Income tax treatment of accommodation payments, employer-provided accommodation and accommodation allowances
CS 12/01 sets out the CIR's position on the existing income tax treatment of accommodation payments, employer-provided accommodation and accommodation allowances.
The purpose of a Commissioner's Statement is to inform taxpayers of the Commissioner's position and the operational approach being adopted on a particular tax matter. The Statement is not a consultative document.
|Important||New tax rules on accommodation|
On 30 June 2014 the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 was enacted. This legislation introduced changes to the tax rules that deal with the taxation of employer-provided accommodation, accommodation payments, and other allowances and payments made by employers to cover employee expenditure. In general these new tax rules, as they relate to accommodation, apply from 1 April 2015. However, in some circumstances it is possible for employers to elect that some of the changes regarding employer-provided accommodation and accommodation payments can apply to a period prior to 1 April 2015 in accordance with section CZ 30 of the ITA 2007. In circumstances where an employer chooses to apply the new accommodation rules retrospectively, to the extent that these new rules differ from the existing rules, CS 12/01 and its appendix will no longer apply to that arrangement from the retrospective date chosen by the employer.
However, where no election is made by the employer to apply the new rules retrospectively or the employer is unable to make such an election (e.g. the employer had taken a tax position that the accommodation was taxable before 6 December 2012 - section CZ 30(2)), and to the extent that the current rules continue to apply until 1 April 2015, the Commissioner considers that CS 12/01 and its appendix still sets out her position as to how those existing rules apply.
A special report on the new rules is on the Tax Policy website in advance of full coverage of the new legislation in the Tax Information Bulletin Vol 26, No 7, August 2014.
All legislative references are to the Income Tax Act 2007.
We have been asked to set out the Commissioner's position on the existing income tax treatment of accommodation payments, employer-provided accommodation and accommodation allowances made by employers to employees.
In some circumstances an employer may fund the cost or provision of accommodation to employees. This can be arranged in various ways. This Statement covers the Commissioner's position on:
- the provision of accommodation or the payment of an accommodation allowance by an employer to an employee;
- payments made by an employer that relate to accommodation expenditure incurred by an employee (expenditure on account).
This Statement also sets out the Commissioner's approach to correcting tax positions taken by taxpayers prior to the release of this Statement.
In summary, the Commissioner considers that accommodation is generally treated as income of an employee and therefore subject to PAYE. This is the case whether it is paid for by an employer on behalf of an employee, paid through an allowance or directly provided by the employer. However, in certain circumstances, overnight and temporary accommodation related to an employee's job will not be taxable.
The provision of accommodation or an accommodation allowance
Under section CE 1(1B), the market value of accommodation provided by an employer to an employee is income of the employee. Equally, the market value of an accommodation allowance paid by an employer to an employee is income of the employee. The employer must account for PAYE.
Issues arise most often in the situation of relocation or temporary accommodation arrangements.
Taxpayers have argued that where the employee is still maintaining a home in another location, employer-provided accommodation or accommodation allowances are not taxable. Taxpayers argue this is because there is no net benefit provided to the employee; the value of any accommodation or allowance received by the employee is nil as the employee continues to pay the cost of their own house.
The Commissioner does not agree with this view. The law does not support a net-benefit approach.
The Commissioner acknowledges there has been some uncertainty and inconsistent practice, by both Inland Revenue and taxpayers, regarding the taxation of employer-provided accommodation and accommodation allowances. The Inland Revenue Technical Rulings Manual paragraph 57.11 reflected a net- benefit approach to determining the value of employer-provided accommodation and accommodation allowances. However, taxpayers were advised in September 19981 that the Technical Rulings Manual was being discontinued and that Technical Rulings should not be relied upon as representing Inland Revenue's views or practice. In addition, the legislation has changed considerably since the relevant Technical Rulings chapter was written.
The Commissioner's position is that determining market value is a practical matter involving an objective valuation. The market value of accommodation provided is the price that a willing provider would accept from a willing customer. The market value of an accommodation allowance is the actual amount of the allowance. It is irrelevant that a person may be maintaining a house in a different location.
Commissioner's operational approach
If you consider you have adopted a tax position for employer-provided accommodation or accommodation allowances that differs from the Commissioner's, we suggest you discuss the matter with your tax advisor, or us, and consider making a voluntary disclosure.
