Employee accommodation
Issue: Support for accommodation framework
Clauses 11, 12 and 20
Submissions
(Business New Zealand, Corporate Taxpayers Group, Deloitte, Ernst & Young, New Zealand Institute of Chartered Accountants, New Zealand Law Society, PricewaterhouseCoopers)
Business New Zealand submitted that the proposed changes were a positive and flexible step forward and should proceed.
The remaining submitters also expressed support for the proposed reforms, subject to areas where they considered clarifications or amendments would be appropriate (captured below in specific submission points).
Deloitte noted that this has been an area of uncertainty for taxpayers and any move to codify sensible rules that minimise compliance costs was appreciated.
Ernst & Young noted its appreciation that the changes represented the outcome of a considerable amount of consultation.
New Zealand Institute of Chartered Accountants noted its support of the key policy objectives of improving clarity, certainty, fairness and efficiency.
Comment
The proposals in the bill take into account three key policy objectives:
- to improve clarity and certainty, thereby improving compliance;
- to improve fairness by ensuring employees pay their fair share of tax and that social assistance payments are targeted at those in genuine need; and
- to enhance economic efficiency by ensuring that the tax rules in this area are not an impediment to business decision-making.
Officials note the support for the general approach taken in the proposals and that, as mentioned by a number of submitters in written and oral submissions, the proposals have been developed following extensive consultation.
Recommendation
That the submissions be noted.
Issue: “Net benefit” test
Submission
(KPMG)
The submitter agrees with the guiding principle that accommodation, accommodation payments, and meal and clothing payments should be taxed as they provide a private or domestic benefit, but that in many cases this private benefit is either incidental to the business objective or is minimal or hard to measure and apportionment is not practical. In such cases the private benefit should be ignored.
The historical approach taken by many taxpayers and their advisers has been to tax employer-provided accommodation only when there is a tangible benefit to the employee (that is, when the employee does not incur a cost from maintaining a home in their normal workplace). This “net benefit” approach has been used to tax the private benefit, if any, enjoyed by the employee from receipt of accommodation.
The submitter considers the net benefit approach gives the correct outcome and that the new rules appear to give much the same outcomes as this approach, and so it is not clear why the new rules are necessary. Instead, changes recommended by the 2010 Rewrite Advisory Panel should be retrospectively legislated so that the Commissioner’s Statement of December 2012 no longer has application.
Comment
The guiding principles that underlie the proposed changes are that where the payments or accommodation provide a private benefit they should generally be taxable except when they are low in value or hard to measure, and are not provided as a substitute for salary or wages.
However, drafting legislation specifically on these principles would provide too much interpretative uncertainty and therefore potential inconsistency of application. For example, should “low in value” be some absolute amount or vary depending on the circumstances, and “hard to measure” is a subjective judgement. The proposed accommodation rules instead include a range of pragmatic tests to determine the boundary between when an accommodation benefit is private (taxable), and work-related (not subject to tax).
As noted in the Regulatory Impact Statement, in coming to the approach proposed in the bill, other options were considered.
One of those options was the “net benefit test”. Under this approach, when an employee maintains a home elsewhere for their use, it is argued there is no benefit from accommodation provided by the employer and, therefore, no tax should arise. Officials did not recommend this approach for several reasons, including:
- If applied properly, it would require an ongoing subjective evaluation of an employee’s personal affairs to determine the correct tax outcome, involving additional administration and compliance costs. Likewise, determining the correct tax outcome may not be possible at the time of payment so a retrospective assessment could often be necessary, with attendant compliance and administrative costs.
- It has no upper time limit so accommodation could potentially be tax-free for many years. Ultimately, there is a private benefit associated with the employer-paid or provided accommodation and the longer the payment/provision continues, the argument that the retention of the other property is an extra cost created by the secondment is less tenable, and more likely to be a personal choice of the employee.
- It would present significant fairness and equity issues, with the potential for employees working side-by-side and incurring similar expenses having different tax and social assistance outcomes, depending on personal circumstances and how these are assessed in determining the taxable element of any accommodation payments.
- The tax base risk as, whether or not provided as cash allowances, the accommodation is equivalent to cash.
As the submitter has noted, for a number of years, many practitioners have applied a kind of net benefit test but, as the Commissioner of Inland Revenue’s statement on accommodation of 6 December 2012 indicated, the test has no foundation in law.
Officials remain of the view that the approach proposed in the bill is more appropriate and have noted that many submitters have welcomed the increased certainty and clarity this approach provides.
