Skip to main content
Inland Revenue

Tax Policy

Employee expenditure payments and employer-provided living accommodation



Over recent years there have been some significant concerns around the tax treatment of employer-provided accommodation, accommodation payments and other allowances and payments by employers to cover employee expenditure. Current tax legislation can lead to impractical outcomes that may differ from how employers apply the rules in practice.

Under current tax law, when an employee expenditure payment is made, provided it is to cover a work expense, it is not taxable. However, when there is a private element linked to the expense, that element is taxable. This is because it is considered to be in effect an alternative to receiving more salary or wages, which would be normally taxed.

An expense is private in nature if it is intended to further some personal purpose or provide a private or domestic benefit. As meals, accommodation and normal clothing are inherently private, the starting position under current tax law is that any employee expenditure payment to cover these sorts of expenses should be taxed.

In many instances, however, the private benefit is either incidental to the business objective or is minimal or hard to measure, and apportionment between the private and employment purpose is not practical, given the compliance costs associated with separating out the relative elements. Accordingly, the proposals in the bill apply the principle that the private amount should be ignored when low in value or hard to measure, and not provided as a substitute for salary or wages.

The proposals also take into account three key policy objectives:

  • To improve clarity and certainty, thereby improving compliance. Rules that are relatively easy for employers to understand and apply aid compliance and help to minimise compliance and administration costs.
  • To improve fairness by ensuring employees pay their fair share of tax, and that social assistance payments are targeted at those in genuine need. When an employee expenditure payment provides a substitute for labour income or a material private benefit, it ought to be, like salary and wages, taxed and included in income when determining eligibility for social assistance. This ensures that the tax and social assistance outcomes are the same for employees irrespective of the composition of their remuneration.
  • To enhance economic efficiency by ensuring that tax rules in this area are not an impediment to business decision-making. The law on employee expenditure payments can affect a broad spectrum of employees who incur expenditure during the course of their work and for which they are reimbursed by their employers. In some cases their employers ultimately bear the additional tax costs. Other than this direct financial implication for the employee or employer, there is the potential for the tax rules to act, where the payment relates to accommodation and meals, as a disincentive to the free movement of labour and, more generally, to normal business activities that require travel. To avoid these economic costs, it is crucial to have rules that are clear and that tax only the private benefit element.

The proposed new rules have been developed after significant consultation, both leading up to the release of the November 2012 issues paper, Reviewing the tax treatment of employee allowances and other expenditure payments, and subsequently. A total of 27 submissions were received on the suggestions in the officials’ issues paper. Most submissions focussed on the tax treatment of accommodation expenses and establishing a boundary between private and work-related expenditure.

Subsequently, Inland Revenue officials carried out further consultation with key stakeholders, including the Corporate Taxpayers Group, New Zealand Institute of Chartered Accountants and the Canterbury Earthquake Recovery Authority. The main area of concern was that any new rules should encompass not only work-related secondments but also employee involvement in longer-term projects. Those projects included work on the Canterbury earthquake recovery and projects in other locations throughout New Zealand (for example, the ultra-fast broadband roll-out, dam rebuilds and other major water storage projects, and road building projects). The proposals in the bill have taken this various feedback into account.

The proposals include the use of a set of time limits to determine the boundary between when an accommodation benefit is taxable or non-taxable rather than the use of fact-based criteria such as whether the employee still has a house at their previous work location; and valuation rules when it is taxable. A special transitional rule will apply for Canterbury earthquake recovery work.

Potentially, the proposed changes could affect a wide range of employees who are required to work away from their normal place of work for a period of time, as well as on specific groups. However, in most cases the new rules will largely match existing business practice but with the added advantage of providing greater certainty, so the overall effect on employees and employers should be limited.

The merits of the proposed changes are analysed in the Regulatory Impact Statement (available on

Application dates

Most of the proposed amendments will apply from 1 April 2015. However, there will be a choice of applying the revised accommodation rules to accommodation arrangements put in place on or after 1 January 2011, subject to meeting certain conditions. The changes specific to Canterbury earthquake recovery work will apply from 4 September 2010, the date of the first earthquake.


