COVID-19: Employment tax updates for a remote workforce – 1 May 2020
While New Zealand has moved from being in Alert Level 4 to Alert Level 3 and more employees are now back on the job, a considerable number of workers remain at home and working under conditions which are outside of the norm. With working from home potentially becoming the new normal for many employees for an extended period (either because adequate social distancing is not possible at the employer’s workplace to have all workers return permanently even if we move to Alert Level 2, or because a particular employee is classed as ‘at risk’ under Ministry of Health guidelines), it is worth considering any employment tax issues which can arise from these working conditions.
The issues employers might be grappling with include:
- If employees have been allowed to take employers’ office equipment home, does this create any issues?
- If an employer has reimbursed employees for purchasing home office equipment, does this create any issues?
- If an allowance is paid to employees for working from home, is this taxable?
- If an employee has been provided with a motor vehicle but is no longer travelling to work, is there a fringe benefit being provided?
Inland Revenue has released some guidance to assist with answering these questions, including issuing Determination EE002: Payments to employees for working from home costs during the COVID-19 pandemic. This Determination aims to reduce compliance costs for businesses who are currently paying - or who are intending to pay - an allowance or reimbursement to employees for furniture and/or equipment, telecommunication usage plan costs and other expenditure. It applies only to payments made between 17 March and 17 September 2020.
Inland Revenue also issued some comment in relation to Fringe Benefit Tax (FBT) and the availability for private use of motor vehicles during the lockdown period.
Home office set ups
For many employees, preparing to work from home before the lockdown period meant setting up a home office. Practically, this may have happened in one or more of the following ways:
- The employee may have taken home office equipment belonging to the employer; or
- The employee may be reimbursed for the cost of buying new office equipment which will belong to the employer; or
- The employee may be reimbursed for the cost of buying new office equipment which will belong to the employee; or
- The employee may use existing home office equipment they already own.
Under the first two options above, where the employer owns the office equipment, no adverse tax implications should arise. Reimbursement by the employer for the cost of new office equipment can be made tax free to the employee. GST can be claimed by the employer in the usual way provided a valid tax invoice is provided by the employee. This is because the employee has acted as an agent of the employer in incurring the cost. It is acceptable for the tax invoice to be made out in the employee’s name.
The cost to the employer will be deductible up front if the value is under the low value asset threshold. This has been increased to $5,000 for the period from 17 March 2020 to 16 March 2021, when it will reduce to $1,000. Incidental private use of the office equipment by the employee will not be subject to FBT provided the assets are business tools used primarily for work purposes and cost less than $5,000 including GST.
Reimbursement of the cost of new or existing office equipment that is owned by the employee is not so straightforward. The tax treatment may vary depending the level of work versus private use of the assets, the cost of the assets and the date they are/were acquired. Recognising that employers could face significant compliance costs in making such assessments, Determination EE002 has been issued to provide some safe harbour options for employers. It is important to note that applying Determination EE002 is optional - employers can use other methods to determine the tax free amount of payments to employees provided they are reasonable and supported with evidence.
The 'safe harbour option' allows employers to treat an amount of up to $400 paid to an employee for furniture and/or equipment costs as exempt income. No evidence is required to be kept regarding the payment, what was purchased or the expected degree of personal use of the equipment. Where an employer selects this option, it cannot treat any other allowance or reimbursement payment for furniture or equipment as exempt income.
Under the 'reimbursement option', an amount paid by an employer will be either wholly or partially exempt income where it is for new or existing furniture or equipment purchased by the employee, provided it is equal to, or less than, the deduction the employee could have claimed for the depreciation loss on the asset (but for the employment limitation).
How much of this payment is exempt income under the reimbursement option will depend on the extent to which the employee uses the asset as part of their employment. If the asset is used exclusively for employment purposes, reimbursement of up to 100% of the depreciation loss of the asset (or cost if it is a low-value asset) will be exempt income of the employee. If the asset is used principally for employment purposes, only reimbursement of up to 75% of the depreciation loss or cost will be exempt income. Finally where the asset is not principally used for employment purposes, only reimbursement of up to 25% of the depreciation loss or cost is exempt income.
