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Employee allowances

Tax Alert - August 2015

Readers will recall from previous Alerts that there have been changes to the tax treatment of employee allowances and payments towards the costs of accommodation and meals. These rules generally apply from 1 April 2015 as a result of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014.

Recent experience tells us that there is still some uncertainty around the correct tax treatment of the costs of accommodation and meal subsidies. This is particularly the case where the payment is in the form of an allowance rather than specific expense payments. We have therefore summarised below the tax treatment of these kinds of payments.

Accommodation payments

Employers can reimburse an employee’s accommodation related costs on a tax free basis in the following situations:

  • Overnight stays for business trips and conference attendance – can be reimbursed on a tax-free basis where there is a business need for the travel away from the normal place of work. This can include accommodation for conferences held in the employee’s home location where there is a business need for the accommodation, such as a requirement to attend networking functions;
  • Accommodation for an out of town secondment – can be reimbursed for up to 24 months for a secondment to a distant workplace (e.g.. not within a reasonable commuting distance). This exemption is only available if the individual is a pre-existing employee prior to the secondment. The exemption ceases at a point from which the intention to exceed the 24 month time limit occurs;
  • Accommodation for an out of town secondment relating to a capital project – can be reimbursed for up to 3 years providing the project is of a capital nature under an arm’s length contract with a third party (e.g.. a construction company proving bridge building services to the New Zealand Government). This exemption is not restricted to existing employees and can be applied to individuals employed specifically for the project, and can be extended for up to 5 years for projects relating to the Christchurch rebuild. This exemption is based on the presence of the individual employee on the project, not the overall duration of the project. However, the exemption ceases at the point from which the intention to exceed the specified time limit occurs; or
  • Multiple workplaces – where an employee operates from multiple workplaces the accommodation costs at the distant workplace(s) can be reimbursed tax-free without time limit. However, this exemption is not available if the employee has two workplaces, one of which is a workplace at home.

Pre-existing rules around reimbursement of costs relating to longer term relocations remain unchanged.

Meal allowances

The costs of meals can be reimbursed on a tax-free basis where the employee is required to work away from their normal place of work. Where this is in the form of a temporary change of workplace for a period of time, the reimbursement can be made tax-free for up to three months.

Pre-existing rules regarding overtime meals and other sustenance meal allowances remain unchanged.

Reimbursing allowances

The above tax-free reimbursements can also be made in the form of a cash allowance payment as an alternative to reimbursing based on expense claim. However, where an allowance payment is made, the onus rests with the employer to ensure that the amount paid represents an equivalent to the amount that would otherwise have been paid by way of a reimbursement of actual expenditure. There are no published or pre-set amounts for such allowances. For this reason, we would recommend that employers who choose this option take steps to record the rationale behind any amount paid as an allowance.

Deloitte has long advocated for greater clarity around employer paid tax-free allowances and we welcome these changes. However, despite the clarification these rules provide, there still exist some grey areas that employers will need to carefully consider.

Please contact your usual Deloitte tax advisor if you would like to discuss how the rules affecting employee allowances may affect you or your business. Updated guidance is also available on the Inland Revenue website.

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