(Clauses 20, 33 and 34)

Summary of proposed amendment

When an employer either provides accommodation or an accommodation payment for an employee who is on a secondment or project of limited duration, time limits will apply to determine whether the accommodation or payment is exempt from income tax. An additional transitional exemption is proposed for employees working on Canterbury earthquake recovery projects. (New sections CW 16B, C, E and CZ 29 of the Income Tax Act 2007.)

Application date

The proposed application date for the new rules is 1 April 2015. However, employers and employees will have the choice of applying the new rules retrospectively to accommodation arrangements put in place on or after 1 January 2011, provided they had not taken a tax position before 6 December 2012 (the date of the Commissioner’s statement on accommodation) that the amounts involved or accommodation provided were taxable.

In the case of Canterbury earthquake recovery projects, the proposed application date is 4 September 2010, the date of the first earthquake.

Key features

Employer-provided accommodation or an accommodation payment provided because an employee needs to work at a new work location and that location is not within reasonable daily travelling distance of their home, will be tax-exempt provided:

  • There is either a reasonable expectation that the employee’s secondment to that work location will be for a period of two years or less, in which case the payment will be exempt for up to two years.
  • The move is to work on a project of limited duration whose principal purpose is the creation, enhancement or demolition of a capital asset and the employee’s involvement in that project is expected to be for no more than three years, in which case the maximum exemption period is three years.
  • If the move is to work on Canterbury earthquake recovery projects, the maximum period is extended to five years if the employee starts work in the period starting on 4 September 2010 and ending on 31 March 2015, and to four years if the employee starts work in the period beginning 1 April 2013 and ending 31 March 2016. The maximum period reverts to three years when the employee starts work on or after 1 April 2016.


Employer-provided accommodation and accommodation payments provide an inherently private benefit to an employee and should generally be taxed, particularly if they are provided as part of a salary trade-off. However, sometimes there is little benefit to the employee, largely because the accommodation or payments arise from the requirements of the employer or the job. In these cases there should be no tax liability. A key concern is identifying an appropriate boundary between private and work-related expenditure.

The amendments propose tests based around time limits to determine the boundary. This approach should be easier for employers and employees to apply than tests that use fact-based criteria such as whether an employee has a house in their previous location. It is also the approach used in Australia, Canada, the United Kingdom and the United States. Australia and the United States have a one-year “bright line” tax exemption, while Canada and the United Kingdom have a two-year “bright line” tax exemption.

Detailed analysis

Two-year time limit

Example 1

Adam is an accountant who has worked for his employer in Auckland for 10 years where he lives with his family. He is sent by his employer to New Plymouth for three months to carry out an audit of a large client before returning to the Auckland office. Adam’s employer reimburses his hotel costs in New Plymouth. As Adam’s employer expects him to work in New Plymouth for less than two years, the payment that Adam receives reimbursing him for his accommodation costs in New Plymouth will be exempt income.

Example 2

Bill lives in Wellington. His job is moved permanently to Auckland but he chooses not to move his family and commutes on a weekly basis, returning to Wellington at the weekend. Bill’s employer pays him an accommodation allowance towards his Auckland accommodation costs. Bill and his employer expect he will work at the Auckland workplace for more than two years. The accommodation allowance is not tax exempt under the two year rule.

Accommodation linked to long-term projects of limited duration

The longer maximum exempt time-period of three years allowed for involvement in longer-term projects takes into account business practices, particularly in the construction industry. The workers might be housed at or near the construction site, might share accommodation, and might be employed on a fly in/fly out basis, so would not be relocating. Employees may be recruited specifically from overseas with no intention that they ever relocate to New Zealand.

Example 3

Eddie is seconded by his employer to work on a dam construction project for a client in a remote area of the North Island. Because of the scale of the project, number of workers and remoteness of the location, Eddie’s employer sets up an accommodation camp to house its employees. The dam project is expected to take around five years to complete. However, Eddie’s employer expects him to work on the project for only the first two and a half years.