The submitter has referred to the recommendations of the Rewrite Panel in 2010. Inland Revenue’s view is that the amendment made through the Rewrite process merely sought to restore a pre-existing ambiguity. Officials have also undertaken considerable policy work since this recommendation was made, resulting in the proposals contained in this bill.
Recommendation
That the submission be declined.
Issue: Taxable accommodation benefits and definition of “accommodation”
Clause 11
Submissions
(Corporate Taxpayers Group, Deloitte, Ernst & Young, KPMG, New Zealand Institute of Chartered Accountants, New Zealand Law Society)
The bill proposes amending section CE 1, which sets out what amounts of accommodation benefits are to be included in employment income. As drafted it arguably limits the amounts included in income. We suggest revising the amendment to include in a person’s income the value of accommodation, accommodation allowances or other payments or expenditure incurred on account of accommodation to the extent to which such items are included in income under sections CE 1B to CE 1D. (Ernst & Young)
Clause 11 of the bill should be amended to clarify that “accommodation” remains employment income under section CE 1, by retaining the current wording of section CE 1. (New Zealand Law Society)
The words “board or lodging should be removed from clause 11 and replaced with “accommodation”. “Board or lodging” is inconsistent with the rest of the Act. (Corporate Taxpayers Group, Deloitte)
The section YA 1 definition of “accommodation” should be revised to include a reference to “board or lodging” rather than that term being used on an apparently isolated basis in section CE 1(1)(bb). This would mean that the clause 32 amendment to section CX 28 would be unnecessary. (Ernst & Young)
“Market value” and “board or lodging” should be removed from section CE 1(1)(bb) and replaced with “the value of accommodation”. (New Zealand Institute of Chartered Accountants)
New section CE 1(1)(bb) is redundant as new section CE 1B will treat the market value of employment-related accommodation as income. (KPMG)
Comment
Officials agree there should be some clarification of the linkage between these taxing and valuation provisions. Officials recommend accepting the submission to remove “market value” and “board and lodging” from section CE 1(1)(bb) and replacing it with “accommodation” and adding “board and lodging” into the definition of “accommodation”. This means the provision for taxing accommodation would be section CE 1(1)(bb) with the various rules to value the accommodation in section CE 1B to CE 1E.
The reference to “benefit” in the current law should not be reinstated however. This is because the current reference to the “benefit” of accommodation being taxable has led to confusion about what exactly is taxable, including arguments that the “net benefit” test should be applied.
Recommendation
That the submissions be accepted in part, subject to officials’ comments.
Issue: Application of exemptions to payments
Clauses 20, 33 and 34
Submission
(Ernst & Young)
The exemptions contained in proposed sections CW 16B to 16F (secondments and projects, conferences and overnight stays, and multiple workplaces) should also apply when employers make payments to enable the employee to obtain accommodation in these same circumstances.
The same applies in respect of the Canterbury earthquake provisions in proposed sections CZ 29 and 30.
Comment
No change is necessary as the situations raised in the submission are already covered in the draft legislation.
Recommendation
That the submissions be declined.
Issue: Lump sum reimbursements
Clause 20
Submission
(PricewaterhouseCoopers)
Some employers pay allowances as regular lump sum reimbursements based on estimates. Assuming the other criteria apply, confirmation is needed that this will be covered by proposed section CW 16B(1)(c)(ii). We also suggest the inclusion in section CW 16B of a similar provision to the existing estimation provision in section CW 17(3).
Comment
As worded, the proposed provision in section CW 16B(1)(c)(ii) does not preclude the payment of a reasonable allowance or lump sum, rather than the actual amount incurred by the employee on accommodation. However we do agree that any allowance should be reasonable and therefore applying the criteria currently in section CW 17(3) that allow the employer to make a reasonable estimate of expenditure should be paralleled in section CW 16B.
Recommendation
That the submission be accepted.
Issue: Definition of “workplace”
Clause 20
Submissions
(Council of Trade Unions)
“Workplace” should be more clearly defined to fit all circumstances, including mobile workplaces. The definition in section 5 of the Employment Relations Act 2000 could be appropriate – “a place where an employee works from time to time; and includes a place where an employee goes to work”.
