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Tax Talk | Income tax treatment of accommodation provided to employees

Inland Revenue has released an operational statement in relation to employer-provided accommodation and its income tax treatment.

Time to read: 4 mins

Legislative changes in recent years have meant accommodation can be provided income tax-free to employees in a wider number of situations. Much of this change was in response to criticism employees were overtaxed especially when sent offshore or brought in from offshore to assist with large-scale projects such as the Christchurch rebuild.

 

General rule

The general position for accommodation provided by an employer to an employee is the accommodation is treated as the taxable income of the employee. This means the employers will need to gross up the payments and withhold PAYE on them.

The legal definition of accommodation is broad so most living arrangements can fall within the definition.

 

Exceptions

However, there are situations where even if accommodation provided falls within the broad definition, it may still be exempt from tax. These exempt categories are as follows:

  • Out of town secondments and projects,
  • Ongoing multiple workplaces, and
  • Meetings, conferences, and training courses.

The reasonable expectation for an out-of-town secondment can be confirmed through the terms of an employment contract, board minutes, planning documents, or correspondence from the employer and third parties.

As noted the general exemption period is two years but can be extended to three years for capital projects. Such projects include:

  • Construction projects,
  • Upgrades to existing infrastructure, and
  • Information technology development and implementation.

 

Falling out of the exemptions

The accommodation provided for secondments or long-term projects will not be exempt from tax if circumstances change. These can occur as follows:

  • Employer buys the employee a house near the new work location by paying for part or all the cost;
  • Employees involvement in the secondment or project comes to an end; or
  • The expectation for an employee at a secondment or project extends to more than two or three years respectively.

If a secondment or project is expected to exceed the two- or three-year period, then it will be subject to tax from that time.

However, if the expectation changes and the secondment or project is no longer going to exceed the two- or three-year period, then the date the expectation changes is when the cost of accommodation becomes exempt. However, the period up to the change in expectation will still be taxable.

 

New employees

The treatment of accommodation provided by employers to new employees can be subject to the exemption in specific instances. New employees can qualify for the two-year exemption for secondments when an employee is sent to work at another work location temporarily or the new employee is seconded to another employer on a temporary basis. The three-year exemption for accommodation for long-term projects for new employees is the same as it is for existing employees.

 

Multiple workplace exemptions

An employee required to work in multiple workplaces who is provided accommodation by an employer when working at distant workplaces is exempt from tax without a time limit. However, this is on the condition the workplaces exceed what is considered as a reasonable daily traveling distance.

Previous Inland Revenue guidance outlines that if the travel time to and from work exceeds more than two hours and the distance to and from work amounts to a daily round trip of around 100 to 160 kilometres, then this would not amount to a reasonable daily traveling distance.

Valuation

The value of the accommodation provided by the employer to the employee is based on the market rental value. Typical factors such as the location of the accommodation, the condition of the accommodation, and the functional characteristics should all be taken into account.

This value can be reduced by the following:

  • Payment by the employee of rent,
  • A pro-rated adjustment for any space used for work purposes (e.g. home office),
  • A pro-rated adjustment where accommodation is shared by two or more employees.

 

Overseas accommodation

If overseas accommodation is provided by an employer, the amount of accommodation treated as taxable is capped at the New Zealand equivalent of the market rental value where the employee would have lived in New Zealand for work.

However, the capping of taxable accommodation is only relevant if the employee remains a New Zealand tax resident, and therefore subject to New Zealand tax.

 

Our thoughts

The operational statement is helpful to taxpayers who may have situations discussed throughout the document. It is important to note in general circumstances determining whether accommodation provided to an employee is exempt from tax is not difficult.

However, complexities can arise in situations where apportionment calculations are required to determine the accommodation costs subject to tax.

Care should be taken when apportionment calculations are required as errors can result in an underpayment of tax and possible penalties and use of money interest associated with the underpayments.

If you require any assistance in relation to determining your tax obligations for accommodation that is being provided to an employee, then please contact your local Baker Tilly Staples Rodway tax advisor.

DISCLAIMER No liability is assumed by Baker Tilly Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this website. It is recommended that you consult your advisor before acting on this information.

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