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Relocation and overtime meal allowances

Relocation expenses

Issue: Reasonable daily travel distance requirement

Clauses 35, 548, 616 and 619

Submissions

(32 – KPMG, 67 – New Zealand Institute of Chartered Accountants)

In relation to the requirement for the employee to have relocated their home base, employers should be able to decide whether or not an employee has relocated as a consequence of the employer’s needs, subject to a “reasonableness test”. The application of this test should not be unduly restricted by Inland Revenue guidelines. (KPMG)

The requirement that the relocation is required because the employee’s workplace is not within reasonable daily travelling distance from the employee’s residence should be removed. In the alternative, if the “reasonable daily travelling distance” requirement is retained, the term should be defined or guidelines regarding its interpretation be issued as soon as possible. (New Zealand Institute of Chartered Accountants)

Comment

Officials agree that employers can largely be relied upon to confine their reimbursements to reasonable relocation expenses because their natural inclination is to minimise the costs that they incur. Nevertheless, the existence of an exemption for one form of expenditure will naturally create an incentive to recharacterise other forms of expenditure to take advantage of that exemption. This provides justification for limiting the scope of the exemption.

One of the proposed limitations is that the relocation of the employee’s home base must be necessary to carry out the job. If the employee could have commuted to the new job from an existing home base there would appear to be a clear monetary private benefit involved when the employer pays for the relocation costs and, in principle, this should be taxable.

This suggests the need for some form of distance requirement before a move could be considered a qualifying relocation. Options considered were that the employee’s existing home must not be within reasonable daily travelling distance of the new workplace (the United Kingdom approach) and a specific minimum distance test (the United States approach). Both these requirements do, however, involve some compliance costs. The United Kingdom’s approach requires assumptions to be made about what is “reasonable”, although reasonableness is a common concept within accounting. The United States’ approach is more certain in this regard but is less flexible in handling genuine local relocations, such as within a major city where traffic congestion and transport difficulties may make shorter distance relocations more justifiable.

A third option, and the one appeared favoured by the submissions, would be to leave it to employers to decide whether there has been a home base relocation that they wish to pay for, on the basis that employers will be reluctant to pay for relocations that are not related to work. While this would generally be the case, there could be some instances, particularly for senior appointments, when a salary recharacterisation could be achieved by relocating locally to coincide with taking up a new appointment.

On balance, our preference, backed by consultation, was to adopt the United Kingdom’s approach. In terms of the reasonableness aspect, we note that the reasonable daily travelling distance is not defined in the United Kingdom’s legislation. Instead taxpayers are expected to apply common sense and take account of local conditions. The usual time taken to travel a given distance is an indication of whether that distance is reasonable. For example, in the United Kingdom employees living within larger cities commonly travel much greater distances or take longer to travel the same distance to work than do employees elsewhere. In the New Zealand context, transport difficulties in the major cities may make long distance commuting less likely.

We consider that the small additional compliance costs associated with this requirement are warranted in light of the reduced opportunity for salary recharacterisation.

Since a number of submissions from our various rounds of consultation asked for guidelines from Inland Revenue on what is meant by “reasonable travelling distance”, we will be developing these in time for the legislation’s enactment. We are happy to work with key stakeholders to develop a set of practical guidelines that are not too restrictive.

Recommendation

That the submissions that there should not be any specific home base change or a reasonable travelling distance test requirement be declined.

That the submission that there should be no Inland Revenue guidelines on how to interpret “reasonable travelling distance” be declined.

That the submission that the guidelines be issued as soon as possible be accepted.

Issue: Developing guidelines on reasonable daily travelling distance

Clauses 35, 548, 616 and 619

Submission

(68 – Corporate Taxpayers Group)

The Corporate Taxpayers Group would like to work with officials on the guidelines prepared on the issue of what is not within a reasonable daily travelling distance of the employee’s former residence.

Comment

Officials are happy to work with the Corporate Taxpayers Group and other key stakeholders on developing the guidelines.

Recommendation

That the submission be accepted.

Issue: Ensure that relocation and overtime meal payments are tax-free

Clauses 35, 548, 616 and 619

Submission

(38 – New Zealand Council of Trade Unions)

The current provisions should be amended to ensure that payments made by employers when relocating their employees and providing them with overtime meal allowances are exempt from income tax and fringe benefit tax.

