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Inland Revenue

Tax Policy

Chapter 5 - Communications and clothing payments

  • 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.

5.1 In many instances when there is a mixed private and work expense, making an apportionment in order to arrive at the private or work element of any employee expenditure payment might be relatively straightforward, based, for example, on respective use. However, in some instances there is no separately identifiable private or work element.

5.2 In these cases, how should an apportionment be made? When the work or private element is likely to be low in value and hard to measure so that the administrative and compliance costs of making an apportionment would be disproportionate to determining the exemption or tax liability, should that element be disregarded?

5.3 This chapter considers these issues principally by reference to communication and clothing payments. Communication payments are those made to meet expenditure, typically when an employee is working away from the employer’s premises, such as the employee’s phone and other electronic communication costs. Clothing payments are payments for buying and maintaining clothing for use while carrying out employment duties.

Policy considerations

5.4 The first issue to consider is how to make an apportionment between a mixed private and work expense.

5.5 The starting point is based on assumptions that:

  • When the private element is incidental, an apportionment should not be made.
  • When the private element is low in value and hard to measure, an apportionment should also not be made.
  • Apportionment, or no apportionment, of the expense should not provide an incentive for salary substitution.

5.6 “Incidental” is a commonly used term in tax legislation, but is not specifically defined. However, it is generally taken to mean something that occurs sometimes by chance as a minor accompaniment to something else, whether an expense or event.

5.7 So, if the private purpose is not independent of the work purpose, but is carried out in order to fulfil that work purpose, it will be incidental to the employment purpose. Similar considerations apply when the work purpose is subordinate to the private purpose.

5.8 However, there will be occasions when the private element of an expense is more than incidental, such as travel costs of a spouse when accompanying an employee on a work journey.

5.9 Often, it will be clear what the respective private and work elements are and the appropriate amounts to be attributed to each. This may be because there is a distinct private/work element or because the relative proportions are clear. In the example in the previous paragraph, the spouse’s travel costs are private and the employee expenditure payment that meets them should be taxable. Alternatively, when an employee works from home and sets aside a distinct part of the house for carrying out work duties, then any employee expenditure payments for the household costs may be apportioned by reference to floor area between the work and private elements.

5.10 However, in other circumstances, the private element may not be so clearly identifiable. If so, and the private element is low in value and hard to measure, an apportionment should not be made.

5.11 In considering these apportionment issues, the scenarios considered are:

  • Communication payments – The employer meets the employee’s home telephone, personal cellphone (or other electronic communications device) or internet costs, and there is mixed employment-related and private use, and part of the cost relates to private use and part to work use but overall apportionment is difficult.
  • Clothing costs – The employer meets the costs relating to the employee’s clothing worn while at work.

Communication payment

5.12 The term “communication payment” in this chapter describes an employee expenditure payment to meet an employee’s phone, other electronic device or internet costs.

5.13 Working away from the employer’s premises has become increasingly common with the development of communications technology and flexible working arrangements. In many cases, the employer will provide the employee with a cell phone or other electronic communications device in the employer’s own name. If so, then the benefit is covered by a specific exemption from FBT and may not be taxed if it satisfies the criteria to be classed as a work tool including that it has been provided mainly for business use.

5.14 As an alternative, the employer may meet all, or a portion, of an employee’s costs, including the employee’s internet costs. Whatever sort of expense, the electronic communication facility is often to meet both private and work expenses with a single bill meeting the combined expense.

5.15 Part of the underlying expense may be specific to the private or work element (for example, individual calls), but part may be common (for example, line rental or a broadband facility). There may be a bundled package including mixed private and business elements to which no particular expense can be attributed. For example, when a phone package provides free calls as part of a single monthly fee.

5.16 If the employer meets the cost of a dedicated work phone line or internet facility with no, or only incidental private use, no apportionment should be required in order to tax the private element. When the employer meets the cost of what is effectively a private line with only incidental work use, an apportionment should also not be required in order to tax the payment. However, when there is mixed use that is more than just incidental, arguably an apportionment between the taxable and non-taxable elements should be made.

5.17 Whether and how this apportionment should be made is discussed below.


5.18 Technology developments mean that phone and internet access are now integral to most people’s private lives. On occasions, an employee may install a dedicated work line or buy a cell phone (or other electronic device) for exclusive use in their job. However, in such circumstances, it is more likely that the employer will make the necessary arrangements – for example, by providing a cell phone package. The FBT business tools exemption provides an incentive for the employer to do so. With this in mind, our starting proposition is that for the vast majority of people, personal phone and internet access will be primarily a private expense and any work benefit will be incidental.

