Chapter 3 - Meal payments
Meal payments – suggested approach
3.1 Our general proposition is that when an employer makes a payment to meet an employee expense, the payment should not be taxable to the employee unless it is also to meet the employee’s private expense. Then, the private element of the employee expenditure payment should be taxed.
3.2 However, difficulties can arise in determining whether a particular payment is to meet a private expense. This chapter considers this issue, with particular reference to payments for meal expenses and how the boundary should be drawn between work expenses and private expenses.
The general approach
3.3 Businesses usually seek to maximise profits and minimise costs. They do not usually make a payment to or for the benefit of an employee that is not for a business purpose. Similar issues arise, whatever the employer’s business, and when public or not-for-profit sector employers make such payments they will also be conscious of the need to minimise costs. Therefore, when an employer incurs an expense it is likely to be a work expense.
3.4 When an employer makes a payment that is a work expense in its hands, to or for the benefit of an employee, it does not determine the nature of the payment in the employee’s hands. For example, a non-cash benefit will almost always be deductible by the employer as a work expense, but may be of private benefit to the employee (and subject to FBT). Salary and wages can likewise be characterised as a private benefit. The New Zealand courts have stressed that whether a receipt is income depends on its quality in the hands of the recipient (for example, Reid v CIR which concerned the tax treatment of a student teacher allowance).[8}
3.5 We therefore need to consider the nature of the underlying expense from the employee’s perspective to determine whether it (or any part of it) is a private expense of the employee and, if so, then determine the tax treatment of the employee expenditure payment.
3.6 What do we mean by a private expense? There is no statutory definition to draw on, but the courts have considered the meaning of “private or domestic expenditure”. In CIR v Haenga[9} (which considered whether payments to a welfare fund were of a private or domestic nature) , Richardson J in the Court of Appeal commented:
“An outgoing is of a private nature if it is exclusively referable to living as an individual member of society and domestic expenses are those relating to the household or family unit …”
3.7 The case, therefore, tells us that a private outgoing relates to an individual living as a member of society – for example, food and drink. A domestic expense is one that relates to the household or family unit – for example, a home telephone. Private and domestic expenses are intended, at least in part, to further some personal purpose.
3.8 In principle, the general approach should be that an employee expenditure payment that is for a private (or domestic) expense of the employee should be taxed.
Exceptions to the general approach
3.9 The next question to consider is in what circumstances we might move away from a full taxation approach. In doing so, we would tend to discount more fact-based considerations, such as the degree of nexus with employment and focus instead, in the interests of simplicity and certainty, on more practical considerations.
3.10 In the next part of this chapter, we consider a number of scenarios involving a payment being made to meet the cost of a meal and the question of how the payment should be taxed. Matters we have taken into account in considering the question are:
- whether any private element is low in value and incidental to the work expense, or low in value and hard to measure;
- whether not taxing the payment would encourage salary substitution; and
- whether not taxing the payment is consistent with the approach taken under the FBT rules when the goods or services are provided directly by the employer.
Employee meals in general
3.11 The New Zealand courts have not given much further general guidance than Richardson J’s comments in Haenga on the meaning of “private expenditure”, but have considered particular types of expenditure, including food and drink. In Case E80,[10} which considered the nature of out of town meal expenses for a removal van driver, Barber J found that the expenditure did not have the necessary relationship with the earning of the taxpayer’s income:
“In my view there is no necessary relationship between the expenditure by O on meals and the earning of O’s income. The meals were purchased by O in order to live and not to perform O’s job. The expenditure was not incidental and relevant to the earning of income but was incidental and relevant to O’s physical sustenance.”
3.12 Barber J did acknowledge that, when the requirements of the taxpayer’s job mean that extra cost is incurred on meals and there is clear evidence of that, then there may be a sufficient nexus between the expense and earning the income from the employment. An example would be when the employee is required by his or her job to work out of town and, therefore, has to spend more on their meals than usual.
3.13 Nevertheless, food and drink are more commonly private expenditure since any meals purchased are to provide the employee with personal sustenance in order to live. They are not generally part of performing an employee’s job. Whether an employer pays an employee wages so they can buy food and drink or some form of meal payment, the outcome is the same and, at least in principle, the meal payment should be taxable.