Comment

Officials agree with this submission as the purpose of the proposed legislative changes is to achieve this very objective.

Recommendation

That the submission be accepted.

Issue: Estimates of relocation expenses

Clauses 35, 548 and 616

Submission

(32 – KPMG, 35 – PricewaterhouseCoopers, 53 – Ernst & Young, 67 – New Zealand Institute of Chartered Accountants)

As a compliance reduction measure, employers should be allowed to reimburse employees for relocation expenses by way of a reasonable estimate of expenses rather than be required to reimburse on the basis of actual expenditure.

Comment

The exemption will apply only to actual expenditure incurred. Hence, paying an employee a relocation allowance would not generally qualify unless it could be shown that the allowance covers costs that were actually incurred. Similarly, any amount paid by the employer in excess of the actual amount incurred will be taxable, even though a particular expense is on the list.

We appreciate that when there is a significant number of employees relocating over the year that the requirement to reimburse actual costs might mean additional compliance costs for employers. We consider this requirement to be necessary, however, given the potentially high variation in the costs of relocating from employee to employee and the potential magnitude of the expenses. Otherwise, general allowances bearing no semblance to actual expenditure in a particular case could be paid as salary substitutes.

Recommendation

That the submission be declined.

Submission

(68 – Corporate Taxpayers Group)

There should be a degree of pragmatism and leniency when it comes to the satisfaction of new section CW 17B(2) which requires the amount paid to be no more than the actual cost, particularly given that full evidence dating back possibly to October 2001 may not be available to employers. We suggest less restrictive wording in the equivalent sections of the 1994 and 2004 Income Tax Acts.

Comment

We acknowledge the passage of time may have made it more difficult to substantiate that previous payments covered actual eligible expenses. Accordingly, a degree of pragmatism is required in applying the test. But rather than trying to reflect this in the legislation, we suggest that it be handled administratively. Practically, the issue is more likely to be of relevance for those relatively few employers that are likely to seek refunds or credits because they have paid tax on relocation payments. Those employers are more likely to have the necessary information given that the cases that we are aware of where tax has been paid arose from reassessments.

Recommendation

That the submission be declined.

Issue: Time limit on eligible relocation expenses

Clauses 35, 548 and 616

Submissions

(32 – KPMG, 67 – New Zealand Institute of Chartered Accountants, 68 – Corporate Taxpayers Group)

A time limit for paying relocation claims is not needed. Instead there should be a test to assess whether there is a sufficient nexus between the expenditure and the employee’s relocation. But if there is to be a time limit, it should also recognise that when relocation occurs early in the income year, some of the expenditure can be incurred late in the preceding income year. (KPMG, Corporate Taxpayers Group, New Zealand Institute of Chartered Accountants)

If there is to be a limit, it should run from the beginning of the income year prior to the income year in which the employee relocates to the end of the next income year. The limit should refer to “tax year” rather than “income year”. (Corporate Taxpayers Group)

The time limit should just be a requirement that the expenditure has to be incurred by the end of the tax year following that in which the relocation occurs. (Matter raised by officials)

Comment

The intention is that to qualify for the tax exemption the expenditure for a particular relocation must be incurred, or the benefit provided, before the end of the income year following the one in which the employee starts the new job or moves to the new location. The purpose of this requirement is to provide a cut-off, to avoid expenditure some years later being attributed to the relocation when that expenditure would have no bearing on the employee’s decision to relocate. In practice, most relocation costs will be incurred close to the time of relocation so the time limitation will not generally be a difficulty.

The draft legislation also requires the expenditure to have been incurred no earlier than the beginning of the income year in which the relocation takes place. Officials agree with submissions that this requirement is not needed and instead the other tests can be relied on to ensure an adequate nexus between the expenditure and the relocation. Expenditure in advance of relocation is quite feasible given the various preparations that a relocation can involve.

We agree that the provisions should refer to “tax year” rather than “income year” to remove any doubt over whose income year is involved. Tax year is a defined term and generally means the period from 1 April and ending on 31 March.

Recommendation

That the submission that there be no time limit be declined.

That the submission that the time limit should just be a requirement that the expenditure has to be incurred by the end of the tax year following that in which the relocation occurs, be accepted and note that this will address the submissions that called for the beginning of the time limit to begin earlier than the income year in which the relocation takes place.

