Through the combined impacts of COVID-19 and evolving flexible work practices, many employees find themselves increasingly working from home.
In response, over the last two years, Inland Revenue has released guidance to employers regarding the circumstances under which allowances paid to employees can be received tax-free. We now have an updated version of such guidance; Determination EE003.
What is the intention of the Determination?
The Determination recognises that employees are not permitted to claim deductions in respect of costs incurred in carrying out employment duties in their own tax returns (the employment limitation) and that an employer may wish to compensate them accordingly.
This Determination applies from 1 October 2021 and is due to lapse on 31 March 2023. It provides a safe-harbour threshold as to the quantum of a tax-free allowance. An employer may choose to deviate from these amounts if they have evidence to substantiate a higher amount.
When can the Determination be applied?
To apply the Determination:
- It must be a payment from employer to employee
- The payment must relate to a cost incurred (or likely to be incurred) by the employee
- The cost must relate to the employment and necessary in carrying out employment duties
- It can apply to an employee who works both at the employment premises and at home, as long as the
home-based work is more than minor.
Importantly, the tax-free payments cannot be made as part of a salary sacrifice arrangement. This is not within the spirit or scope of the Determination.
Safe-harbour payments
The following circumstances are contemplated:
- Use of employer telecommunications at home: If the employee works from home and does not use their own telecommunications tools and/or their own usage plan, the Commissioner considers that a tax-free reimbursement of $15 per week to be reasonable.
This is deemed sufficient to compensate for an increase in household costs as a result of working from home and depreciation on any depreciable assets used.
- Use of personal telecommunications at home: If the employee works from home and uses their own telecommunications tools and/or own usage plan, the Commissioner considers that a tax-free reimbursement of $20 per week to be reasonable.
- Use of personal plan for business: Notwithstanding the $20 option above, if the employee uses their personal usage plan principally for business purposes, the Commissioner considers that the employer can reimburse up to 75% of this cost as tax-free income of the employee. This is in addition to the $15 per week as per above.
In contrast, if the employee uses their personal usage plan principally for private purposes, the employer can reimburse up to 25%.
- Use of personal telecommunications offsite: If the employee does not work from home, but uses their own telecommunication tools and/or usage plan in carrying out employment duties, the employer has a choice of safe-harbour tax-free reimbursing thresholds:
- $5 per week; or
- If used principally for business purposes, up to 75% of the total usage plan bill; or
- Reducing to 25% of the total cost, if principally used for private purposes.
In calculating use (business or private), a reasonable judgement must be exercised and should be reviewed periodically (every two years as a guideline).
It is recommended that a positive affirmation from the employee be sought with a signed declaration if reimbursement is made on the basis use is principally for business purposes.
- Reimbursement for asset purchases: If the employee acquires new furniture and equipment, including telecommunications equipment, and the employer wishes to reimburse the employee, the Determination offers two options:
- A one-off payment of $400 for furniture and another $400 for telecommunications equipment
(a maximum payment of $800); or
- An amount calculated that is no more than the depreciation claim that the employee would
have been entitled to claim (but for the employment limitation).
The latter of the two carries a high degree of compliance cost and we therefore do not expect it’s use to be wide spread.
Summing up – our thoughts
Tax does not often work within boundaries of materiality, and we welcome the pragmatic approach taken by the Commissioner. In seeking to provide equitable tax treatment for employees whose employers want to compensate for expenditure incurred in carrying out their duties, compliance should not be a barrier. This Determination provides useful clarity and direction.
It does, however, leave the employee who is not reimbursed by their employer out of pocket, and we therefore question whether it would be appropriate to also look at relaxing deductibility rules.