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Inland Revenue

Tax Policy

Chapter 1 - Introduction

1.1 Over recent years, a number of concerns have arisen around the tax treatment of payments made by employers to or for the benefit of their employees. As a result, the Government has included a review of employee allowances in its tax policy work programme. This issues paper provides officials’ initial thinking in this area.

1.2 Although the term “allowance” is commonly used to refer to non-salary or wage cash payments for employees, the review covers a range of payments made by employers to employees, or made on their employees’ behalf. There is a spectrum of such payments ranging from payments that reimburse an employee’s private expenditure, to payments that are no more than the direct reimbursement of business expenditure incurred for the employer by the employee. In this issues paper we use the term “employee expenditure payment” to refer to all these payments.

1.3 In some cases the generality of the legislation determining the tax treatment of employee expenditure payments can lead to impractical outcomes that may differ from how businesses are applying the rules in practice. We are also aware that in some cases there is a difference between how employers treat employee expenditure payments in practice and Inland Revenue’s view of how the legislation operates. Gaps that arise from the general rules may therefore need to be filled with either more detailed legislation or published statements from Inland Revenue.

1.4 Initial discussions with employers and representative groups suggest that the employee expenditure payment rules work well for employers for the most part, but there are some significant interpretive issues that require a policy response.

1.5 Key types of payment requiring some attention are:

  • Meal payments – a number of scenarios involving a payment being made to meet the cost of a meal in work-related circumstances and the question of how the payment should be taxed are considered.
  • Accommodation payments – situations involving both an employee expenditure payment and the provision of accommodation by the employer when taxing less than the full value of the payment are considered.
  • Communication and clothing payments – issues in relation to communication and work clothing payments when it is often difficult to make an apportionment are considered.

1.6 The paper considers these employee expenditure payments and sets out possible options for how to treat these. Later the paper considers the current legislation and how well it works in providing certainty for other employee expenditure payments more generally.

1.7 A boundary between payments that meet a private expense (defined in chapter 2) and those that do not is considered. Payments for a private expense can be seen as a salary substitute. In these circumstances, our starting point is that salary/wages and salary/wage substitutes should be taxed equally. All payments that are salary or wage substitutes should be taxed since all salary and wages are taxed.

1.8 However, to reduce compliance and administrative costs, some payments to meet a private expense should be treated as non-taxable when they are:

  • low in value and incidental to the work element;
  • low in value and hard to measure; and
  • there is little risk of re-characterisation of salary and wages as non-taxable payments.

1.9 Finally, in establishing the taxable amount, valuation is a key concern, including taking into account any employee contribution which reduces the value of any private benefit.

1.10 A summary of the suggested approach and options is set out below and a comparison with the current treatment is provided in the table at Appendix A.

Summary of suggested approach and options


  • We suggest that employee expenditure payments to meet an employee’s meal expenses during work travel away from the employee’s normal workplace should be exempt from tax, subject to a three-month upper time limit at a particular work location.
  • Employee expenditure payments to meet the cost of an employee’s working lunches and other working meals/refreshments outside of work travel should not be taxed, provided any payment is not made regularly as an additional payment for the employee’s services.


  • We suggest that employee expenditure payments to meet an employee’s accommodation expenses during work travel away from the employee’s normal workplace should be exempt from tax, subject to a 12-month upper time limit at a particular work location, with a power for the Commissioner to extend that time limit in certain exceptional circumstances.
  • When an employee is provided with accommodation by their employer at or near their normal workplace, the value of the accommodation should be taxable to the employee based on the market rental value of the property, after taking into account any employee contribution to the cost of the accommodation.
  • When an employee has more than one permanent workplace for the same job, one option is not to tax employee expenditure payments to cover accommodation costs at one workplace.
  • A valuation method other than market rental value may be needed to establish the taxable amount when the accommodation is in an overseas location – for example, a valuation by reference to comparable New Zealand accommodation.


  • We suggest that employee expenditure payments to meet internet and other electronic communication costs should be taxed in full when meeting mixed work-related and private expenses and there is no separately identifiable work or private element.


  • We consider that employee expenditure payments to meet clothing costs should be taxed in full except when they relate to uniform, protective or specialist clothing required for the employee’s job.

General legislative issues

  • Alternative approaches to the current general legislation around the tax treatment of employee expenditure payments are considered, ranging from a fundamental change in approach to leaving the general rules unchanged but introducing a power to exempt particular payments by Commissioner determination – making power for the treatment of payments not addressed by specific rules.
  • Changes may be needed to the legislation concerning “expenditure on account of an employee” to remove ambiguities around the application of the general exclusions.

Next steps

1.11 Once the consultation period has closed, officials will report to Government to consider whether any legislative changes are appropriate.

1.12 All legislative references are to the Income Tax Act 2007 except when otherwise stated.

How to make a submission

1.13 You are invited to make a submission on the proposed reforms and points raised in this issues paper. Submissions should be addressed to:

The tax treatment of employee allowances
C/- Deputy Commissioner, Policy
Policy Advice Division
Inland Revenue Department
PO Box 2198
Wellington 6140

1.14 Or email [email protected] with “Employee allowances” in the subject line.

1.15 Electronic submissions are encouraged. The closing date for submissions is 1 February 2013.

1.16 Submissions should include a brief summary of major points and recommendations. They should also indicate whether the authors would be happy to be contacted by officials to discuss the points raised, if required.

1.17 Submissions may be the subject of a request under the Official Information Act 1982, which may result in their release. The withholding of particular submissions on the grounds of privacy, or for any other reason, will be determined in accordance with that Act. Those making a submission who consider there is any part of it that should properly be withheld under the Act should clearly indicate this.