That the submission that the limit should refer to “tax year” rather than “income year” be accepted.

Issue: Treatment of temporary moves that become permanent

Submission

(53 – Ernst and Young)

The section CW 17B(3)(b) qualification should be omitted or amended to provide that the time limit applies from the start of the income year in which the relocation becomes permanent for any further relocation expenditure which is the result of the change from temporary to permanent relocation.

Comment

The bill generally does not distinguish between temporary and permanent relocations. For example, there is no minimum requirement on the length of time that an employee has to stay in the new location. The only reference to temporary moves is in relation to allowing more flexibility around the time limit.

The draft legislation, however, omits to say what time limit applies when a temporary move becomes a permanent relocation. The intention is that if the earlier temporary move had not been treated as an eligible relocation against which claims had been made, the temporary move would be ignored. We agree that the legislation should make this clear.

Recommendation

That the submission be accepted in part, so that the legislation makes it clearer what time limit applies when a temporary move is ignored.

Issue: Application date

Clauses 35, 548, 616 and 619

Submissions

(32 – KPMG, 67 – New Zealand Institute of Chartered Accountants)

To remove any residual doubts about reassessments of previous tax positions, either all tax positions taken in relation to relocation expenses and overtime meal allowances before the law change should be affirmed or the retrospective application date should be extended to match the period that Inland Revenue could reassess. (KPMG)

The backdating of the application date to 2002–03 will not provide any cover for taxpayers who have made tax-free relocation and overtime meal payments before that date. To be effective, the changes need to be made retrospective to the date when the current legislation was enacted. (New Zealand Institute of Chartered Accountants)

Comment

The submissions question whether the Commissioner’s ability to reassess taxpayers is limited in this instance to four years, as per the statute bar.

The uncertainty about whether the statute bar would apply is a technical argument and should not be a problem in practice. Officials therefore consider that there is no need to take the application date back beyond the 2002–03 income year as contemplated in the draft bill.

Furthermore, reaffirming all previously taken tax positions would not provide tax credits to those who had paid tax, which was a key reason for making the change retrospective.

Recommendation

That the submissions be declined.

Issue: Commissioner’s determination specifying eligible relocation expenses

Clause 485

Submission

(35 – PricewaterhouseCoopers, 68 – Corporate Taxpayers Group)

The draft determination issued on 21 November 2008 should be finalised by the Commissioner immediately following enactment of the bill.

Comment

Officials intend to finalise the list of eligible relocation expenses in time for the bill’s enactment. This was the reason why the draft determination setting out the suggested list was circulated by Inland Revenue late last year for comment.

Recommendation

That the submission be accepted.

Issue: Additional items for list of eligible relocation expenses, including catch-all

Clause 485

Submissions

(24 –New Zealand Law Society, 35 – PricewaterhouseCoopers, 67 – New Zealand Institute of Chartered Accountants)

There are a number of payments commonly made to expatriates and relocating employees which should be included on the list, for example:

  • visits to the new location before the actual move to scope matters such as accommodation options and schooling for children;
  • property management fees paid to real estate agents engaged to manage the employee’s family home (if it is rented out);
  • travel insurance paid in respect of moving to the new location and any pre-move visits to the new location;
  • language lessons, if the employee is moving somewhere where they are unable to speak the main local language;
  • costs incurred in cancelling utility connections in their current location;
  • “home leave” travel costs;
  • costs incurred in relocating to a “developing country”, which might be considered a fringe benefit in a developed country, but which are a required expense for someone relocating from New Zealand.

The following items should also be included in the list of eligible relocation expenditure:

  • any loss on sale of a family home;
  • the GST charged on goods transported into New Zealand;
  • fees for the employee and their immediate family to attend training and employment consultation, provided these costs are incurred within, for example, 12 months of the relocation;
  • the costs incurred in sending a child to a school of a comparable standard to the school they attended previously;
  • costs incurred on, for example, family reunion visits and compassionate travel;
  • the costs involved in obtaining a host-country driving licence;
  • the costs involved in the purchase of reasonable furniture and electrical goods if it is decided not to transfer these from the previous location;
  • any other incidental costs in relation to the relocation, up to a maximum of $1,000. (PricewaterhouseCoopers)

The following items should be included on the list of eligible relocation expenditure:

  • the cost of immigration applications (including application fees, x-rays, doctors’ reports, police reports and other special documentation);
  • charges for currency exchange on moving money to New Zealand;
  • house valuation costs;
  • LIM reports (or similar);
  • customs clearance costs;
  • storage costs at the new location before obtaining a permanent residence;
  • costs associated with complying with New Zealand customs regulations;
  • statutory obligations that arise on importation of cars, vans, boats and trailers (for example, compliance certificates and modifications required to comply).

