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Accommodation allowances on the radar!
The enactment of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 on 30th June 2014, 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.
The new rules will generally apply from 1 April 2015.
While the new legislation should in many ways clarify for employers the taxation treatment of various payments made to their employees, it does not clarify how existing payments should be treated.
To provide some clarification in this regard, the Commissioner issued a Commissioners Statement (CS 12/01) (“the Statement”) on 21st August 2014, outlining the Departments position with respect to the existing income tax treatment of accommodation payments, employer-provided accommodation and accommodation allowances made by employers to employees.
The Statement is broken into two parts, covering:
- 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). For example a tenancy agreement is signed by the employee but the employer makes the rent payments directly to the landlord.
The Statement does not apply to accommodation related to a “work-related relocation” under section CW 17B of the Income Tax Act 2007 (“the Act”). For example, an employee permanently relocates to another city and the employer funds the accommodation costs for three months.
With regard to the first part, in the first instance, the Commissioner considers that accommodation payments should generally be treated as income of the employee and will therefore be subject to PAYE (although acknowledged that there may be exceptions relating to overnight or temporary accommodation payments, such as a temporary shift by an employee to another location).
The basis for the Commissioners opinion is section CE 1(1B) of the Act, which states that the market value of the benefit of either the provision of accommodation or the provision of an accommodation allowance instead of accommodation to an employee is income of the employee if provided in relation to their employment.
The historical view held by many, including the writer, and one that was also written in an Inland Revenue Technical Rulings Manual, was that the first issue to determine was whether the employee had actually received a benefit as a result of the accommodation provided to them (either directly or via an allowance payment) and a key consideration in this regard was whether the employee was still maintaining a home in another location. This was often referred to as the “net benefit” approach.
Where the employee continued to cover the cost of maintaining a home in the other location, it was viewed that they did not receive any benefit from the employer provided accommodation. Therefore there was no benefit to tax under section CE 1(1B).
The Statement advises that the Commissioner’s position is that the legislation does not support a net benefit approach and therefore the issue of whether the employee still maintains a home in another location is irrelevant for the purpose of determining assessable income in accordance with section CE 1(1B). Why she does acknowledge that confusion may have been created as a result of the Technical Rulings Manual commentary, it is the Commissioners view that taxpayers were advised back in 1991 that the Technical Rulings Manuals were being discontinued and therefore they were no longer to be relied upon by the taxpayer as representing her views or practice.
For those taxpayers that have applied a net benefit approach historically or treated the provision of accommodation to employees in a way that differs to the expected treatment outlined in the Statement, the Commissioner now expects taxpayers to consider making voluntary disclosures to have their prior positions corrected.
In this regard the Commissioner has made some sort of amnesty by stating that those employers who make a voluntary disclosure will only be required to correct their PAYE returns for the two year period prior to the date of issue of the Statement. Additionally, due to the confusion that the Commissioner may have played a part in creating, those employers filing voluntary disclosures will not be subject to use of money interest charges or shortfall penalties on the reassessments.
It should be noted that where taxpayers have received explicit advice in writing from Inland Revenue which they have relied upon which now differs from the position outlined in the Statement, then no reassessment action will be taken in respect of any PAYE periods pre the date of issue of the Statement however naturally those taxpayers can no longer continue to rely on that earlier advice.
The second part of the Statement refers to expenditure on account payments. It is the Commissioners view that these type of payments have always been subject to taxation under section CE 1(1)(b) , note the different section reference, and includes reimbursement type payments to the employee (although acknowledgement that certain expenditure on account payments may be exempt e.g. where employee away overnight and the hotel accommodation booked under their own name but the employer pays the hotel directly) .
The Commissioner notes that the net benefit approach has been used by taxpayers in expenditure on account situations based on the Technical Rulings Manual commentary, however states that the commentary in this regard clearly stated that the net benefit approach could not be applied to expenditure on account payments. Consequently such treatment by the taxpayer in these cases has always been incorrect.
Again the Statement recommends that taxpayers review their tax positions previously filed and should consider making a voluntary disclosure where past filings are not in accordance with the treatment outlined by the Commissioner in CS 12/01.
The Commissioner advises that there is no statute bar (usually a four year limitation period for any reassessment action once a particular return has been filed) with respect to returns already filed that do not include PAYE that should otherwise have been paid. However where a voluntary disclosure is made, only the four year period pre the date of issue of the Statement will be subject to reassessment. Unlike the part one concession above, use of money interest charges will apply to any reassessment and consideration will still be given to the imposition of shortfall penalties.
The writer does not agree with the Commissioners present view regarding the net benefit approach, particularly with regard to section CE 1(1B), because the provision is clearly worded to subject to tax the market value of the benefit received by the employee in respect of accommodation provided by their employer. Where the employee continues to maintain a home at another location and they are only present at their current location to fulfil their employment duties, in the writer’s view they do not benefit from their situation and consequently the payments should not be taxed.
However the Statement is not a consultative document and consequently until such time as either the Commissioner expresses a change of position or a decision of the Court determines the Commissioner is wrong with respect to her net benefit view, taxpayers who continue to apply a treatment to accommodation type payments that does not accord to the treatment outlined in the Statement will expose themselves to possible reassessment action and associated penalty and interest costs.
We would recommend that professional advice is sought prior to the filing of any voluntary disclosure.
Should you like to discuss any of the content of this article further, you are welcome to give the writer a call.