Eddie is working on a project involving the construction of a capital asset so the three-year upper time limit applies. His employer expects him to be working at the distant work location for no more than three years so the value of the accommodation is exempt.

While the projects covered by the three-year exemption will often relate to the construction industry, they may also involve upgrades of existing infrastructure and information technology development and implementation, for example. The duration of the project can be longer than three years. The project will also have to satisfy the following requirements:

  • Creation of a capital asset – The principal aim of the project must be the creation of a capital asset of some form, whether a new capital asset, a replacement of an existing asset, an upgrade or refurbishment.
  • Employment duties specific to the project – The employee must be engaged exclusively on project work (bar incidental activities).
  • The project must involve work for a client not related to the employer.

When does the exemption cease?

The payment or employer-provided accommodation will cease to be tax-exempt before the respective maximum period if any of the following occur:

• The employer pays the employee’s costs associated with buying a house in or near the new work location, as an eligible relocation expense.
• There is a change in the expectation that the employee will be at the new location for, as relevant, a maximum of two years or three years.
• The employee’s involvement in the secondment or project comes to an end before the maximum time is up.

Example 4

Donna works for an employer in Auckland. Her employer sends her to work in Hamilton for an expected 18-month period. After four months, Donna decides that she wants to relocate permanently to Hamilton and her employer agrees to make her job there permanent. Donna’s employer has agreed to pay her an accommodation allowance for the first six months after arrival.

Up to the four-month point, Donna’s employer’s expectation was that she would not be working in Hamilton for more than two years, and payments to cover accommodation up to that point are exempt under the two-year rule. But given the expectation that Donna will now be working in Hamilton for more than two years, payments to cover Donna’s accommodation after four months would be taxable.

Anti-avoidance rules

The proposed rules will be subject to certain conditions to protect against abuse:

  • The exemption will not apply if accommodation is provided under an explicit salary trade-off arrangement.
  • There will be an anti-avoidance rule to prevent behaviour intended simply to restart the respective time limit.

New employees

The above exemptions will apply to accommodation provided to existing employees, and to new employees in specific instances.

New employees will qualify for the three-year exemption subject to the same conditions as existing employees, including that the work is on a project of limited duration and their contract is for a period of three years or less. This will ensure that there is no disparity in the treatment of new and existing employees working on the same project.

New employees will only qualify for the two-year exemption when:

  • the employee is newly recruited to work at a particular work location but is then sent to work at another work location temporarily – for example, an individual is recruited to work in Auckland but is then sent to work in Dunedin for a month before returning to Auckland; or
  • an employee working for one employer is seconded to work for another employer on a temporary basis, with the expectation that the employee will return to work for the original employer – for example, an individual working for an Australian accountancy firm is sent to work for an affiliated New Zealand firm in Auckland for 18 months.

A more restrictive approach is being taken for new employees in respect of the two-year rule to reduce the likelihood of behavioural changes to the way that new employees are remunerated. The existing rules applying to tax-exempt relocation payments will continue to be available to these new employees.

Exceptional circumstances

There will be a very restricted ability to extend the thresholds in exceptional circumstances. Exceptional circumstances will be confined to those that are outside the control of the employer and employee, such as a natural disaster or medical emergency, that mean the employee has to stay at the work location beyond the maximum tax-free time threshold. The time limit will be extended for as long as the employee is unable to leave the work location because of the exceptional circumstance. Whether exceptional circumstances apply will be determined by self-assessment.

Accommodation linked to Canterbury earthquake reconstruction work

Given the special nature and scale of the Canterbury earthquake reconstruction work, there will be a transitional rule (new section CZ 29) for employer-provided or paid-for accommodation for employees working on Canterbury earthquake reconstruction projects over the period from 4 September 2010 to 31 March 2019.