Alternatively, a more expansive definition from section 2 of the Health and Safety in Employment Act 1992 could be considered, which defines “place of work” as:
A place (whether or not within or forming part of a building, structure, or vehicle) where any person is to work, is working, for the time being works, or customarily works, for gain or reward; and, in relation to an employee, includes a place, or part of a place, under the control of the employer (not being domestic accommodation provided for the employee), –
(a) where the employee comes or may come to eat, rest, or get first-aid or pay; or
(b) where the employee comes or may come as part of the employee’s duties to report in or out, get instructions, or deliver goods or vehicles; or
(c) through which the employee may or must pass to reach a place of work.
Comment
Officials consider that the Employment Relations Act 2000 definition is no clearer than the one proposed in the bill. The second definition (from the Health and Safety in Employment Act 1992) is too constrained as it refers to places under the control of the employer. While that constraint may be appropriate for health and safety matters, the proposed amendments in the bill are intended to also cover situations when employees are working at places not under the control of the employer, such as the premises of a client of the employer.
Recommendation
That the submission be declined.
Issue: Accommodation subject to sections CW 16B to 16F
Clause 11
Submission
(New Zealand Law Society)
It should be made clear that treating “accommodation” as employment income is subject to proposed new sections CW 16B to 16F.
Comment
Officials do not consider it necessary to expressly state that the treatment of accommodation as employment income is subject to sections CW 16B to 16F. Having a general rule with subsequent exemptions, as proposed in the bill, is consistent with the rest of the structure of the Income Tax Act.
Recommendation
That the submission be declined.
Issue: “Office or position”
Clause 11
Submission
(Ernst & Young)
There should be clarification of any distinction between the terms “office or position” and “employment or service” in the context of section CE 1.
Comment
For the accommodation to be treated as employment income, the draft bill requires it to be provided to the person in relation to their employment or service. The current legislation requires accommodation to be provided in relation to the person’s office or position. The intention of using “employment or service” is to update the provision to be consistent with the rest of the Income Tax Act. However we note that this may mean that accommodation provided by non-resident employers would inadvertently not be covered. Officials propose ensuring this does not occur by extending the definitions of “employer” and “employee” for the purposes of the allowances provisions.
Recommendation
That the submission be noted and that an extension to the definitions of “employer” and “employee” be included to ensure that accommodation provided by non-resident employers is not inadvertently excluded.
Issue: Meaning of “living premises”
Clause 11
Submission
(New Zealand Institute of Chartered Accountants)
It is unclear what “living premises” in the definition of “accommodation” refers to and what features would be required for something to be considered “living premises”. The meaning should be clarified.
Comment
The wording “living premises” is contained in the existing definition of “accommodation” and has therefore been included in the proposed revised definition for consistency. Officials are not aware of any issues with “living premises” in the existing definition.
Recommendation
That the submission be declined.
Issue: Guidance on “reasonable daily travelling distance”
Clause 20
Submission
(New Zealand Law Society)
Additional guidance should be provided on the scope of the term “reasonable daily travelling distance” through examples provided in proposed new section CW 16B or in a determination issued by the Commissioner.
Comment
The concept of reasonable daily travelling distance is already contained in the Income Tax Act in relation to relocation payments (section CW 17B). Guidance was requested by taxpayers at the time this provision was introduced and was subsequently published in Tax Information Bulletin Vol 21, No 9 (December 2009). Officials will cross-reference to this Tax Information Bulletin in the edition that will be issued subsequent to the employee payments changes being enacted.
Recommendation
That the submission be noted and that officials will provide guidance on where to find information on “reasonable travelling distance”.
Issue: Out-of-town secondment accommodation payments made by company employee is seconded to
Clause 20
Submission
(BDO Wellington Ltd)
Proposed sections CW 16B and 16C provide time-limited exemptions for accommodation when an employee is working away from home on a secondment or capital project. In order to qualify, the accommodation must be provided or paid for by the employer. In situations when an employee is seconded by their employer, Company A, to another company (Company B) and the accommodation is provided by Company B, but the employee remains employed by and paid by Company A, the exemption would not be available.
Comment
Officials agree that, on the proposed wording, this situation would not receive the accommodation exemption contained in proposed section CW 16B. There does not appear to be any reason why the exemption should not apply in these circumstances and therefore officials recommend an amendment to include this situation.
Recommendation
That the submission be accepted.
Issue: Extension of two-year rule to new employees
Clause 20
Submission
(KPMG, Russell McVeagh)
As currently drafted, the two-year exemption rule for out-of-town secondments does not apply to new employees of an employer. The exclusion of new employees is not warranted. Employers should not be penalised based on how they decide to resource a project (transferring an existing employee or hiring a new one). We understand the rule is aimed at avoiding salary sacrifice arrangements, but believe the conditions attached to the rule are sufficient to deal with abuse. It is unclear what a “new employee” is – how long do they need to have been employed before they are no longer “new”? There is no such distinction in relation to the three-year exemption for capital projects, or the five-year exemption for the Canterbury rebuild. We see no reason to treat the two-year rule differently.