3.14 It is certainly arguable that when an employee incurs extra meal costs during a work journey, then that additional cost is not private expenditure. However, the amount saved on the employee’s normal day-to-day expenditure remains private expenditure. The question is whether this argument can be reflected adequately in the options proposed in this chapter, given that, for many employers, it will not be practically possible to comply with or administer a test that requires an apportionment to be made. Identifying the private part of the expenditure would require consideration on an employee-by-employee basis of their meal consumption which could change from day to day.
3.15 There is a range of circumstances in which an employee might be provided with some form of meal payment by their employer. The most common appear to relate to:
- work travel – when an employee has extra meal costs because they have had to work away from their normal place of work over a meal period;
- non-work travel related:
- working lunches (and other working meals) – when the needs of the job mean an employee has to work through a meal period;
- conference meals – when an employee attends a work-related conference that extends through a meal period;
- light refreshments, such as tea and coffee – when employees work away from their employers’ premises and cannot use tea and coffee ordinarily provided to on-premises based staff.
Employee meals during work travel
3.16 Commonly, employers make payments to meet employee meal costs when their employees are travelling away from their normal place of work on work-related duties through a meal period. This may be for a specific journey of short duration, or for a longer period such as a secondment.
3.17 Employers recognise that their employees may have to spend more on their food and drink than they usually would when travelling away from home for work. Therefore, they will normally meet their employees’ meal expenses in such circumstances, to a varying extent. This recognises the fact that employees may be reluctant to travel if it means they are likely to be out of pocket for work-related costs. However, employers will also want to control costs on what can be a substantial work expense. For example, some employers may limit meal reimbursement payments to work journeys when an overnight stay is required, and make or set a daily payment, or an amount based on a monetary limit – either with a fixed upper limit or by reference to what is a “reasonable” amount.
3.18 Employers meet their employee meal expenses in different ways, depending on their internal procedures and sensitivity to administrative costs. This might be by settling the bill directly (for example, through the employee using a company credit card), by reimbursing actual expenses (for example, on receipt of a claim by the employee), or by paying an allowance (for example, based on an estimate of restaurant costs for a particular location).
Low in value, incidental to earning employment income and hard to value
3.19 Any comparison between meal costs when travelling on a work journey and normal day-to-day meal costs is likely to be between the cost of dining out and self-catering (at least for short-term business journeys rather than longer term secondments). An employee usually stays in a hotel, or similar accommodation, without self-catering facilities and therefore has to buy catered food. In these circumstances, the amounts saved by the employee are likely to be variable and very difficult to measure. When short-term work travel is concerned, the private element of any meal costs is also incidental to the need to travel.
3.20 When an employee undertakes a longer journey or secondment, this is likely to change after a period of time. An employer is likely to be reluctant to fund restaurant meals on a long-term basis and the employee will often move to self-catering accommodation. At that point the meal costs are not likely to be significantly greater than the normal day-to-day costs at home and the case for allowing tax-free treatment becomes more questionable.
3.21 Reimbursing an employee’s meal costs is unlikely to lead to significant salary substitution when the employee is travelling on a short-term work journey because the cost of meals is generally ancillary to the cost of the travel. Employees would normally expect to have their expenses reimbursed on top of salary and not see it substituted. However, there could be salary substitution risks if allowances are paid and the employee does not have to account for matching expenses.
Match with FBT
3.22 When the employer provides a meal while the employee is travelling (for example by booking and paying for the meal, along with other expenses, centrally), then the meal is exempt from FBT to the extent that an allowance to meet the cost would be exempt.[11} The FBT rules, therefore, follow the approach used with allowances.
3.23 Meals provided off the employer’s premises are normally treated as entertainment expenditure and the employer’s tax deduction is limited to 50 percent of the expenditure as a proxy tax impost with no tax charge for the employee. Meals consumed in the course of business travel are normally excluded from this treatment.
3.24 We have identified a number of options for determining the tax treatment of meals during work travel.[12} In arriving at these, we have already concluded that the practical difficulties in apportioning expenditure on meals between normal and additional meal costs while travelling for work reasons mean that apportionment is not a realistic option.
3.25 The options we have identified are:
- Exempt from tax payments to meet meal costs – Employers and employees would not need to apportion any payments once they establish that meal expenses have been incurred on a work journey to a location other than the employee’s normal work location. The advantage for employers is obvious, particularly since our understanding is that, in practice, employers do not apportion expenditure. However, a disadvantage is that the option may not adequately address the possible incentive to make tax-free payments when an employee is sent to work at a particular location for a longer period of time, when their meal costs are likely to reduce and become more in line with their normal day-to-day expenditure.
