Taxing telecommunication tools

By Robyn Walker and Evie Storey

Anyone who has been involved in tax for a reasonable time period has probably heard of the “50% rule of thumb” when it comes to taxing phones. The rule of thumb was first established many years ago in the days of home phone lines, and possibly before the proliferation of the internet and the mobile culture that we now have. In an attempt to bring Inland Revenue guidance into the modern era, they have released a draft determination that provides new rules for the taxation of certain telecommunication payments. Rather than the 50% rule of thumb, there is now three new rules proposed - 25% and 75% and a de minimis rule.

“Employee use of telecommunication tools and usage plans in their employment” (“draft determination”) was released on 9 August 2019 and submissions close on 20 September 2019. It applies to arrangements where employees use their own communication tools and/or usage plans in their employment (sometimes called a “bring your own device” or “BYOD” arrangement).

The draft determination splits the tax treatment of these allowances or reimbursements into three classes:

It is worth noting that once finalised the draft determination will be optional for employers and employees to follow, if either has evidence to support a different apportionment in particular circumstance.

Class A – telecommunications tools are principally used in employment

Class A covers circumstances where an employer arranges with the employee for the employee to provide their own tools and / or usage plans, and:

(1)   The employee incurs the cost of the tools and / or usage plan and is reimbursed; or

(2)   If the employee is reimbursed, an estimate amount or allowance represents a reasonable estimate of the likely expenditure to be incurred by the employee; and

(3)   The telecommunications tools and / or usage plan are principally used by the employee in their employment, and the employee also uses the tools and / or usage plan for private use.

In these circumstances, employers can treat 75% of the amount paid as exempt income for the employee. The extent to which the payment is taxable is 25%. If the employer pays only 75% of the employees’ costs as an allowance or reimbursement, then the total amount is exempt. When determining the employees’ costs this can include an amount of depreciation on the relevant devices used by the employee. Any depreciation is calculated using the Commissioner’s rates for the items.

Determining that the telecommunications tools are principally used in employment can be done in a number of ways with differing levels of associated compliance costs:

(1)   Measuring the time of use or amount of data used (in many cases it may be clear that business use amounts to the principal or leading use);

(2)   In lieu of monitoring usage, an employer may obtain a signed declaration from the employee that the tools will be principally used for employment; or

(3)   Establishing the importance of the employee having access to the tools (for example they need to be available at all times for calls).

The draft determination notes that employers are expected, at a minimum, to have a record of the usage plan or agreement entered into by the employee. The rationale for requiring this level of detail is not explained.

The draft determination envisages a level of judgment being applied. There is also some pragmatism in play, in particular if an employer is paying a regular fixed amount Inland Revenue will be satisfied that the full amount paid will be tax exempt if the employee provides a declaration that their costs are at least 1.33 times the amount of the allowance. For example, a $75 per month allowance is paid and the employee has a plan costing $100 per month.

Class B – arrangements where telecommunications tools are required, but not principally used for employment

Class B covers situations similar to Class A, the difference being that rather than the telecommunications tools and usage plans being principally used by the employee in their employment, the employee is required to use telecommunications tools and usage plan in their employment based on a business reason but primarily uses these tools for private use.

In these circumstances, employers can treat 25% of the amount paid as exempt income of the employee. The extent to which the payment is taxable is 75%. If the employer pays 25% of the costs of the employee, then the whole amount paid is exempt.

An established employment policy related to the use of the tools is sufficient to establish that the employee was obligated to use the tools for an employment reason.

As with Class A arrangements, if an employer obtains a declaration from an employee that the employees’ costs are at least four times the amount of the allowance the whole amount can be treated as tax exempt. For example, an allowance of $25 is paid and the employee has a plan costing $100 per month.

De Minimis Class

The De Minimis Class covers the same situations as Class B. However, to the extent that the reimbursement or allowance payments are no more than $5 per week per employee, amounting to no more than $265 per year, the payments can be treated as exempt income of the employee.

It is not necessary to support this de minimis level of reimbursement or allowance with records.

Our view

The 50% rule of thumb was successful because of its simplicity, but these new proposed rules are also relatively simple to understand. Where the real issue will arise with these proposals is the ability of employers to be able to obtain and maintain the necessary documentation in order to support a classification of an allowance or reimbursement as either Class A or Class B. It won’t be a simple one size fits all employees either, so there are likely to be compliance costs for employers.

We question the need for employers to know details of employees’ usage plans, particularly where some employees may be using a prepay system and may be able to dial up and down the amount they are spending on phone calls or mobile data on a monthly basis. The ability for the employees to provide a declaration of the 1.33 or 4 times cost level represents a more pragmatic outcome, however obtaining these on a regular basis may be a compliance headache especially for large employers.

So overall, the draft determination may provide better outcomes for some employees, who may now receive a greater amount of exempt rather than taxable income, but employers may be facing additional compliance costs. Submissions can still be made on the draft determination until 20 September 2019, if you think the compliance costs will be too high under this determination then have your say.

Now may also represent a good time to consider your approach to communication tools and allowances. It is worth noting that the draft determination does not apply to situations where an employer provides the communication and usage plan; in those instances Fringe Benefit Tax (FBT) and in particular the business tools exemption from FBT may apply to ensure no tax is payable.

If you would like to discuss your existing employee allowances and reimbursements please contact your usual Deloitte advisor.

September 2019 Tax Alert contents

·         What's on the tax policy work programme

·         A stick and carrot approach: FATCA, CRS and QI update

·         Customs is also interested in your transfer pricing 

·         Taxing telecommunication tools

·         Mileage reimbursements revisited - again!

·         Follow the rules when deducting bad debts

·         Recent developments

·         Deloitte Insights app