Alternatively, proposed section CW 16E should be amended so that it contemplates a scenario where an individual is employed with a specific out-of-town secondment in mind, followed by the possibility of a period of work at a workplace that is not a distant workplace.
Comment
The exclusion of new employees from the out-of-town secondments rule was deliberate. As the submitter has noted, this is due to the potential for salary substitution arrangements in what can be a wide range of situations. While, as the submitter has stated, the exclusion of new employees does not apply in respect of the three-year exemption for capital projects and the up to five-year exemption for the Canterbury rebuild, this is to ensure that there is no disparity of treatment for new and existing employees working on the same project in what is considered to be more limited situations. Officials consider the more restrictive approach in relation to secondments is valid due to the risk of behavioural changes in the way new employees are remunerated – for example, contracts with new employees that would normally be for three years could be changed to two-year contracts to take advantage of the exemption.
We note that new employees will qualify for the two-year exemption in some limited situations including 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.
- 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.
Russell McVeagh has proposed amending proposed section CW 16E so that where an employee is hired for a specific out-of-town secondment but there is the possibility that a period of work will follow at a workplace that is not a distant workplace, then the two-year secondment exemption should apply. Officials consider this to be too low a threshold. As noted in the first of the above examples, when the new employee has been employed to work in a local workplace and is immediately sent to a distant workplace for a period with the expectation that they will return to the local workplace, the exemption will apply. There needs, however, to be a greater degree of certainty than the possibility that an employee may subsequently work at the local workplace in order to mitigate the salary substitution concerns.
Recommendation
That the submission be declined.
Issue: Distant workplace
Clause 20
Submission
(Council of Trade Unions, KPMG, New Zealand Institute of Chartered Accountants)
The definition of a “distant workplace” that requires there to be a new workplace is problematic (proposed new section CW 16B(4)). We do not see that the word “new” in this section serves a useful function and recommend it is removed, or replaced. We consider that this will potentially result in the exemptions not applying in situations where it is intended they apply. (Council of Trade Unions)
The definition of “distant workplace” refers to a new workplace not within reasonable daily travelling distance of the employee’s residence. This has the potential to create confusion – for example, if the employee temporarily relocates to the distance workplace, their residence is likely to be within reasonable travelling distance. (KPMG)
Further guidance should be given on what constitutes an employee’s “residence” for the purposes of the allowances rules. It will be clear in many circumstances – for example, when the employee’s family remain in their home location and the employee returns home at weekends. It is less clear if the employee’s spouse accompanies them to the secondment location, they rent out their family home and do not return there for the duration of the secondment. It is not clear in what situations, if any, an employee’s residence may be deemed to shift to the secondment location and therefore the exemptions become unavailable. There is real uncertainty as Inland Revenue has asserted, in relation to tax residency, that a home rented out to others can still constitute “an abode available to the taxpayer”. (New Zealand Institute of Chartered Accountants)
Comment
The inclusion of the word “new” was intended to emphasise that the employee needed to be going to a workplace other than their usual workplace. Officials agree that the use of the word “new” may cause some confusion as suggested by the submitter, particularly in the context of the multiple workplace rule where some employees may go to the same places on a regular basis. We recommend that the word “another” be used instead.
The employee’s residence being referred to is their residence before the secondment and the distance test is assessed at the time immediately before the commencement of the secondment, not after. This concept of “residence” is also used in existing provisions in relation to relocation payments (section CW 17B) and officials are not aware that any issues have arisen in that context. Some guidance on this point can be included in the Tax Information Bulletin following enactment of the bill.
Recommendation
That the submission regarding the word “new” be partly accepted and that “another” be used in its place.
That the submission regarding residence be noted.
Issue: Multiple workplace rule should apply to those with a home office
Clause 20
Submission
(Tax Team)
Proposed section CW 16F(2)(b) should not preclude the application of the multiple workplace exemption if an employee has a workplace which is a home office, but that home office is not the “distant workplace”.