5.19 For these reasons, exempting employee expenditure payments from tax when the associated expenditure is mainly a work expense, but the private element is more than incidental is not a workable option despite its alignment with the FBT exemption. This approach would ignore the potentially significant private value which might accrue and provide an incentive for salary substitution.

5.20 The options considered are:

  • Apportion between private and work elements on a “reasonable” basis – This broadly reflects the current approach that seeks to provide a split between private and work elements across all expenses. It would achieve a broadly equitable result, but requires an analysis of the underlying expense with associated compliance costs for employer and employee who would both have to monitor expenditure. Calls may not necessarily reflect the appropriate work element of the line rental. For example, the communications device may have been provided so the employee can be available when on call, or otherwise available to be contacted by the employer, but all calls made from the communications device are unlikely to reflect business use. Additionally, when there is no separately identifiable private or work element, such as call charges, any apportionment may be difficult to establish.
  • Tax a fixed ratio – Under this approach, a standard ratio, such as 50 percent of expenses, might be used to apportion expenditure. Many employers already adopt this approach as a rule of thumb. This option would recognise the intention to establish broadly the correct amount to tax in relation to the administrative and compliance costs, and likely revenue implications.
    In many instances, a fixed apportionment may produce a broadly reasonable result. However, it is, of necessity, arbitrary. It would require a set apportionment without regard to particular underlying facts and could over- or under-tax depending on the employee’s circumstances.
  • Tax any employee expenditure payment when there is mixed work and private use – Under this option, any reimbursing payment to meet expenditure with mixed use would be taxed in full. This is on the assumption that when private use is more than incidental, the employer has the ability to take advantage of the FBT business tools exemption and provide access to electronic communication devices tax-free as business tools. Such an approach would avoid the need to make arbitrary or complex apportionments of mixed expenditure.
    An employee expenditure payment would not, however, be taxed when there is a dedicated work facility or other separately identifiable and exclusive business cost being reimbursed.

Preferred option

5.21 Overall, our preference is for the third option that would tax any communication employee expenditure payment when there is a mixed work and private expense that is more than incidental private use.

5.22 One of the aims of this review is to provide certainty by establishing clear boundaries between taxable and non-taxable payments that are easy to understand and apply. This approach would avoid the need to make arbitrary judgements about apportioning mixed-use expenditure. It would also recognise that the expense is mainly a private expense. When an employee has a significant on-going need to be contacted or to work away from their office, the employer is likely to provide the facilities in its own name – for example, by providing an electronic communications device or dedicated home office facilities. In these circumstances, the FBT rules will apply to exempt any benefit when work tools are provided mainly for use in the employee’s job.

Clothing payments

The current approach

5.23 The New Zealand courts have considered the tax treatment of clothing on a number of occasions and concluded that expenditure incurred on the purchase and maintenance of clothing is normally a private expense.[22} Any employee expenditure payment to meet a clothing expense should therefore normally be taxable in full.

5.24 The general proposition that expenditure on clothing and its maintenance is normally a private expense was summarised in Case E51[23} which concerned clothing worn by a police officer. Judge Barber stated “Broadly, the authorities say that expenditure on clothing and maintenance is generally of a private nature and non-deductible”. Expenditure on conventional clothing (which might broadly be considered to be clothing reasonably suitable for private use) is a private expense, even when the employee is required to wear that particular clothing as part of a uniform (for example, see Case F45[24} which concerned conventional clothing worn by a ferry steward) and irrespective of whether the clothing is worn outside of the employment situation.

5.25 There is an exception to this general approach when the nature of the employee’s occupation means that “abnormal expenditure on conventional clothing” is required. In Case F9[25}, Judge Barber allowed a deduction to hotel managers for an amount representing the extra clothing (and dry cleaning) that was required because of the nature of their employment. In particular, it was observed that the taxpayer’s employment required them to maintain a larger stock of clothes and to clean and replace clothes more often.

5.26 An employee expenditure payment to meet clothing costs is also not taxable when the particular clothing is “necessary and peculiar” to the employee’s occupation (see, for example, Case F45, referred to above). This includes a uniform, or specialist clothing that is not reasonably suitable for private use. Examples include uniforms worn by nursing staff or members of the armed forces. However, ordinary clothing of a particular style or colour which could reasonably be worn outside the job would not be treated as a uniform. Specialist clothing might include overalls and protective boots worn in an industrial plant.