When the employment duties of the employee require them to work in greater Christchurch on a project or projects for rebuilding or recovery work arising out of the Canterbury earthquakes, the time limit in the definition of “project of limited duration” in proposed section CW 16B(4), is effectively replaced by the following:

  • five years when the employee’s date of arrival is in the period from 4 September 2010 to 31 March 2015;
  • four years when the employee’s date of arrival is in the period from 1 April 2015 to 31 March 2016; and
  • three years when the employee’s date of arrival is in the period from 1 April 2016 onwards, for arrivals up to 31 March 2019. The normal three-year rule will apply to Canterbury rebuild and recovery work from 1 April 2019.

When the date of arrival in “greater Christchurch” (as defined in the Canterbury Earthquake Recovery Act 2011) is in the period from 4 September 2010 (the date of the first earthquake) to 31 March 2015, the time limit will be applied by reference to the time the employee works continuously in greater Christchurch rather than to any expectation. For other periods, the time limits apply based on the employer’s expectation.

Applying time limit in other cases

In the case of other out-of-town secondments and projects, for the period 1 January 2011 to 31 March 2015, the relevant time limit can be assessed by either using the employees actual period of continuous work at the distant work place or the employer’s expectation of how long the employee will be involved in the out-of-town secondment or project (see proposed section CZ 30). For other periods, the time limits apply based on the employer’s expectation.


(Clause 20)

Summary of proposed amendment

The bill proposes that when an employee has to work at more than one workplace on an on-going basis the accommodation or accommodation payment will be tax-exempt without an upper time limit. (New section CW 16F of the Income Tax Act 2007.)

Application dates

The application dates for the proposed new rule are the same as for the previous item.

Key features

There are a number of circumstances in which an employee would have to work at more than one workplace on an on-going basis, because of the nature of their duties, and the additional workplaces are beyond reasonable daily travelling distance from their home. This could be the case, for example, for senior managers of large organisations. In these circumstances there will be an exemption for employer-provided accommodation and accommodation payments, without an upper time limit, given that there will be genuine on-going additional costs in such cases. (If the employee has multiple work places for a limited period, the two or three-year time limit-based exemptions may also apply.)

Detailed analysis

Example 1

Andrew manages two offices, one in Christchurch and one in Dunedin. He works in Christchurch two days a week and in Dunedin for three days a week. His home is in Dunedin. Andrew has more than one on-going work location. When he works in Christchurch, he is beyond reasonable daily travelling distance from his home in Dunedin. An accommodation payment to cover his hotel costs when staying in Christchurch is not taxable. The Christchurch accommodation is exempt under the multiple workplace rule. The Dunedin accommodation is not tax-exempt.

The multiple workplace rule can also apply when an employee is sent on a short-term business trip to another location. In these circumstances the employee will continue to have on-going duties at their normal place of work while they are working at the other work location during the business trip.

Example 2

Carmen is chief executive of a large group of companies based in Auckland. The company has offices in several cities across New Zealand. Each month Carmen visits one of these offices as part of her management duties. Typically these visits can last up to a week and her employer arranges and pays for her accommodation.

When Carmen is visiting the offices away from Auckland she has more than one on-going workplace for the duration of her visit. The accommodation while working at those offices is exempt under the multiple workplace rule.



(Clause 20)

Summary of proposed amendment

When an employee needs to attend a work-related conference or training course that requires at least an overnight stay, the accommodation or accommodation payment will be tax-exempt without an upper time limit. (New section CW 16D.)

Application dates

The application dates for the new rule are the same as for the previous item.

Key features

While the need for accommodation would normally arise because the work-related conference or training course is beyond reasonable daily travelling distance from the employee’s home, this need not be the case. Some courses may be held locally but for reasons, such as networking and team-building, may require employees to stay overnight. Proposed section CW 16D, therefore, covers both local and distant accommodation situations. It is possible, depending on the circumstances, that the multiple work-place exemption or the two or three-year time-based exemption could also apply.



(Clauses 11, 12, 24 and 35)

Summary of proposed amendment

When employer-provided accommodation, accommodation allowances and other payments for accommodation are taxable, the proposed revisions to section CE 1B of the Income Tax Act 2007 specify how to determine their taxable value.

In the case of employer-provided accommodation, the taxable value will continue to be linked to market rental value but will be subject to certain adjustments and exceptions.