Comment
Proposed section CW 16F (multiple workplace rule) excludes employees who have two workplaces, one of which is a home office. This is to protect the revenue base from situations – for example, when an employee takes a permanent job that is located at a workplace that is distant from their home and, by virtue of working a small portion of time from home, gains tax-free accommodation (with no upper time limit) whenever they are working at their workplace rather than their home. This is contrasted with the intended coverage of the exemption, where an employee has a workplace near their home and is also required to work at other, distant, workplaces on either an ad hoc or regular basis.
We note that in situations when an employee works from home and has two or more distant workplaces, accommodation at the second and subsequent distant workplaces would be exempt under section CW 16F.
Recommendation
That the submission be declined.
Issue: Capital project exemption should be extended
Clause 20
Submission
(Council of Trade Unions)
It is not clear why the extension to three years is only for capital projects. There could well be projects of substantial length that do not have the principal purpose to “create, build, develop, restore, replace or demolish a capital asset”. Employees could be required to move to work on other large projects lasting more than three years, such as to design and then implement major organisational change. The longer time limit should apply to any defined project.
Comment
The two and three-year time limits were set following extensive consultation. The November 2012 officials’ issues paper, Reviewing the tax treatment of employee allowances and other expenditure payments, proposed a time limit of one year for all secondments. Feedback suggested this would be too short for a significant proportion of temporary shifts such as work-related secondments. Consultation indicated that a two-year limit should cover the vast majority of cases. However there were still concerns in relation to longer-term projects particularly in the construction industry. The three-year extension for capital projects (and transitional five-year extension for Canterbury rebuild projects) was therefore proposed.
Officials do not consider it is warranted to extend the proposed capital projects exemption to cover a wider group of projects. The extended exemption was developed in response to feedback from consultation and is intended to deal with situations such as large infrastructure projects in remote areas. Extending the three-year exemption to any project would effectively turn the proposed two-year secondment limit into a three-year limit, which in some cases would seem to be more than a temporary shift.
Recommendation
That the submission be declined.
Issue: Associated person restriction should be removed from “project of limited duration”
Clause 20
Submission
(Deloitte, KPMG, New Zealand Institute of Chartered Accountants)
A “project of limited duration” (three-year accommodation exemption) will exclude a project carried out under a contract between an employer and one or more persons associated with the employer. This restriction is not warranted and is not applied for out-of-town secondments (the two-year accommodation exemption). It is not uncommon to have transfers of personnel between related parties for project work, particularly trans-Tasman. Accommodation should be able to be exempted for up to three years provided all the other criteria are met. Paragraph (b) of the definition of “project of limited duration” should therefore be removed. If there is an anti-abuse rationale for this provision, such concerns should be dealt with by way of a more targeted provision.
Comment
The three-year exemption for projects of limited duration is designed for situations when employees are sent to work on large projects that their employer is contracted to deliver, or deliver aspects of, for an unrelated third party. In contrast, the two-year exemption contemplates secondments to another location carrying out their employment duties more generally – this could be work on internal or external projects. The three-year exemption is intended to be more limited than the two-year exemption, covering only the delivery of external projects. Extending the exemption to cover projects for associated parties would increase the fiscal risk of the proposal.
Recommendation
That the submission be declined.
Issue: Change of expectation from over- to under-time limits
Clause 20
Submissions
(Ernst & Young, Council of Trade Unions)
There should be express clarification of the intended treatment of secondments under proposed section CW 16B in relation to situations when initial employer expectations may have been for a secondment longer than two years (and therefore accommodation would be taxable) but those expectations subsequently change to a less than two-year secondment, or a change in circumstances causes the secondment to be cut short before its intended end, inside the two-year period. (Ernst & Young)
In these situations the exemption on accommodation should become available, backdated to the start of the project or secondment. (Council of Trade Unions)
Comment
Officials agree that clarification is required on the treatment of secondments when the initial expectation is for a secondment of longer than two years but the expectation subsequently changes to less than two years. We recommend an amendment to the proposed definitions of “out of town secondment” and “project of limited duration” in section CW 16B(4) to clarify that to qualify for the exemption there must be an expectation, at the outset, that the period of the secondment or project will be within the respective two or three-year time limits. This means that if, during the course of the secondment the expectation changes from being over the time limits to within the time limits, the accommodation will still remain taxable.
Accordingly, officials do not agree with the Council of Trade Unions’ submission that a retrospective exemption for the full period of accommodation should be available when an expectation subsequently falls within the time thresholds. If this approach were taken, taxpayers could potentially be switching backwards and forwards between taxable and non-taxable throughout the life of the secondment or project. This would add significant administrative and compliance costs which is inconsistent with a key aim of the proposed rules to improve certainty.
