Tax treatment of working-from-home and telco allowances confirmed again
Tax Alert - March 2023
By Robyn Walker & Jess Wheeler
Since the 2020 lockdowns, employers and employees have continued to evolve how they work, with remote working being a trend that is here to stay. With more employees enjoying the convenience of not battling peak hour traffic and employers downsizing office spacing and not physically having enough office space for all workers, it raises a question of whether employers should be compensating employees for their increased costs… and if so, what are the tax consequences?
During the original COVID-19 lockdowns, Inland Revenue came to the party with a determination that set safe harbour amounts for employers to pay employees without tax and without having to collect copious amounts of supporting documentation. That determination was known as EE002. It expired and was reissued again as EE002A, then expired and was reissued as Determination EE002B, then expired and was reissued as EE003 (and now incorporated another Determination EE001 on telecommunication allowances). Determination EE003 is due to expire on 31 March 2023, and Inland Revenue is consulting on its replacement Determination EE004, which will apply from 1 April 2023 for an indefinite period.
Determination EE004 is very similar to EE003, but with some useful updates.
We summarise the key tax considerations for employers setting up employees to work from home and explain how EE004 will apply.
Home office setups
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; of
- 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 of $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 EE004 provides some safe harbour options for employers. It is important to note that applying Determination EE004 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 to 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 an 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 EE004 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 EE004 will apply regardless of whether employees are working from home or not, providing they are using their own devices or usage plans in the course of their employment.
The starting point is that if the reimbursement only covers the business use of the device, then the payment will be fully exempt. If the 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 business 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 $7 a week (up from $5 under EE003).
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 an 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, many will be seeing 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 proposed Determination EE004, an employer can pay its employees up to $20 per week (up from $15 under EE003) 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. The payments do not have to be paid weekly, and can instead be made fortnightly or monthly to align with the employee’s regular payday (i.e. $40 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.
Determination EE004 is out for consultation until 17 March 2023, and we expect it will be finalised by its 1 April 2023 application date. While it is proposed that Determination EE004 does not have an expiry date, it does note “the Commissioner will continue to monitor the amount of variable expenditure typically incurred by employees and will periodically update the amounts in this determination as appropriate”.
If you would like to discuss the issues raised here further, please contact your usual Deloitte advisor.