Application date

The amendments will apply from 1 April 2015. However, the amendments relating to accommodation provided to ministers of religion will apply from 1 July 2013 and those relating to accommodation provided to personnel of the New Zealand Defence Force will apply from 6 December 2012.


When employers make a payment for accommodation, then the market value is just the amount of the payment. However, when an employer directly provides accommodation to its employees, the current approach is to base the taxable amount on its market value. What “market value” means in these circumstances, including what adjustments can be made, is not always clear. The proposed rules endeavour to provide more clarity in this area.

Key features

  • The taxable value will be confirmed as market rental value when accommodation is provided by the employer, less any rent paid by the employee and any adjustment for business/work use of the premises.
  • There will be a specific valuation rule for accommodation supplied (whether owned or rented) by religious bodies to their ministers (proposed section CW 25B). A long-standing administrative practice has, in certain circumstances, capped the benefit of church-supplied accommodation at 10 percent of ministers’ stipends. This longstanding practice will be incorporated into the legislation, subject to the amount to which this treatment applies being capped at a reasonable rental value that is commensurate with the duties of the minister, and the location in which the minister performs his or her duties. This rule is intended to apply across a wide variety of churches.
  • There is also a specific rule to confirm that the market value is discounted in the case of accommodation provided to New Zealand Defence Force personnel to reflect the specific limitations imposed on such properties (proposed section CZ 31).
  • The taxable value of employer-funded accommodation provided to employees as part of an overseas posting will be capped at the average or median rental value for accommodation in the vicinity that the employee would live if in New Zealand. This cap, which is of significance to employees who remain tax-resident in New Zealand, recognises that the market rental value of accommodation in overseas locations can be disproportionately high compared with that which an employee might occupy if working in New Zealand.

Detailed analysis

In addition to the above, there will be a rule for when more than one employee shares in the accommodation provided by their employer. In these circumstances, the taxable amount will, for simplicity, be apportioned equally between the employees to ensure the accommodation benefit is taxed only once.


Two employees share a house provided by their employer with a weekly rental value of $300. They will each be taxed on $150 per week.

The deduction from the taxable amount when part of the accommodation is used for work purposes (and there is no private benefit) reflects current practice and the amendment is merely intended to clarify and confirm that approach.


An employer provides an employee with accommodation with a market rental value of $500 a week. One-tenth of the accommodation is used for work purposes. $50 is deducted from the taxable amount.

Accommodation provided by religious bodies to ministers of religion

The proposed valuation rule based on 10 percent of remuneration for accommodation provided to a minister of religion or member of the clergy by the religious body of which he or she is a minister will apply only to ministers who are performing religious duties. The amount exempted under this rule will be capped based on what is a reasonable rental value commensurate with the duties of the minister and the location in which the minister performs the duties. The proposed valuation rule will apply to a wide range of religious bodies and their ministers. The religious body may own the accommodation or, alternatively, rent the accommodation being provided to the minister. The proposed valuation rule extends to both these situations.

This specific valuation rule will supplement the existing exemption in section CW 25 for board and lodging provided to members of religious societies or orders whose sole occupation is service in a society or order and who are not paid for their service.

Accommodation for employees working overseas

The proposed amendment to use a New Zealand-based value rather than the market value of the overseas accommodation will apply not only to employer-provided accommodation but also when the employer makes an accommodation payment for the employee’s accommodation costs at the overseas location.

In establishing the value of the comparable New Zealand property, the work location the employee would be likely to be working in for the employer, and the average or median market rental values at or near that work location would need to be taken into account.


Zoe is seconded by her employer to Brussels for three years and is provided with a flat for the duration of her secondment. The rent paid by the employer is equivalent to $120,000 a year. Zoe would normally work in Wellington if working in New Zealand, where an average rental value would be $24,000. Zoe will pay tax on an accommodation benefit of $24,000.

When there is more than one location in New Zealand where the employee could work for the employer, a New Zealand-wide valuation can be used.