Recommendation
That the submission be accepted in respect of clarifying that the expectation needs to be determined at the outset of the secondment or project, but declined in terms of being able to retrospectively revisit qualification for the exemption.
Issue: Change of expectation from under to over time limits
Clause 20
Submission
(Council of Trade Unions)
When an employer re-estimates the length of the project from being under the relevant two, three or five-year limit, to over the limit, the exemption for accommodation should continue to apply for the original two, three or five years.
Comment
A change in expectation will trigger a change in the prospective treatment of the accommodation, from the date of that change in expectation. The time limits are intended to be a maximum time limit, not a safe harbour, and therefore it is not appropriate to continue to receive an exemption when the expectation has changed. We note that the legislation ensures the exemption is not clawed back for the period before the change in expectation.
Recommendation
That the submission be declined.
Issue: Clarification of status of time limits
Clause 20
Submission
(KPMG)
Proposed sections CW 16B and 16C should be reviewed to more clearly reflect the policy intent of the proposed exemption. It is not clear currently that the tests are a maximum threshold rather than a safe harbour.
Comment
Officials do not consider that the proposed rules require amendment as submitted. The legislation requires the exemption to be read in conjunction with the defined terms, in particular “out-of-town secondment” or “project of limited duration”.
Recommendation
That the submission be declined.
Issue: Timing of change in expectation
Clause 20
Submission
(KPMG, New Zealand Institute of Chartered Accountants)
The point in time a change in expectation will be treated as having occurred (for the purpose of exemption time-limits) should be clarified as when the employer and employee have modified the terms of their employment in a way that binds both parties. (KPMG)
Further guidance should be given in the legislation as to determining when a change in expectation occurs. (New Zealand Institute of Chartered Accountants)
Comment
The point in time at which an expectation is treated as having changed is when the employer has a firm expectation that the secondment or project will last longer than initially expected. This may be evidenced by modification in the employee’s terms of employment, but in many cases there may not be such a written agreement. Rather there may be other documentation such as board minutes, planning documents, correspondence with the third party for whom the employer is undertaking the capital project and so on, that will suffice to demonstrate that the expectation has changed.
Officials agree that further guidance might be helpful but do not consider that legislative change is necessary. It is not practical or appropriate to try and capture all the possible ways in which the expectation may be evidenced in the legislation. Rather, more detail can be provided in the Tax Information Bulletin following enactment of the bill.
Recommendation
That the submission be declined, subject to noting officials will provide further guidance in the Tax Information Bulletin.
Issue: Travel to distant workplace
Clause 20
Submission
(KPMG, New Zealand Institute of Chartered Accountants)
It is not clear why proposed section CW 16B(1)(c)(iii) has been included. Examples and further explanation would be helpful.
Comment
Proposed section CW 16B(1)(c)(iii) is intended to cover accommodation provided while an employee is undertaking necessary travel to and from a distant workplace. This is in contrast to proposed section CW 16B(1)(c)(ii) which covers the accommodation at the distant workplace.
Examples of accommodation covered by proposed section CW 16B(1)(c)(iii) are:
- where an employee is required to travel to London for work and it is necessary to stay a night in Hong Kong between flights; or
- where an employee from Auckland is required to attend a meeting in Canberra that starts early in the morning. No direct flights are available from Auckland to Canberra and the first flight from Auckland on the day of the meeting would not reach Sydney in time to catch the necessary connecting flight to Canberra. The employee could either fly to Canberra the day before (in which case the accommodation would be covered under proposed section CW 16B(1)(c)(ii) or stay the night in Sydney and then take the first morning flight from Sydney to Canberra, in which case section CW 16B(1)(c)(iii) would apply.
Officials have noted the submission and will include an example in the Tax Information Bulletin.
Recommendation
That the submission be noted.
Issue: Application date
Clause 34
Submission
(Business New Zealand, Corporate Taxpayers Group, Deloitte, KPMG)
The application date of the accommodation proposals should be backdated to 6 December 2008 at the election of the employer (four years before the Commissioner of Inland Revenue’s Statement of 6 December 2012).
Comment
The general proposition put forward by a submitter in oral evidence was that taxpayer-favourable changes codifying existing practice should generally be applied retrospectively back four years (Corporate Taxpayers Group). The bill effectively achieves this as the proposed application date of the accommodation provisions is 1 April 2015, with employers being able to elect to apply the rules back to 1 January 2011 (provided they have not taken a tax position that the accommodation was taxable before 6 December 2012, the date of the Commissioner’s Statement outlining Inland Revenue’s interpretation of the law).