Where the reimbursement option is selected, employers will need to know the cost of the asset and the relevant depreciation rate (if using depreciation loss). They will also need determine the extent to which the asset is used for employment purposes. A written statement such as an email or expense claim from the employee will be sufficient evidence of the level of employment use.
In these scenarios, no GST should be claimed by the employer as the employee has not acted as agent for the employer, even if the employee provides a tax invoice in support of their expense claim.
Infinity Limited is a software development company. When its employees started working from home due to COVID-19, a number of them realised that they did not have suitable chairs for use at home. The employees were able to purchase new chairs during Level 4 Lockdown as they are essential items. Infinity Limited agrees to reimburse the employees for the cost of the chairs acquired and that the employees will retain ownership of the chairs. Each employee submits an expense claim, with the cost of the chairs ranging from $150 to $300. No other equipment related claims are made by the employees.
As the payment is under $400 per employee, each reimbursement can be treated as exempt from tax. The payment will be deductible to the employer, but no GST can be claimed.
Reimbursing employees or paying an allowance to cover household expenses
With employees home throughout the day working, it is expected that many will see an increase in their utility bills from running heating and lighting during the day when they would normally be at work. Employees may also experience other additional costs, such as tea and coffee and light snacks that would ordinarily be provided at work. Some employers are looking to pay their employees an allowance to assist with the increase in their household expenses while working from home.
Under Determination EE002, an employer can pay its employees up to $15 per week to cover these expenses, and this will be treated as exempt income. Employers will not be required to collect any evidence as to what the employees use these payments for; albeit an allowance can only be paid tax free if an employee is actually working from home on a more than minor basis. The payments do not have to be paid weekly, and can instead be made fortnightly or monthly to align with the employees’ regular payday (i.e. $30 per fortnight or $65 per month). These payments can be combined with the de minimis payments (as set out in Determination EE001) of up to $5 per week for employees who use their telecommunications devices or usage plans (e.g. laptops, mobile phones etc.) for both business and private use.
Inland Revenue released guidance last year (Determination EE001) in relation to telecommunication allowances or reimbursements paid to employees for using their own devices or usage plans. The starting point is that if the allowance/reimbursement only covers the business use of the device, then the payment will be fully exempt. If the payment covers both business and personal use then the Determination sets out three categories for allocating the cost of these payments between business and private use:
- 75% exempt (Class A), if the device/usage plan is principally used in employment. (Businesses need to demonstrate reasonable judgement in determining whether the principal use is for employment. This can be based on time spent or signed declarations from employees confirming principal use);
- 25% exempt (Class B), if the device/usage plan is not principally used in employment but still required; and
- 100% exempt (de minimis Class C) where the amount reimbursed is $5 a week or less (maximum of $265 a year).
As with payments for employee owned equipment, no GST should be claimed by the employer on reimbursements or allowances for telecommunication or other working from costs as the employee has not acted as agent for the employer, even if the employee provides a tax invoice in support of their expense claim.
Sarah is working full time from home, Sarah is required to be contactable at all times and estimates that she is spending 60% of her working day on either Skype or Zoom video calls, the remainder of her working day is spent connected to the internet. Her monthly broadband bill is $100, of which her employer, Blue Skies Ltd, has agreed to contribute $10 towards each week she is working from home. In this instance the broadband connection is being principally used for business purposes and Sarah falls within Class A. Because the amount of the employer contribution is actually less than 75% of the costs incurred by Sarah, the full amount of the payment is treated as tax exempt.
Isobel is working from home during the lockdown and her employer, Rolling Hills Ltd, pays her an allowance of $20 a week to cover the increased costs she has incurred working from home. Isobel does not ordinarily work from home and her house is usually empty during standard working hours. Rolling Hills Ltd is paying this as a tax exempt allowance of the basis that the $20 is made up of a $5 a week Class C telecommunications payment to go towards her broadband bill and the remaining $15 is to pay the increased power bill to account for the extra heating and lighting Isobel is using being home all day.
In both of these examples the cost will be deductible to the employer but no GST can be claimed.
The table below is taken from Determination EE002 and is a useful summary of the rules:
If you are considering paying an allowance or reimbursement to your employees, we recommend getting in touch with your usual Deloitte tax advisor.