Accommodation provided to Defence Force personnel

The proposed valuation rule for accommodation provided to New Zealand Defence Force personnel is that, up to 31 March 2015, the rent currently being paid will be treated as the market rental value. After that date, the market value will be the lesser of (a) the market rental value for the accommodation and (b) the market rent for the national New Zealand Defence Force benchmark property of that type less a discount. The benchmark properties, their market value and the discount will be determined jointly by the Commissioner of Inland Revenue and the Chief of the Defence Force, following advice from a registered valuer.

Given the compulsion on New Zealand Defence Force personnel to accept a posting anywhere in New Zealand, the New Zealand Defence Force has historically considered it appropriate to take a national approach to considering market rental value of New Zealand Defence Force accommodation. The deployment of personnel is concentrated around the central North Island, and therefore national benchmark properties have previously been assessed by reference to accommodation in the area of Linton Camp. Linton also offers a representative range of NZDF housing stock, reasonable access to amenities and a stable basis for rental comparison purposes.



(Clause 22)

Summary of proposed amendment

The full amount of meal payments linked to work-related travel will be tax-exempt, subject to a three-month upper time limit at a particular work location. The full amount of meal payments and light refreshments outside of work-related travel, such as at conferences, will be tax-exempt without a time limit. Such payments include reimbursement payments and allowances.

Application date

The amendments will apply from 1 April 2015.

Key features

Proposed section CW 17 CB will introduce two specific exemptions:

  • An exemption of up to three months for meal payments if the employee is required to work away from their normal work location because of travelling on business. This may be for a specific short-term, work-related journey or for a longer period such as a secondment to a distant work location.
  • Payments to cover working meals and light refreshments when working off the employer’s premises will be exempt without any upper time limit.

In both circumstances, when the exemption applies, the full amount of any meal payment will be exempt.

These proposed rules will not affect the existing exemptions in section CW 17C that apply to overtime meal payments and sustenance allowances.

Likewise it is not intended that meals provided directly by the employer should be subject to these rules. Such meals may, however, be subject to the fringe benefit tax rules.


Employers typically meet an employee’s meal costs when linked to work-related duties. This recognises that these meal costs may be more expensive than normal meal costs at home for the employee.

When an employer reimburses the cost of a work-related meal, the amount saved by the employee (in other words their normal expenditure on the meal) is arguably taxable. However, it would not be practical to carry out an apportionment each time a meal payment is made. A more practical approach that better matches business practice is needed, given that these meal payments are generally not provided as a substitute for taxable salary.

Detailed analysis

Calculating the three-month time limit

The three-month time limit will run from the date the employee starts working at the workplace and extend for as long as the employee works continuously at that location.


Vernon normally works in Christchurch but is sent by his employer to work in the employer’s Nelson office for a period of six months. Vernon’s employer pays him a meal allowance for the duration of the secondment. The meal allowance is exempt for the first three months and taxable for the remainder of the secondment.

If the employee does not have a fixed work base, but instead works at a variety of locations and works out of an accommodation base, the time limit will apply from the date at which they arrive at the accommodation base.


An employee is working on an infrastructure project that requires him to work in a variety of locations. Rather than moving to each location, the employee rents a house to use as a base from which he can travel to those locations each day as required. The three-month time limit will apply from the date the employee moves to the rented accommodation.

In determining whether the employee is working continuously at a particular location, periods when away from the location for personal reasons such as leave, weekend breaks and short breaks that are required for work purposes will be disregarded.

The payment will not be exempt when it is paid by way of a salary trade-off.

Working meals and light refreshments at or near the employee’s normal work location

Payments to cover meal expenses for a working meal near the employee’s work location will be exempt. For example, this will include lunches at conferences or training courses near the employee’s normal work location.

The expense will only be exempt if the employee attends the meal because of the nature of the duties of the job. The meal expense will not be exempt if it is provided as a salary trade-off.

The amendments will also introduce an exemption for payments for light refreshments (in the form of tea, coffee, water or similar), when the following criteria are met:

  • the employee normally works at least seven hours a day;
  • the nature of the employee’s employment duties mean he or she has to be away from the employer’s premises for most of the day;
  • the employer would normally provide the refreshments to the employee on the day; and
  • it is not practicable for the employer to provide the refreshments on the day.



