Tax law impacts accommodation allowance

In this world of specialisation, employers find it difficult to identify the right person for the right job and hence look for talents from different locations across the world.

In some cases, employees are required to work at different locations either in the same country or overseas.

As a result, employers reimburse or pay a reimbursing allowance from time to time to employees. Providing accommodation or accommodation allowance by employers relating to the expenditure incurred by employees or the overnight and temporary accommodation has been the subject of a recent Issues Paper by the Policy Advice Division of the Inland Revenue Department (IRD).

The tax treatment of an expenditure incurred by the employer on behalf of the employee is straightforward.

In such a case, the whole of the employee expenditure payment is taxed as a part of the employee’s income and PAYE needs to be deducted from such payments to employees.

Service reward

The accommodation payment in such cases is treated as a part of employee’s salary package, based on the principle that such payment is a reward for service.

Issues arise when there is a private element of accommodation payments to meet the accommodation costs of employees at their normal place of work and while on a work-related tour.

IRD is of the opinion that there are issues in situations of relocation or temporary accommodation arrangements.

Conflicting views

Taxpayers and their advisors argue that when employees are required to maintain a home in another location, then the accommodation or accommodation allowances provided by employers should be not be made taxable to the employee.

This is because, apart from the fact that there is no ‘net benefit’ provided to employees and also because they are required to maintain their present home.

If a person is required to work elsewhere and is required to maintain a home, there is no reward for service, even if the accommodation is provided in the work location. Thus when an employee is using their after tax income to maintain a home in a place which is far off from workplace, it is hard to perceive the benefit that the Income Tax Commissioner is trying to tax.

Sadly, the Commissioner does not agree with this approach, as the present law does not support a net benefit’’ approach and acknowledges that there has been some uncertainty and inconsistency in the application of these provisions amongst IRD officials as well as taxpayers or their advisors.

Differing scenarios

The issues paper contemplates scenarios where accommodation is not taxable or could be subject to tax at less than the full value.

The first situation is where accommodation is provided to the employee during temporary work travel.

In such a case, it is proposed to specifically exempt accommodation payments for a 12-month period, with discretion given to the Income Tax Commissioner to extend the period in certain cases.

The second situation is where accommodation is provided to the employee because of the needs of the job.

In certain job situations, it is essential for an employee to live in a particular location to perform their duties in a timely manner (for example, rural police officers).

IRD officials believe that such provision of accommodation should be taxed on the basis of full market value of the property.

It is IRD’s position that accommodation payments by the employee that solely relate to the expenditure on accommodation incurred by the employee (also called, ‘expenditure on account,’ are usually income of the employee).

Accommodation payments that are expenditure on account of the employee are a part of the salary package on which PAYE should be paid.

Vijay Talekar is Director of Tax Experts Limited, Chartered Accountants (www.taxeperts.co.nz) with offices at Level 1, 208 Great South Road, Papatoetoe, Auckland, Telephone (09) 2792987. The above article should be considered only as a guideline and not a specific advice. Mr.Talekar absolves himself, along with the management and staff of Tax Experts Ltd and Indian Newslink of any responsibility or liability that may arise from the above article. Readers should seek professional advice before acting upon any information contained above.

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