- Exempt from tax payments to meet meal costs, but limit to overnight journeys – This would assume that when a work journey does not involve an overnight stay the employee does not incur significant additional meal costs. This is an approach Australia follows.[13} However, this approach would not recognise that some employees may incur additional costs even when an overnight stay is not required.
- Set an upper time limit for making tax-free meal payments – This is a variant on the first option and recognises that when an employee is away from their normal work location for a limited period of time they are likely to have to incur significantly higher meal costs. However, after a reasonable period of time in a particular location, they and their employers are likely to make arrangements to reduce the additional meal costs – for example, by the employee moving into self-catering accommodation. After an appropriate period, therefore, any employee expenditure payments should become taxable.
This option has the advantages of the first option in resolving the apportionment issue but also seeks to recognise the potential reward element of reimbursing meal costs for longer trips to a particular location. However, an upper time limit would have to be a one size fits all approach. Any limit would act as a cliff edge, which inevitably means that some employees will find themselves on the wrong side of it.
- Exempt from tax a fixed portion of any payment to meet meal costs – Under this option, whatever amount is reimbursed or paid by the employer, a fixed proportion would remain taxable. This would recognise that the employee is receiving a tangible benefit when their employer pays for their meals but overcomes the practical difficulties in identifying the amount saved by making a round sum adjustment. Such an approach is adopted by the United States of America and Canada which only give a tax deduction to the employee for 50 percent of expenditure on meals when travelling overnight on a business journey. However, it is a fairly arbitrary adjustment that has no regard to particular circumstances and would over- or under-tax in many instances.
- Set a maximum amount that can, with certainty, be paid tax-free – This would provide a threshold below which the employer could reimburse the full amount tax-free. The benefit of this approach would depend on the amount it is set at. If set too low, it would be of little value to an employer who would still have to make an adjustment. If set too high, it could provide an incentive for salary substitution. Either way, there may be a need for criteria to be set by Inland Revenue to allow the exemption to continue if the cap is exceeded – for example, if the meal expense is incurred in a particularly expensive part of the world. There may be some value to employers in this approach, however, if the capped amount could be used more broadly as a daily amount that employers could pay without having to check employee records in detail (similar to the approach in the United Kingdom).
3.26 On balance, our preference is to fully exempt the payment, subject to an upper time limit for this treatment at any given temporary work location. This would mean that an employer would not have to worry about identifying the notional private/work split of any meal payment – it would either be not taxable at all, or taxable in full.
3.27 Setting an upper time limit for tax-free treatment would recognise the significant additional meal expenses normally incurred during work travel. However, it would also recognise that a meal payment is inherently private and that after an appropriate period of time the additional costs are likely to reduce and any meal payment will be more in line with an employee’s normal day-to-day spending on meals.
3.28 Setting an upper time limit would provide a clear boundary that should be easy to understand and apply. It would provide employers with certainty and resolve many of the problems around identifying when a work location should be treated as temporary for the purposes of making a meal payment. It would also leave it to employers to determine what amount they consider is appropriate to pay their employees by way of a meal allowance in different circumstances.
3.29 A time limit does provide a cliff edge though and where that limit is set would be important. Data about the length of business trips is not available. However, it is likely that most visits by an employee to a particular location (other than their normal work location) are for a relatively short period of time, usually days or weeks rather than months. As already noted, when meal payments are concerned, we would anticipate that when a trip runs into months, employers and employees will make arrangements to reduce spending on meals.
3.30 On this basis, an upper time limit of three months before a meal payment becomes taxable in full, would set an appropriate margin. However, we are interested in feedback on the pattern and duration of work trips to particular locations and what employers do in practice.
Employee meals in other circumstances – working lunches and other working meals/ refreshments outside of work travel
3.31 An employee may have to work through lunch or some other meal time because of the needs of the job. For example, it may be more effective to carry on a meeting without breaking for lunch, or to conduct business at a lunch-time meeting or hold an early morning meeting over breakfast. Often, any food and drink will be provided or paid for directly by the employer – for example, by arranging and paying for the catering directly. However, there will be occasions when the employee has to pay for and claim reimbursement for any costs – an allowance in this situation would be less likely. It may also be unclear how much of the cost relates to the employee and how much to guests.