(Clause 23)

Summary of proposed amendments

The amendments propose exemptions for:

  • payments provided to cover the costs of purchasing and maintaining distinctive work clothing, such as uniforms, that are clearly related to the employee’s job; and
  • payments to meet the costs of a plain clothes allowance paid to members of a uniformed service who are required to wear ordinary clothing instead of their uniform.

Application date

The amendments will apply from 1 July 2013.

Key features

The amendment to exempt payments provided to cover the costs of purchasing and maintaining distinctive work clothing, such as uniforms, will ensure that the rules covering employee expenditure payments are better aligned with the equivalent fringe benefit rule.


Under the current general rules used to determine whether a payment or allowance is taxable, expenditure incurred on the purchase and maintenance of clothing is normally a private expense. Case law has confirmed that there is an exception to this general approach when the particular clothing is “necessary and peculiar” to the employee’s occupation. This has been taken to include a uniform, or specialist clothing that is not reasonably suitable for private use. Examples include uniforms worn by nursing staff, members of the armed forces and police officers. 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 clothing worn for health and safety reasons.

When an employer directly provides or maintains work-related clothing instead of paying an allowance, the fringe benefit tax rules apply. Rather than relying on case law, the Income Tax Act specifically includes a distinctive work clothing exemption (section CX 30). Applying this same approach to clothing allowances would provide consistency in this area.

Detailed analysis

The proposed changes in section CW 17CC will make it clearer that an allowance to cover the cost of buying and maintaining distinctive work clothing will not be taxable income. “Distinctive work clothing” is defined drawing on the fringe benefit tax definition in section CX 30(2) to mean a single item of clothing, that:

  • is worn by an employee as, or as part of, a uniform that can be identified with the employer:
    • through the permanent and prominent display of a name, logo, or other identification that the employer regularly uses in carrying on their activity or undertaking; or
    • because of the colour scheme, pattern or style is readily associated with the employer; and
  • is worn in the course of, or as an incident of, employment; and
  • is not clothing that employees would normally wear for private purposes.

Payments in relation to the purchase and maintenance of other clothing will continue to be subject to the general rules for determining when a payment that does not have its own exemption rules is tax-exempt.

The proposed distinctive clothing exemption will also cover partly taxable plain clothes allowances that were in place as at 1 July 2013 and paid to uniformed personnel who are required to wear plain clothes in order to carry out their duties. This is in line with a long-standing expectation that a portion of the plain clothes allowance paid to police officers is non-taxable, based on the specific circumstances involved. The formal exemption of the non-taxable portion will apply only when:

  • the employer provides a uniform to all or almost all of its employees to wear when performing the duties of their employment; and
  • despite the fact that the employee has been provided with a uniform, it is a requirement of their current job with the same employer that they do not wear that uniform and, therefore, need to wear plain clothes; and
  • the plain clothes allowance was in place at 1 July 2013; and
  • part of that allowance was treated as taxable.



(Clauses 21 and 134)

Summary of proposed amendment

Various legislative changes, including a Commissioner determination-making power, are proposed in relation to the general rule that determines what portion of other payments made to employees are exempt income.

Application date

The amendments will apply from 1 April 2015.

Key features

The amendments add several criteria to the general rule in section CW 17 of the Income Tax Act 2007 for determining the tax treatment of amounts paid to or for the benefit of employees for expenditure in connection with their employment or service. These criteria are intended to clarify when an expense would be an allowable deduction in relation to earning employment income and, therefore, would be non-taxable.

The amendments will also provide the Commissioner of Inland Revenue with the ability to issue determinations on what proportion of a particular type of payment provided to a wide group of employees would be exempt income.


For the most part, beyond the specific payments discussed earlier in relation to accommodation, meals and distinctive clothing, the general rule for establishing the taxable part of an employee expenditure payment works satisfactorily. However, some further clarity about what the rule involves is merited. Furthermore, there is still the possibility that at some time in the future the general rule may not provide an appropriate outcome for another particular type of payment. There are advantages in having a mechanism to handle this other than through specific legislative amendment.

