, their costs won’t be deductible unless they are making a substantial contribution to the business purpose of the trip. Inland Revenue has released guidance on this in an earlier QWBA, Income Tax – Deductibility Of A Companion’s Travel Expenses.
Meals for self-employed travellers: The rules are more complex when you’re self-employed. Meal costs are only deductible if they are over and above what you would normally spend on meals at home. For more information, you can check out an earlier Interpretation Statement, Income tax and GST – Treatment of meal expenses.
The statement does not discuss accommodation costs that may also be met by a business when an employee is travelling overseas. If you pay for accommodation, this is treated as a taxable allowance (subject to PAYE, not FBT) unless an exemption applies. An exemption would usually apply where an employee is travelling for work to attend meetings, conferences or training but would not extend to accommodation paid if the employee chooses to add a holiday on to the trip.
Creating a taxable presence for your business overseas
Travelling to another country and running your New Zealand business while you are there can easily create a taxable presence in that country for your business. The rules are different in every jurisdiction, so don’t assume that the rules for one country apply anywhere else. If you’re planning more than short visits to any country, check in with your tax advisor to make sure you’re not creating a tax liability overseas.
Creating tax liability for you or your employees in another country
As well as creating a taxable presence for their business, when business owners or employees travel the world this can create other tax issues, both for the business and for its people. The business might have to register for payroll taxes in other countries, make contributions to local pension or social security schemes, and the owners or employees might have a personal tax liability if they spend long enough in another country. If a business’s employees find they have a tax liability in another country, they will turn to their employer to help them navigate the rules and reimburse them if they end up out of pocket. There are international treaties that can prevent double taxation, but you need to check whether the business meets the criteria, and then correctly claim the benefits. As soon as a person lands in another country, that country’s day-count rules may kick in and with many employers looking to accommodate flexible work arrangements that may allow employees to work overseas it’s better to know that in advance and plan ahead for what that means.
For more tips on how to manage your overseas business, check out our May Tax Alert article, Top 10 mistakes when expanding overseas
If you need any help navigating the tax rules that might apply when you’re travelling overseas, contact Emma Marr or Jayesh Dahya, or your usual Deloitte advisor.
July 2022 - Tax Alerts