3.32 One variation is when the employee attends a work conference. Normally an employer will fund and pay for conference costs (including meals) directly. However, there may be occasions when the employee pays for meals and claims reimbursement for the costs from their employer.
3.33 Finally, some employers pay modest tea and coffee allowances to members of staff who routinely work out in the field away from their employer’s premises and cannot use the refreshments the employer provides on the premises.
Low in value, incidental to earning employment income and hard to value
3.34 The cost of a working lunch or conference meal is usually reimbursed by the employer only when there is a particular work need. Working meals are not generally provided as a reward so the effective value to the employee is the saving they make over their normal day to day expenditure. This private element is likely to be low in value, incidental to earning the employee’s income and difficult to measure.
3.35 Tea and coffee payments related to the employee’s inability to obtain tea and coffee on the employer’s premises because they are working off site, are likely to be modest.
3.36 Working meals (outside of work travel) are likely to be intermittent, relatively modest and only provided when there is a work need. With these assumptions in mind, exempting payments to meet the cost of working lunches seems unlikely to encourage a material behavioural response towards salary substitution.
3.37 However, it might be necessary to prevent regular meal payments that are effectively rewards from being treated as non-taxable. For example, tea and coffee payments might need to be broadly linked to the value of tax-free refreshments the employer provides at the workplace and provided because the employee cannot access on-premises refreshments.
Match with FBT and entertainment regime
3.38 A further matter to consider is whether exempting an employee expenditure payment on food and drink is consistent with other taxing provisions. Working lunches provided by an employer on their premises are already exempted from being treated as fringe benefits although entertainment tax may apply in some instances to limit the employer’s deduction to 50 percent of the expenditure. In certain circumstances, when food and drink is provided away from the employer’s premises the entertainment expenditure rules also remove any potential FBT charge but limit the employer’s tax deduction to 50 percent of the expenditure. Working lunches are currently being taxed through the entertainment limitation.
3.39 Exempting modest off-site tea and coffee payments when provided because the employee cannot access on-premises refreshments would align with the FBT exemption that applies when light refreshments are provided to an employee on the employer’s premises.
3.40 The following two options have been considered:
- Exempt from tax any payments to meet working meal/ light refreshment costs, subject to an upper monetary limit – A key advantage of this approach is that it provides a clear and easily understood boundary that would provide an exemption for reasonable amounts. However, one disadvantage of this approach is that it would introduce a cliff edge which could result in employers having an incentive to pay up to the boundary, but no more. This would require maintenance to keep it up-to-date. There might also be problems in allocating expenditure to particular employees and for employers ensuring spending fits the cap. It would also introduce an inconsistency with the FBT and entertainment rules.
One variation on this option would be to define the upper limit in terms of “reasonable” expenditure on meals. However, while it could provide a more flexible boundary it would introduce a new subjective test and further uncertainty around what is meant by “reasonable”.
- Exempt from tax any payments to meet working meal/ light refreshment costs – This approach would exempt employee expenditure payments to meet the cost of working meals or light refreshments, but not provide particular limits.
This approach leaves judgements about when and how much to fund working lunches to employers who would not have to worry unduly about tax consequences. It would not be inconsistent with the FBT rules which provide that food and drink provided off the employer’s premises is not taxed as a fringe benefit when subject to the 50 percent deduction limitation under the entertainment expenditure tax rules.
The disadvantage of this approach is the small risk that working meals and refreshments could become a vehicle for salary substitution or simply a means to provide an additional tax-free reward. The circumstances in which the exemption would apply would need to be clarified and require, for example, that it is not provided to a particular employee on a frequent basis or as a reward for services.
3.41 Overall, when a meal payment is provided in work circumstances and is not intended to reward its employees, our preference is to exempt the payment. When the meal is provided as part of entertainment, any payment will already be taxed through the employer’s business under the entertainment rules by restricting the employer’s tax deduction.
3.42 The rule would have to be carefully crafted to make it clear that this does not extend to circumstances when the payment is made on a regular basis for the employee providing his or her services. Additionally, when light refreshments are concerned, any payment might have to be linked to what the employer provides to its staff, tax-free, on its premises more generally, limited to relatively modest amounts and only to situations when the employee has to work regularly on site away from the employer’s premises.