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Employee reimbursements for WFH
You may recall when Covid first hit our shores and we were forced into lockdown with everyone working from home (or at least those of us who were lucky enough to be able to). Inland Revenue (IR) released a number of determinations, reflective of the fact that employers were reimbursing their employees for the additional costs now being occurred due to the WFH scenario.
The last of those Determinations, Determination EE003, is set to expire on 31st March 2023. Consequently, IR has now issued Determination EE004 – ‘Tax treatment of reimbursing payments made to employees that work from home and/or payments made for an employee’s use of their personal telecommunications tools and/or usage plans in their employment.’ This time around, however, the determination is for an indefinite period, with IR continuing to monitor and update if appropriate.
The easiest way to start off addressing any payment to an employee by an employer, is that it is taxable to the employee unless you can then locate a specific exemption for the payment. The place where you will most likely find an exemption in relation to the present topic, is within the provisions of section CW 17 of the ITA07.
In accordance with section CW 17(2), payment can be exempt, to the extent that:
- It’s paid to the employee in connection with their employment; and
- It reimburses the employee for additional expenditure they have incurred as a consequence of the employee working from their home; and,
- The expense incurred by the employee is of a kind that would be ordinarily deductible to the employee if the employment limitation did not apply.
Expenditure is treated as having been incurred in connection with an employee’s employment when:
- The expenditure is incurred because the employee is performing an obligation required by their employment; and,
- The employee is deriving employment income from performing that obligation; and,
- The expenditure is necessary to perform that obligation.
Now one aspect which may sometimes be overlooked by the employer, is that a payment is only exempt to the extent that it reimburses an employee for additional costs incurred. So, components of any payment which relate to the non-variable costs of the employee (rent, rates, mortgage interest, etc), will not be exempt via application of section CW 17(2) – the employee would incur those costs regardless of the WFH scenario.
Determination EE004 provides certain de minimis amounts which the employer can pay to the employee, without the need to obtain further evidence from the employee of actual costs incurred. It is a compliance cost reduction tool issued by IR therefore, however, it is not binding on employers, who may choose instead to reimburse their employees based on actual additional costs incurred.
So, what can you pay (weekly)?
- WFH but no use of employees’ telecommunication tools/usage plans – $20
- WFH and use of employees’ telecommunication tools/usage plans – $27
- No WFH but use of employees’ telecommunication tools/usage plans – $7
Alternatively, employers can use the $20 de minimis just for the WFH cost reimbursement, but then in respect of the use of employee’s telecommunication tools/usage plans:
- If the employee uses their personal telecommunications tools and/or their usage plans principally for business purposes, employers can treat any reimbursement of up to 75% of the amount of the employee’s total usage plan bill as exempt income of that employee; or,
- If the employee uses their personal telecommunications tools and/or their usage plans principally for private purposes, employers can treat any reimbursement of up to 25% of the amount of the employee’s total usage plan bill as exempt income of that employee.
Reasonable estimates may be used by the employer where the employee’s plans have variable cost amounts.
Finally, Determination EE004 extends to payments for the cost of newly acquired furniture and equipment and telecommunications equipment by the employee – two single one-off reimbursements of up to $400, the first covering new furniture/equipment, and the second, covering new telecommunication equipment. Note that these are not per-item reimbursements, and they do not renew annually. These payments are referred to as the safe harbor option.
Alternatively, employers can reimburse employees based on actual costs incurred (in which case records will need to be kept), the payment amount determined by whether the asset purchase would qualify under the low-value asset threshold (100% immediate reimbursement), or require depreciation over a number of periods. The same principally business/private use proportions set out for telecommunication usage plan reimbursements can also be used here.
If you have any questions or would like a second opinion on any national or international tax issues, please email me directly.