The tax treatment of payments provided to employees working from home
Inland Revenue has recently published Determination EE003: Payments provided to employees that work from home; Employee use of telecommunications tools and usage plans in their employment. The new determination applies for the period 1 October 2021 until 31 March 2023, and clarifies the ambit of exempt income for reimbursements paid by an employer to an employee for costs they incur in connection with their employment income.
Generally, these reimbursements are taxable in the hands of the employee unless the payment is exempted by the provisions of section CW 17 of the Income Tax Act 2007. Due to the potential administrative difficulties and various compliance costs in applying section CW 17, the Commissioner has, over the past two years, published several determinations that deal with additional expenditure employees may face when they work from home and/or use their personal telecommunications tools and usage plans in their employment.
For Determination EE003 to apply:
- An employer must make a payment to an employee;
- The payment must be for expenditure or a loss incurred (or likely to be incurred) by the employee;
- The expenditure or loss must be incurred by the employee in deriving their employment income and not be private or capital in nature (the capital limitation does not apply to an amount of depreciation loss);
- The payment must be made because the employee is doing their job and the employee must be deriving employment income from performing their job;
- The expenditure or loss must be necessary in the performance of the employee’s job; and
- Where an employee is partly working from home and partly outside of their home, the home-based work must be more than minor.
Telecommunications equipment and/or usage plans
Under this determination, where an employer pays an employee who is working from home an allowance, or pays an allowance in respect of the employees use of their personal telecommunications equipment and/or usage plans (an affected employee), the most appropriate of the following options can be chosen and that amount treated as exempt income of the affected employee:
|Where the affected employee||Works from home||Does not work from home|
|Does not use own telecommunications tools and/or usage plans in their course of their employment||Up to $15 per week|
|Does use own telecommunications tools and/or usage plans in the course of their employment||De minimis option||Up to $20 per week||Up to $5 per week|
|Principally business use||Up to $15 per week plus up to an additional 75% of the amount of the affected employee’s total usage plan bill||Up to 75% of the amount of the affected employee’s total usage plan bill|
|Principally private use||Up to $15 per week plus up to an additional 25% of the amount of the affected employee’s total usage plan bill||Up to 25% of the amount of the affected employee’s total usage plan bill|
The determination acknowledges it may be difficult to determine the level of use precisely, and allows for less than precise estimation. For example, the Commissioner suggests the employer may rely on evidence of time spent by the employee or a signed declaration from the employee to indicate that telecommunications tools are used principally for employment purposes. The employer should review this periodically.
Home office furniture and equipment
Where an employer wishes to reimburse the employee for costs incurred in acquiring home office furniture or equipment, either the safe harbour option or the reimbursement option can be used.
Safe harbour option
Under this option an employer can treat payments of up to $400 made to reimburse the employee for the costs incurred in acquiring new furniture and equipment as exempt income. Additionally, they may also treat payments of up to $400 made to reimburse the employee for the costs incurred in acquiring new telecommunications equipment as exempt income
Under this reimbursement option, an amount paid by an employer will be exempt income of an employee if:
- The amount is for furniture or equipment or telecommunications equipment purchased by the employee to enable them to work from home; and
- The amount paid is no more than the deduction that the employee would have been entitled to for depreciation loss on the furniture or equipment (or the cost of the asset, in the case of low-value assets) for the income year in which the payment is made, but for the employment limitation.
A written statement from an employee to their employer that the employee intends to use an asset for their employment, and whether principally or not, will be sufficient to establish such use. An email or expense claim application is sufficient to show the employee’s intended use of the furniture or equipment.
While the determination is not binding on employers or employees, the increased clarity and guidance on the extent reimbursements paid to employees can be exempt income is welcome and will give comfort to employers, particularly given New Zealand’s recent return to Alert Level 4.
The thresholds determined are more specific than earlier determinations, for instance, affected employees are classified into those who work from home and those who do not. Employers may wish to review their reimbursement framework in light of the new guidelines and ensure there is sufficient documentation to support the positions adopted.
If you have any questions, please contact one of our experts.
Co-authored by Louise Meng, a Solicitor in our Tax team