Submitters expressed concern that the Commissioner’s Statement of 6 December 2012 altered what they considered to be current practice in relation to the treatment of allowances. They therefore submit the application of the new rules should be backdated to four years before the Commissioner’s Statement (6 December 2008). This is because the Statement required any voluntary disclosure in relation to expenditure on account (for example, when the employee entered into a tenancy agreement in their own name for the accommodation and the employer then paid the landlord directly) to be taken back four years. Disclosure in relation to actual accommodation and allowances need only go back two years from the date of the Commissioner’s Statement.
Officials do not consider that the application of the proposed changes should be backdated to 2008. The proposed optional retrospective application is designed to give employers the option of applying the new rules in place of the Commissioner’s Statement in the period between the issuing of that Statement and the application date of 1 April 2015, and to allow a further two years backdating to create some equivalence with the rule for the Canterbury earthquake rebuild. Allowing application back to 6 December 2008 would be a retrospective application of more than eight years which officials consider would potentially give rise to significant administrative costs and undermine the finality of tax positions.
Recommendation
That the submission be declined.
Issue: Retrospective application should apply regardless of pre-December 2012 position
Clause 34
Submission
(Tax Team)
Proposed section CZ 30 should allow the application of the proposed sections CE 1B and CW 16B to CW 16F (the accommodation provisions) to taxpayers who have paid tax in relation to the provision of accommodation before 6 December 2012. Accordingly, proposed section CZ 30(2) should be deleted.
Comment
This submission is a variant of the preceding submission on the retrospective application date. Taxpayers have submitted that there was uncertainty about the treatment of accommodation following the Commissioner’s Statement of 6 December 2012 as, in their view, this changed Inland Revenue’s previous position. The transitional provision takes account of this view taken by taxpayers by allowing the employer to elect to apply the proposed new rules rather than those outlined in the Commissioner’s Statement, so long as a tax position has not been taken before the Statement that the accommodation was taxable. This means anyone having taken a position after 6 December 2012 generally will not be disadvantaged by having treated the accommodation as either taxable or non-taxable. We consider that people should be bound by their tax positions before 6 December 2012 as these positions are based on the particular facts in each case and are likely to be appropriately based on the law as it was being interpreted and applied at that time.
Recommendation
That the submission be declined.
Issue: Amendments to proposed section CZ 30
Clause 34
Submission
(Tax Team)
Proposed section CZ 30 should make it clear that proposed sections CE 1B and CW 16B to CW 16F apply to a taxpayer’s provision of accommodation (or incurring of related expenditure) from 1 January 2011, notwithstanding that the provision of such accommodation may have begun before 1 January 2011.
Comment
Officials agree that accommodation or accommodation expenditure provided or incurred from 1 January 2011 should fall within the proposed new rules. We consider that the legislation does allow for the portion provided or incurred on or after 1 January 2011 to be covered by the rules (but not the portion provided or incurred before 1 January 2011) provided the other relevant criteria, such as the expectation test, are met.
Recommendation
That the submission be noted and that the proposed legislation should already allow some portion of accommodation straddling the 1 January 2011 application date to be treated as non-taxable provided the other criteria, such as the expectation test, are met.
Issue: Choice to backdate application
Clause 34
Submission
(Corporate Taxpayers Group, Deloitte, KPMG)
The bill allows employers to elect to apply the new accommodation provisions retrospectively, but does not cover the employee’s ultimate obligation to pay tax on all taxable income. The provision should either be extended to cover this obligation or it should be clarified that there is no obligation on the employee to account for any unpaid tax. (Corporate Taxpayers Group, Deloitte)
Employees should also be able to elect to apply the rules retrospectively. In situations when the amount was treated as taxable, but would not be under the new rules, employees may want to apply the new rules but there is no guarantee employers will want to re-file past returns. Employees should therefore also have the option to apply the transitional provisions to reopen past tax assessments and receive a refund of PAYE deducted. (KPMG)
Comment
The bill proposes allowing the accommodation provisions to be applied retrospectively by the employer as it is the employer that has the obligation to deduct PAYE in respect of the employee’s taxable employment income. We do not consider it necessary to also provide an option for the employee as the employer and employee ought, as necessary, to discuss what option should be taken by the employer. Legislating for the employee to take a position could lead to considerable confusion and complexity if the employer and employee take different tax positions.
Recommendation
That the submission be declined.