5.27 If the costs of particular articles of clothing are treated as exempt, any payments to meet the costs of cleaning and otherwise maintaining them should be likewise exempt – for example, when the employer pays a laundry or dry cleaning allowance that meets those costs.

Policy considerations

5.28 In the majority of cases the position is clear. When an employee wears ordinary clothing to work, the cost of maintaining and replacing that clothing is a private expense and any employee expenditure payment should be taxed.

5.29 However, uncertainty can arise around whether something is a uniform, or whether a particular employee or an employee in a particular occupation is required to buy and maintain extra clothing beyond what might be expected for an ordinary employee. Apart from identifying situations when this might apply, there are questions around identifying the additional expense.

5.30 When the employee is provided with what is essentially ordinary clothing, there is a very substantial private value that goes beyond being merely incidental to the work purpose. An employee may be required to wear something that they might not otherwise choose to wear. However, alongside meals and accommodation, clothing should be treated as being inherently private. This also means it is difficult to apportion ordinary clothing expenses between private and work elements, or even to make a judgement about a broad apportionment. Therefore, the primary approach should be to tax all or none of any employee expenditure payment to meet personal clothing costs.

Abnormal expenditure

5.31 The principle in Case F9 was that when the nature and duties of the employment required the employee to spend more on buying and maintaining clothing than would be the case for an “ordinary” employee, extra costs were deductible. The case concerned hotel workers, but the principle applies more generally.

5.32 The previous chapters discussed the difficulties of taking account of an employee’s personal circumstances when working away from their normal place of work temporarily, in the context of meal and accommodation allowances. Similar considerations arise with clothing allowances. Questions around whether a particular clothing expense is excessive compared with other employees or occupations are difficult to resolve and not generally something that the tax system should have to make judgements about.

5.33 This paper has tried to focus on rules that provide clear “bright lines” between what is and what is not taxable. When possible, there should be clear rules that do not have excessively moveable boundaries. Rules that have to take account of personal judgements about what is and what is not ordinary clothing are not consistent with this approach. Therefore, in our view, while exemptions should be maintained for uniforms and other specialist clothing which might be subject to particularly arduous use resulting in excessive wear and tear, there is less justification for exempting payments for similar treatment for ordinary clothing.

5.34 This approach would be consistent with the FBT rules that apply when the employer provides the clothing or meets any maintenance and cleaning costs. There are specific FBT exemptions for “distinctive work clothing”[26} which cover uniforms and for protective clothing which are generally covered by the health and safety exemption.[27}

Preferred option

5.35 Ordinary clothing worn at work is often indistinguishable from or interchangeable with clothing the employee might wear outside of work. In these circumstances, any employee expenditure payment is simply meeting a private expense. Therefore, our preference is to move away from the position that an employee expenditure payment in respect of personal clothing is to meet a private expense only in specific circumstances.

5.36 These specific circumstances are when the clothing in question is specific to the job in question and not something that is readily useable outside of work. A uniform, protective or specialist clothing that is not reasonably suitable for private use would fall within this category. Judgements about the tax treatment of clothing allowances that fall short of this standard lead to subjective questions about what an employee might be expected to wear at work in “normal” circumstances. These are questions that are impossible to answer with any certainty.

5.37 It is suggested that the law in this area be made more certain by making it clear that payments to meet clothing costs are taxable unless they concern expenditure on uniforms, protective clothing and other specialist work clothing that is not reasonably suitable for use outside work. They are taxable if they meet expenditure on ordinary clothing that can reasonably be worn outside the job, irrespective of the quantity of clothing or maintenance required.

5.38 This may result in some allowances becoming taxable – for example, hosiery allowances, but these allowances have already been built into pay in most cases.


22 Although these were decided under the deduction rules set out in the Fourth Schedule of the Income Tax Act 1976 which were repealed with effect from 1 April 1988, the principles derived from them are still relevant in determining the tax treatment of employee expenditure payments covering clothing expenditure today because they focused on the private nature of clothing.

23 Case E51 (1982) 6 NZTC 59,786.

24 Case F45 (1983) 6 NZTC 59,786.

25 Case F9 (1983) 6 NZTC 59,606.

26 Section CX 30. 

27 Section CX 24.