IRD backtrack confuses employers and employees with ruling that the cost of accommodation when a worker is required to work away from home is taxable income for the employee

The New Zealand tax authorities are changing their mind on how accommodation allowances are taxed, and signaling the change will be retrospective.

In a Statement released Thursday, the IRD now says these allowances will be "treated as income of an employee and therefore subject to PAYE".

They also say "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."

But tax professionals are unhappy with what they see as an unwarranted change - and some have called for the IRD to withdraw the Statement and have the matter clarified by Parliament.

The Institute of Chartered Accountants (NZICA) said it was "deeply concerned" about the new tax. It would have a significant impact on industries which relied on itinerant workers, such as agriculture, the film industry, and the Christchurch rebuild effort, the accounting industry body said. Acting general manager tax, Jolayne Trim, said it was a retrospective law change "of the worst kind".

"Inland Revenue is taking the chance that taxpayers will not have the resources available to question the commercial impracticality of its announcement," she said.

The IRD's change of mind will affect many companies and potentially employees. Employers will be liable for uncollected PAYE on these allowances and be required to make 'voluntary disclosures' (that is, admit to errors in previous filings) when in fact it was the IRD position that may have been in error. Those employers who followed the IRD's previous pronouncements are likely to now be held by the IRD of breaching the tax law.

The IRD's previous position was based their Technical Rulings Manual paragraph 57.11. They now say they warned everyone in 1998 that this could not be relied on.

KPMG says this is "unfair and disingenuous". They point out that current tax law says it is the "benefit" that is taxable, not the gross amount. And they point to the fact that the law was changed in 2010 to ensure only a "benefit" was treated as income. Few employees "benefit" from having to be accommodated when they are required to travel for their work.

Employees may also be directly impacted as they could see their student loan repayments increase, or their Working for Families entitlements drop as a consequence of needing to travel for work. Treating these allowances as income on a gross-benefit basis, rather than the currently assumed net-benefit basis, will surprise almost everyone affected.

Businesses who need to deploy skilled people away from home - such as for the Christchurch rebuild - will be directly affected, unless the trip is just for an as yet undefined "few days". All employer-paid accommodation on such trips will be deemed to be income of the employee.

"It's not going to stop things from happening, it's just going to represent another cost. And the cost of the rebuild goes up and up and up all the time," said Geordie Hooft of Grant Thornton.

To make matters more confusing, the IRD has also just released an Official issues paper which proposes changes for employee allowances, including accommodation payments (see Chapter 4). This paper notes that employees' accommodation expenses are generally not taxable and proposes a 12 month limit for non-taxes work-related accommodation. As such, it seems directly opposite to the position released in the Statement.

Perhaps 'policy' officials in the IRD are not talking to the 'operational' officials.

"This retrospective change in the Commissioner's position is unwarranted. The Commissioner should withdraw the Statement and advise Government on a law change to achieve clear and appropriate objectives," KMPG said in a recent note on the issue.

What the IRD said:

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 1998 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.

What KPMG said:

While the IRD may seemingly have unlimited resources to expend on pursuing academic nuances in the tax law, this is not costless for taxpayers and does not contribute to the efficient administration, or integrity, of the tax system.