UPDATE: REIMBURSING ALLOWANCES PAID TO EMPLOYEES
Tax law provides for employers to reimburse employees for any work-related costs incurred on the employer’s behalf. Any qualifying reimbursing allowance paid is tax deductible to the employer and tax free to the employee.
Vehicles
When reimbursing your employee for use of their private vehicle for work-related purposes, you can reimburse on either:
- Actual costs incurred by your employee. Costs other than fuel will require an apportionment based on usage (excludes interest & depreciation); or
- The pre-vailing Inland Revenue Department mileage rate; or
- Other published rates (e.g. the AA rates); or
- Using a reasonable estimate of the expenditure likely to be incurred.
The IRD mileage rate is currently 70 cents per kilometre irrespective of what type of car is driven. The rate is reviewed periodically by IRD and takes into account the cost of fuel, repairs and depreciation.
When reimbursing your employee for travel costs, they must be additional to costs normally incurred in travelling between their home and place of work. Home to work is not a work related expense unless the vehicle is required for the use and benefit of the employer e.g. carry work tools or stock.
If you pay your employee more than what they incurred as a cost on your behalf, then that excess is treated as monetary remuneration and is subject to PAYE.
Shareholder-employee
If you are a shareholder-employee and you use your own private vehicle for work-related purposes, you have the same options as above available to you.
If you qualify you are able to be treated as an ‘ordinary employee’ and have no maximum limit for mileage reimbursement.
In order to qualify as an ‘ordinary employee’ one of the following conditions must be met:
- You must receive a regular amount of salary or wage at least monthly throughout the year, or
- You must receive a regular salary or wage that makes up at least 2/3 of your annual gross income as an employee of the company.
If neither of these conditions is met you will only be able to claim reimbursement for up to 5,000km per annum.
Our Advice
If you reimburse costs incurred by employees based on their actual expenditure, there is little likelihood that those reimbursements will be treated as monetary remuneration.
All reimbursement allowances should be checked thoroughly to ensure that they are not at some point deemed to be benefiting the employee, and therefore treated as monetary remuneration and subject to PAYE.
Relocation payments.
Tax law has been clarified to ensure employer payments for relocation and overtime meal allowances that meet all of the following criteria are tax-free:
- The employee’s relocation must be as a result of:
- taking up employment with a new employer;
- taking up new duties at a new location with their existing employer; or
- continuing in their current position, but at a new location.
- The employee’s existing home must not be within reasonable travelling distance of the new workplace (unless accommodation is provided as an integral part of the job).
- The expense must be on the proposed list of eligible relocation expenses (yet to be published by the IRD).
- The payment must reflect the actual expenditure incurred.
- The expenditure must be incurred within the period from the start of the income year in which the employee relocates or undertakes work at the new location to the end of the next income year.
For some employers tax has been paid on some past relocation payments. Because the legislative changes are being backdated to the 2003 income year some employers and employees may be entitled to tax credits that arise in relation to past relocation payments that were subject to PAYE deductions if the employer has grossed up a payment to reflect the tax liability.
Overtime meal payments and allowances.
For these payments to be tax-free, all of the following criteria must be met:
- The employee must have worked more than 2 hours beyond their ordinary hours on that day.
- Either the employee’s employment contract must specify that the employee is eligible for a payment in relation to overtime hours worked, or an employer must have a policy or practice of paying an overtime meal allowance.
- The allowance must reflect the actual expenditure incurred by the employee with documentation required for amounts over $20 per meal, or alternatively be a reasonable estimate of the expected costs likely to be incurred
BUSINESS TIP
Forecasting future business cashflow on a daily basis is a great financial management tool to help avoid getting into to cashflow difficulties (and it takes the worry out of knowing if you can meet those future payments). It is quite easy to do with an Excel spreadsheet model, looking 42 days ahead. We have a spreadsheet model available…please call your Fraser Accounting advisor.
