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Inland Revenue

Tax Policy

Appendix C: Approach in other countries

The payment of allowances and reimbursement of employee expenses is a common feature of businesses across the world. The rules to cater for these sorts of payments are, therefore, also common features of other countries’ tax systems.

The core features of the approaches adopted by the USA, UK, Australia and Canada are summarised in the tables below. These cover their approach to employee expenditure payments in general, meal payments and accommodation payments.

In general, countries tax monetary payments to or for the benefit of an employee as income or as a cash benefit but reduce the taxable amount to the extent that the underlying expense the payment intended to meet is incurred for employment purposes. The common aim is to tax only payments to meet private or non-employment related expenses. Therefore, many countries also provide administrative easements so that payments that are matched by clearly allowable employment expenses are not reported.

Common features in the USA, UK, Australia and Canada are:

  • The full amount of any payment to meet employee employment-related expenditure is taxable.
  • Deductions are allowed from the taxable amount when the underlying expense is to meet allowable business or employment-related expenditure incurred while performing employment duties.
  • Administrative easements apply so employers and employees do not need to report payments matched by clearly allowable employment expenses.
  • Statutory and non-statutory scale rates that can be paid without detailed checking of amounts are provided either by way of administrative practices or in legislation.

However, there are variations around the world on the detail of how this approach is applied to payments in general and in particular circumstances.

A significant difference from the New Zealand rules is that all these countries allow employees to claim deductions for employment-related expenses.

General allowances

USA UK Australia Canada
All compensation for personal services must be included in gross income. Includes allowances and reimbursed income.

Allowances and payments to reimburse expenses are taxed as income.

An allowance received by an employee is taxable as income.

 An allowance or reimbursed personal or living expenses are treated as taxable income.

The amount of any ordinary and necessary business-related expense is deducted from income. Expenses incurred wholly, exclusively and necessarily in the performance of the duties of the employment are deducted from income.

Expenses incidental and relative to the employment are deducted from income.

Employees may claim a deduction for certain employment expenses.

Under an “accountable plan”, neither the amount reimbursed nor the matching expense are reported.

When “dispensation” issued, neither the amount reimbursed nor the matching expense are reported.

Reimbursed expenses give rise to a fringe benefit (expense payment benefit) on which employer pays fringe benefit tax.

Reimbursement of out-of-pocket business expenses which is proved by vouchers does not have to be reported.

Under a “non-accountable plan”, the reimbursement is included within gross income and the expense can be deducted.

“Benchmark” rates set in certain circumstances to allow tax-free amounts to be paid without detailed checking of receipts.

Exemptions if no private use declaration for reimbursement of employment-related expenses.

Exemptions when “reasonable” allowances are paid for travel and motor vehicle expenses.

Claims for expenses are subject to a floor set at 2% of gross income.

Claims for meal and entertainment expenses are set at 50% limit.      

Meal payments

USA UK Australia Canada

The cost of meals is deductible from a payment if employee temporarily away from general area of tax home for substantially longer than an ordinary day’s work and the employee needs to sleep or rest to meet the demands of their work while away from home

Meal expenses are deductible if there is a material change in the journey to work and the employee is required to travel to a temporary workplace.

A meal payment is not taxable if it is paid to meet travel expenses incurred in earning assessable income. Applies when the employee travels away from their ordinary residence in the course of their duties. ATO interprets this as requiring a sleep away from home.

Meal allowances are taxable unless they are received by the employee for travelling away from the area where the employee normally works or reports in order to carry out their job.

“Tax home” is employee’s regular place of business or post of duty (if more than one then main place, if none the place where the employee regularly lives).

A temporary workplace is somewhere the employee has to travel to as part of their job for a temporary purpose or for task of limited duration.

Allowable travel expenses cover travel to an alternative workplace.

Travel has to be away from the municipality and metropolitan area where the employer’s establishment is located and the employee ordinarily works or reports.

Temporarily means employee expects to work there for 12 months or less.

Temporary means employee expects to work there for two years or less.

12-month time limit for Living Away From Home Allowance from 1 October 2012.

There is no set time limit for travel.

Allowance not taxable if “accountable plan” - business expenses accounted for in full to employer, any excess over is taxable. Otherwise full allowance taxable. Employee may claim deduction for itemised meal expenses to 50% limit.

The additional cost of meals is allowed in full. In practice provided some expense is incurred, HMRC will also allow deduction for the amount saved from not eating at home.

ATO sets “reasonable travel allowance rates” each year. Provided the allowance is paid at or below those rates PAYG does not have to be operated on the allowance and it does not have to be returned. If employee spends more than the allowance they must keep detailed records if they want to claim the excess.

The meal allowance has to be reasonable.

The Canadian Revenue Authority sets very broad guidelines about what it considers reasonable. As at 6 December 2011 it considered a meal allowance of $17 is reasonable.

“Standard meal allowance” method can be applied rather than actual costs but subject to 50% limit.

HMRC sets tax-free rates which can be paid if employees do not want to keep detailed records.

If LAFHA paid, exempt amount is excess over standard weekly amount.

Claims for meal expenses are set at 50% limit.

Meals cannot be lavish/ extravagant. May challenge if meals are lavish/extravagant.    

Accommodation payments

USA UK Australia Canada

The value of accommodation or an accommodation allowance provided to an employee will usually be taxed as part of the employee’s compensation package.

The taxable value is the fair market value (market rent), reduced by anything made good by the employee.

The cash equivalent of employer provided accommodation is taxable. Taxable value is the rent paid by the employer less any amount made good by the employee. Special rules if owned by the employer, linked to rateable value of property and interest rates.

The market value of the right to occupy accommodation is taxable as a fringe benefit when the unit is the employee’s normal place of residence.

The taxable value is effectively the market rental value of the unit, reduced by anything made good by the employee.

The fair market value of employer provided board and lodging must be added to the employee’s salary, less any amount the employee paid to the employer.

Exemption for accommodation provided by an employer to an employee for the employer’s convenience on the employer’s premises if the employee is required to accept the lodging as a condition of employment.

Exemption if accommodation necessary for proper performance or better performance (and customary) of the employment duties.

Exemption when the employee is living away from their usual place of residence in order to carry out their employment duties, or travelling in the performance of those duties (up to 12 months from 1 October 2012).

Exemption if the employee performs duties temporarily in an area where, because of the distance of the areas, they are not expected to return daily to their principal place of residence.

There are also specific exemptions for campus lodging, ministers of religion and lodging when temporarily away from the normal tax home (up to 12 months).

Exemption for accommodation at a temporary workplace (up to two years). But if private use, for example by family or lavish, then adjustment made to reduce tax free element.

If part of accommodation necessarily used exclusively for employment purposes deduction may be given for appropriate proportion of expenditure.

Special exemption for accommodation provided in remote areas.

Payment of a LAFHA is a LAFHA fringe benefit. Taxable value is allowance paid less any exempt component. The exempt accommodation component is the additional accommodation expenses the employee could reasonably be expected to incur at the alternate location (depends on facts and circumstances) .

Special exceptions for sports teams, members of the clergy and remote work locations.

If the employee has to occupy accommodation larger than he or she needs, the taxable value can be reduced to the value of the accommodation the employee needs.

If the employee’s privacy or quiet enjoyment is impaired because of the nature of the accommodation, the taxable value may be reduced.