Taxpayers making such voluntary disclosures will only be required to account for PAYE for the two year period prior to the date of issue of this Statement.
Given the previous uncertainty and inconsistency, taxpayers making voluntary disclosures will not be subject to use of money interest or shortfall penalties.
Where taxpayers, on the basis of explicit current advice given to them by Inland Revenue in writing, have incorrectly treated the provision of accommodation or an accommodation allowance as non-taxable, the Commissioner will not seek to adjust the treatment adopted by them in periods prior to the issuing of this Statement. However, these taxpayers cannot rely on that advice in the future and should contact us to discuss their position.
Accommodation payments made by an employer relating to expenditure incurred by an employee (expenditure on account)
The Commissioner's position is that accommodation payments made by an employer that relate to expenditure on accommodation incurred by an employee (expenditure on account) are usually income of the employee under section CE 1(1)(b) and PAYE should be deducted. An example of expenditure on account is where a tenancy agreement is entered into and signed by the employee and the rental payments are then paid by the employer directly to the landlord (or property manager) on behalf of the employee.
Accommodation costs are usually considered private in nature, as everyone needs shelter of some form. Often accommodation is about the employee getting themselves into a position to work. There will be limited circumstances where an accommodation payment that is expenditure on account will be exempt from tax under section CW 17. For example, where an employee works away from their usual office at the direction of their employer and incurs hotel accommodation costs directly in their own name, where their employer pays the account directly to the hotel this would not be taxable.
Aside from the limited exemption in section CW 17, the Commissioner's position has always been that accommodation payments that are expenditure on account are generally subject to income tax. The Commissioner's position on this matter is unchanged.
We note that some taxpayers have attempted to extend the net-benefit approach to expenditure on account cases. However, the net-benefit approach, as reflected in the Technical Rulings Manual, never applied to expenditure on account cases.
We also note that reimbursements for employee accommodation costs are treated in the same manner as expenditure on account for income tax purposes.
Commissioner's operational approach
If you consider you have adopted a position for accommodation payments that are expenditure on account that differs from the Commissioner's, we suggest you discuss the matter with your tax advisor, or us, and consider making a voluntary disclosure.
In circumstances where PAYE should have been paid, the Commissioner is not prevented from adjusting those previous periods as no statute bar applies.
However, taxpayers making voluntary disclosures in this circumstance will only be required to account for PAYE for the four year period prior to the date of issue of this Statement.
Incorrect tax positions taken will be subject to use of money interest and potentially shortfall penalties.
Overnight and temporary accommodation
The Commissioner considers that the provision of accommodation, the payment of an accommodation allowance, or accommodation payments that are expenditure on account, will not be taxable when they relate to overnight or other short-term stays by an employee in a location other than their home location in the performance of their employment duties. The cost of such temporary arrangements is not considered private in nature.
Similarly, the provision of accommodation, the payment of an accommodation allowance, or accommodation payments that are expenditure on account, may not be taxable when they relate to a temporary shift by an employee to another location. That is, where the employee has not relocated permanently but needs to be based in a different location for a temporary period as part of the performance of their current employment duties. However, this will depend on the facts of each case, including the duration of the temporary shift and the structure of the arrangement.
This Statement does not apply to accommodation related to a "work-related relocation" under section CW 17B. For example, an employee permanently relocates to another city and the employer funds the accommodation costs for three months.
Making a voluntary disclosure
When making a voluntary disclosure (and for the purposes of applying the correct tax treatment going forward), care must be taken in determining the facts of each case. Inland Revenue has seen a number of arrangements where the employment agreement has provided for the payment of an accommodation allowance to a particular employee. However, an examination of what has actually occurred has revealed that no allowance was paid but rather a payment was made by the employer on behalf of the employee (expenditure on account).
Guidelines for making a voluntary disclosure are contained in our booklet Putting your tax returns right (IR280) and Standard Practice Statement 09/02 Voluntary Disclosures (May 2009).
Any voluntary disclosures or case-specific queries can be sent to: [email protected]
1 Refer Tax Information Bulletin Vol 10, No 9 (September 1998): 10.