Fringe Benefit Tax on motor vehicles
With the March 2020 quarter return due to be filed with Inland Revenue at the end of May, a common question we have been asked is what effect the lockdown will have on the FBT payable on motor vehicles provided to employees. We put this question to Inland Revenue and had been hopeful that the six Level 4 lockdown days to 31 March could be treated as exempt days where the vehicles had been parked at employees’ homes. Unfortunately a favourable response has not eventuated.
Inland Revenue’s position is that unless there are valid restrictions on private use imposed on the employee, motor vehicles remained available for private use and FBT remains payable even during Level 4 lockdown when employees may only have been able to use the vehicle for essential trips. The rationale for this is that FBT is based on availability for private use, not actual private use. This outcome is in line with the position where an employee leaves their work vehicle at the airport when away on a family holiday. FBT is payable in this case because the employer has not done anything to remove the ability for the employee to use the vehicle privately.
However Inland Revenue has provided some hope – indicating that there is a possibility of legislative change that may provide some FBT relief; however the timelines on this are not clear. If you have company cars that are subject to FBT and these were parked at employee’s homes during the Level 4 Lockdown, we recommend you file on the basis of the vehicles being available. It will be possible to put through a self-correction in the FBT return for the quarter ended 30 June if it becomes more apparent that the law will be retrospectively changed. If you believe that your employees have severely limited opportunity to use their work vehicles for private purposes in the short term you could consider imposing private use restrictions to minimise your FBT liability.
For completeness, we also note that Inland Revenue released specific guidance in respect to the treatment of pool vehicles, home as a place of work and other available exemptions. An overview in respect of these positions is below:
- Pool vehicles – If the vehicle was ‘subject to a genuine private use restriction’ during lockdown, no FBT will need to be paid. However FBT is required to be paid on the day the vehicle was brought home and the day it was returned to work, other than where the employee’s home is also a workplace.
- Home as a place of work – Given that many people’s place of work has been their home during the level four lockdown (and beyond), the Commissioner has stated that she will accept that home to work travel ‘such as driving a pool vehicle home before level 4 and returning it when the employee can go back to work’ is not subject to FBT. She has stated however that there needs to be a genuine private use restriction in place for this to apply.
- Exemptions – An FBT liability may not arise if one of the normal exemptions applies; e.g. emergency calls and business trips.
While not covered in Inland Revenue’s comments, some employers may have required company cars that are otherwise available for private use to be left on site for the duration of the Level 4 Lockdown. Where this is the case, the employer has removed the availability for private use for the duration and FBT will generally not be payable except on the first and last days of the period.
In the current environment it is particularly important for businesses to be considering their tax costs and taking advantage of available exemptions from FBT and considering how their FBT liability is calculated. For example:
- Ensure your employees are claiming all available exempt days for all motor vehicles provided - don’t just pay FBT on 90 days every quarter if there was not actually full availability for private use;
- Review your motor vehicle policies; are there any options here to reduce the availability of vehicles for private use?
- Are there any vehicles being provided which could be work related vehicles (and exempt from FBT) but are not currently being treated as such?
- Ensure you are structuring your employees’ arrangements correctly to fall within FBT rather than PAYE if there is a possible exemption in the FBT regime which is not replicated for PAYE purposes;
- Consider the application of the de minimis rule (which allows unclassified fringe benefits of up to $300 per employee per quarter and $22,500 to all employees over the current and previous three quarters to be exempt from FBT) - can you manage your fringe benefits to fall within these rules? Remember that the $22,500 threshold must be assessed at a group level;
- Are you attributing fringe benefits to your employees? While undertaking an FBT attribution is more time consuming than paying FBT at a flat rate of 49.25%, there are potentially tax savings to be made;
- If you don’t want to do an attribution calculation, do you have benefits that can be pooled and taxed at the pool rate of 42.86%?
The content of this article is accurate as at 1 May 2020, the time of publication. This article does not constitute professional advice. If you wish to understand the potential implications of current events for your business or organisation, please get in touch. Alternatively, our COVID-19 webpages provide information about our services and provide contacts for relevant experts who can help you navigate this quickly evolving situation.
Robyn is a Partner within the Tax Team at Deloitte in New Zealand. This involves many things, including preparing submissions on behalf of Deloitte and developing thought leadership in the area of tax. She likes to think about how tax developments really impact on Deloitte's clients and has a particular interest in tax policy and keeping up to date with all the many tax developments.