Employee allowances: make sure you get the tax right

The payment of cash allowances to employees for things like tools, meals and accommodation is common across the New Zealand building industry. However, most businesses are currently busy and often the tax treatment of the allowances may not have been properly considered by employers or may no longer reflect current law.

It can be common for businesses to treat allowances as tax-free because “that’s the way it’s always been done” or to refer to allowances by a particular label when the reality, in terms of how the funds are used, can be quite different. In addition, for tax-free allowances relating to work- related matters such as tools, the amounts paid to employees can sometimes appear arbitrary with no particular thought given to what an appropriate or reasonable amount should be.

Getting the tax treatment incorrect can result in a significant financial burden and a time-consuming process for the business, both to correct the historical position and to revisit what the business should provide to employees. Even if your business outsources its payroll processing to a third-party provider, it is worth turning your mind to the different allowances paid to employees and to have the tax treatment reconsidered and confirmed.

In most cases, if the allowance relates directly to work-related expenditure, it should not be taxable for the employee. However, often the rules applying to allowances are not as simple as that.

Work-related meal allowances are a good example. If your team are working on a project that requires them to be out-of-town for a period, generally
any allowance paid to those employees for meals should not be taxable. However, that exemption from tax only applies for a period of up to three months. If the project is significant and you’re continuing to pay a meal allowance beyond that three-month period, the allowance should then become taxable and subject to PAYE.

Allowances for work-related matters such as tools, work boots or mobile phones should generally not be taxable but need to be reasonable in terms of the amount provided.

If you’re providing accommodation for the team to work on an out-of-town project, it is also worth keeping in mind that particular rules apply to the provision of accommodation.

If you are providing a variety of allowances to your employees, it may be worth a conversation with your accountant or tax advisor to ensure there are no tax “surprises” around the corner.

by Greg Neill
Partner – Tax Advisory