Issue: Treatment of applications to re-file before bill passed
Submission
(PricewaterhouseCoopers)
Taxpayers require certainty over how Inland Revenue will treat applications to re-file PAYE and individual income tax returns before the passage of the bill. In addition, the recovery of PAYE could result in the reassessment of an employee’s tax returns. If there is a reassessment of an employee’s tax returns that increases their residual income tax liability, confirmation is sought that the use-of-money interest rules will not apply.
Comment
The proposed rules are not planned to come into effect until the bill has been enacted. Applications to re-file in order to take advantage of the retrospective election to apply the new rules therefore cannot take place until the new rules are in effect.
If a reassessment results in tax being payable, the use-of-money interest rules will apply, as usual. For example, if a taxpayer has taken a net benefit approach, and is not covered by the proposed exemptions, they will be taxable.
Recommendation
That the submission be declined.
Issue: Canterbury earthquake measures application date
Clauses 33 and 34
Submission
(Ernst & Young)
Clauses 33 and 34 propose new transitional rules providing specific periods for accommodation exemptions in relation to employees working in the Canterbury area following the 2010–11 earthquakes. The exemptions would apply from 4 September 2010 unless the accommodation has been treated as taxable before 6 December 2012. These exemptions should not be excluded from applying if the accommodation was treated as taxable before 6 December 2012.
Comment
The restriction on backdated application where accommodation has been treated as taxable before 6 December 2012 does not apply in respect of proposed section CZ 29 which contains the Canterbury accommodation transitional rules. Officials note, however, that this could be made clearer by expressly stating that the restriction does not apply to section CZ 29.
Recommendation
That the submission be noted and that officials will ensure the section is clarified to reflect the position that the Canterbury earthquake accommodation rules will apply back to 4 September 2010 regardless of the tax position taken before 6 December 2012.
Issue: Generic rule should be added for adverse events
Clause 33
Submission
(New Zealand Institute of Chartered Accountants)
We support the specific Canterbury rules but consider it appropriate to add generic rules for accommodation provided or paid for by employers carrying out rebuild work after an event in the nature of an “adverse event” or other event declared by the Governor-General by Order in Council.
Comment
While officials appreciate that there might be some administrative case in having generic rules for adverse events, we consider that there are too many variables to have a set of generic rules for adverse events. Events of the magnitude of the Canterbury earthquakes clearly require significant rebuild projects that justify extended timeframes, but this may not be true of all adverse events. As the general rules regarding two and three-year exemptions will apply in the first instance, officials consider it preferable to deal with adverse events on a case-by-case basis. If more time is needed, this can be assessed and legislated for at the time.
Recommendation
That the submission be declined.
Issue: Exceptional circumstances – Canterbury provisions
Clause 33
Submission
(New Zealand Law Society)
An “exceptional circumstances” provision is included in proposed new section CW 16C. The Canterbury provision (proposed section CZ 29) effectively mirrors, with more concessionary time limits, the exempt income rules in proposed section CW 16B and 16C but does not contain an “exceptional circumstances” provision. This should be included.
Comment
As the submitter has noted, there is an “exceptional circumstances” provision included in proposed section CW 16C. This provision also applies for Canterbury accommodation. Proposed section CZ 29 alters the time limits in section CW 16C in respect of Canterbury rebuild-related accommodation, but the remainder of the rules in that section continue to apply, including the “exceptional circumstances” provision.
Recommendation
That the submission be noted.
Issue: Increased monitoring requirements resulting from the new rules
Submission
(Business New Zealand)
The proposed changes mean that businesses’ payroll and finance teams will need to be extra vigilant about any changes in circumstances that often occur with projects as they progress. Changes in expectations, meaning a secondment will last more than two or three years will affect the tax treatment of accommodation payments. It is important therefore that businesses are provided with sufficient information about when Inland Revenue believes expectations are changed (how probable does the expectation need to be) and how this should be documented, particularly over the next few years, to minimise tax compliance errors.
Comment
Officials note the submitter’s comments regarding additional monitoring regarding expectations. The new rules are designed to increase certainty, thereby reducing compliance costs compared with other options. However, we acknowledge that there will still be some compliance costs involved in ensuring employers meet the rules. We note also that the proposed time limits for exempt accommodation are more generous than those currently applicable following the Commissioner’s Statement on accommodation of 6 December 2012.
As noted in comments on earlier submissions, officials also propose including some comment regarding expectations in relation to time limits in the Tax Information Bulletin following enactment of the bill.
Recommendation
That the submission be noted.