Through the combined impacts of COVID-19 and evolving flexible work practices, many employees find themselves increasingly working from home.
Over the last 2 years, Inland Revenue has released guidance to employers regarding the circumstances under which allowances paid to employees can be received tax free. Determination EEOO3: “Payments provided to employees that work from home; Employee use of telecommunications tools and usage plans in their employment” deals with the additional expenditure that employees may face when they work from home and/or use their personal telecommunications tools and usage plans in their employment. It sets out the extent to which a payment made by an employer to an employee is able to be treated as exempt income to the employee.
The determination applies from 1 October 2021 and is due to lapse on 31 March 2023. It provides a safe-harbour threshold as to the quantum of a tax-free allowance. An employer may choose to deviate from these amounts if they have evidence to substantiate a higher amount. To apply the determination:
• it must be a payment from employer to employee
• the payment must relate to a cost incurred (or likely to be incurred) by the employee
• the cost must relate to the employment and necessary in carrying out employment duties, and
• it can apply to an employee who works both at the employment premises and at home, as long as the home-based work is more than minor.
Inland Revenue’s “Agents Answers” August 2022 update for tax agents states the following in relation to Determination EE003:
“Companies and home office expenditure
A company can claim a deduction where it has reimbursed an employee or shareholder-employee for expenses incurred in the use of their home (so that the employee or shareholder-employee are not out-of-pocket) provided there is a sufficient connection between the expenses incurred and the business income that is being generated. The company needs to keep accurate records.
A company cannot claim a deduction if it has not incurred the home office expenses. For example, if a company uses an employee’s or shareholder-employee’s home office (that the company does not own), and the employee/shareholder-employee pays all the expenses relating to the home office. There is more information and options for employers in Determination EE003.
Reimbursement of employees who work from home
Where an employer pays an employee a reimbursement allowance for necessary additional costs incurred due to working from home, the payments may be exempt income of the employee under s CW 17 of the Income Tax Act 2007. This means that the employee will not need to pay tax on this.
For the period 1 October 2021 to 31 March 2023 Determination EE003 allows an employee to receive an exempt payment of:
• $20 where they use their own telecommunications tools (such as a laptop, desktop, headset, mobile phone, home phone) and/or usage plans (such as mobile phone plan, internet plan, landline plan), or
• $15 if the employee does not use their own telecommunications tools and/or usage plans.
The amount of the allowance paid may be more, but both the employer and employee will need to be able to show that they have the evidence to demonstrate that some other amount is appropriately treated as exempt income. Any amount paid will be taxable income to the employee to the extent that it is higher than the costs incurred by the …….