Detailed analysis

Nexus test – clarifying the approach

Under the current approach, expenditure being paid to or on behalf of the employee is exempt income of the employee provided it is incurred in connection with the employee’s employment or service, and the employee would be allowed a deduction of that amount if the limitation on employees claiming deductions (the employment limitation) did not exist. This is often referred to as the “nexus test”. It effectively means that a payment is exempt provided it is not of a private, domestic or capital nature. Given that these rules generally deal satisfactorily with the vast majority of expenses that do not have their own rule, the proposed changes are simply aimed at providing greater clarity about what the nexus test involves.

Section CW 17 clarifies that to qualify as expenditure that is incurred in connection with an employee’s employment or service, it must be because the employee is performing an obligation required by their employment or service, and the employee earns income through the performance of the obligation, and the expenditure is necessary in the performance of the obligation.

Commissioner determination-making power

The amendments introduce a power to enable the Commissioner to issue a determination (under section 91AAT of the Tax Administration Act 1994) in relation to a payment made to a wide group or class of employees. The Commissioner may determine the extent to which on average the amount is exempt income, by setting a percentage that represents the extent to which the payment for the particular type of expense, based on a reasonable estimate, is taxable.

This determination-making power would be discretionary and the Commissioner would need to be satisfied that the payment not only affects a large group or class of employees but also that the average private or capital benefit likely to be received is hard to measure, and that the payment is not paid as a substitute for salary or wages.

Any determination issued will be binding on the Commissioner but not the taxpayer, which means that it will act as a safe harbour. If the employer or employee has evidence to demonstrate that in their particular circumstance some other apportionment is appropriate under the section CW 17 general rule, the taxpayer will still be able to apply that apportionment.



(Clause 13)

Summary of proposed amendment

A minor technical change to the exclusions from the definition of “expenditure on account of an employee” is proposed.

Application date

The amendment will apply from 1 April 2015.

Key features

The amendment changes the general “expenditure on account of an employee” definition to make a clearer distinction between the exclusion in section CE 5(3)(c) and the exclusion in section CE 5(3)(a), and removes any overlap.


When an employer reimburses or otherwise meets a specific employee expense, this is an employee expenditure payment known as “expenditure on account of an employee”. The statutory definition is very widely drawn, so there is a comprehensive list of exclusions from the definition, including two general exclusions that cover employee expenditure payments in general.

The first of these excludes payments to third parties or to employees for expenditure incurred by those employees in deriving their employment income. The second excludes payments made by employers to employees for expenses that an employee had incurred and paid for on their employer’s behalf, when the expenses were the employer’s liability. An example would be when the employee buys a box of photocopying paper on the employer’s behalf on the basis that the employer will reimburse them.

There have been significant changes to the definition of “expenditure on account of an employee” since it was first introduced in 1985. As a result, the general exclusions have been amended and expanded and it is no longer clear how the two exclusions should apply in relation to each other. Arguably, there is now some overlap, which the proposed amendment is designed to remove.

Detailed analysis

The amendment changes the general exclusion in section CE 5(3)(c) of the Income Tax Act 2007 so that it applies subject to:

  • the particular payment not falling within section CE 5(3)(a), which should take priority;
  • the expense covered by the payment being incurred by or on behalf of the employee’s employer; and
  • the expense having been paid for by the employee on their employer’s behalf.

Provided these criteria are satisfied, the payment will be excluded from being expenditure on account of an employee under section CE 5(3)(c).



(Clauses 11, 13, 21, 31 and 32)

Summary of proposed amendment

Several technical amendments are proposed to support the wider changes to the rules governing the tax treatment of employer-provided accommodation, accommodation payments and other allowances and payments by employers to cover employee expenditure.

Application date

The amendments will apply from 1 April 2015.

Key features

The amendments cover changes to definitions, headings and cross-references that are being made to ensure compatibility with the proposed rules.