The list should also include a “catch-all” clause. (New Zealand Institute of Chartered Accountants)

Comment

The legislation proposes that the Commissioner issue a list of eligible relocation expenses. New section 91AAR of the Tax Administration Act 1994 provides some parameters around the Commissioner’s proposed power to issue such determinations.

Section 91AAR(3) sets out the factors that the Commissioner may take into account when considering whether a type of expenditure necessarily arises from a relocation of an employee rather than being costs, including capital costs, that would have been incurred gradually over time, irrespective of whether an employee had relocated. In this regard, factors that may be borne in mind are whether the expenditure is really a substitute for salary and wages, whether employers generally treat the expenses as relocation expenses and the difficulty and costs of measuring any private benefit element. Losses on the sale of a house, for example, would not be considered to qualify as they are a potentially sizable capital loss that may have accumulated over time.

As noted earlier, Inland Revenue issued a draft determination in November 2008 for comment, setting out a suggested list of eligible relocation expenses. The items referred to above can be considered by the Commissioner, alongside the suggestions made directly to the Commissioner on the draft determination.

Officials confirm that the intention is that the list would also include a “catch-all” category to cover miscellaneous relocation expenses.

Recommendation

That the submissions be noted, and the items suggested be considered by the Commissioner along with the submissions made directly to the Commissioner on the draft determination.

Issue: Nature of the list – ability to amend the determination and whether it should be a fixed list for earlier years

Clause 485

Submissions

(24 – New Zealand Law Society, 35 – PricewaterhouseCoopers)

A mechanism should be put in place so that the determination can be amended easily as omissions are identified and agreed with the Commissioner. (New Zealand Law Society)

In relation to earlier income years (those starting from the 2002–03 income year), the list of eligible relocation expenses should be a fixed list.

But for future income years, the Commissioner should be able to add and delete items from the list provided the Commissioner gives adequate notice of any amendment. (PricewaterhouseCoopers)

Comment

Draft section 91AAR(4) already provides for a determination to be altered, subject to the Commissioner giving at least 30 days notice of the implementation date of any change. A person affected by a determination may challenge the determination under the Disputes Procedures and Challenges parts of the Tax Administration Act.

The aim is to get from the outset as comprehensive a list as possible so that changes to the list items will then need to relate only to future income years. Nevertheless it is important to have the ability to backdate changes as taxpayers may subsequently realise that a relocation expense item that they have been paying or reimbursing tax-free in the past has been omitted from the list and it should be on the list.

Recommendation

That submissions recommending a mechanism be put in place so that the determination can be amended easily as omissions are identified and agreed; and that the Commissioner be able to add and delete items from the list, provided the Commissioner gives adequate notice of any amendment be accepted. Note that the draft legislation already provides for this.

That the submission recommending that the list be fixed in relation to earlier income years be declined.

Issue: Nature of the list – inclusive or definitive

Clause 485

Submissions

(24 –New Zealand Law Society, 32 – KPMG, 67 – New Zealand Institute of Chartered Accountants)

The list should be an “inclusive” list. (New Zealand Institute of Chartered Accountants)

The relocation expenses that can be reimbursed tax-free should not be restricted to a list determined by the Commissioner as this will unnecessarily constrain employers in the types of reimbursements that they make, and the list could become outdated. The legislation could establish broad principles, coupled with a list of common expenses. If the list approach is to be retained:

  • the types of expenses should be broadly defined; and
  • there should be no restrictions based on monetary limits, either as an overall cap or for specific items. (KPMG)

The determination should be kept as general as possible. A finite list may result in some valid employee relocation payments being denied tax-free status to which they should be entitled. (New Zealand Law Society)

Comment

A list of all eligible relocation expenses provides greater control and certainty over the expenses that would be tax-exempt than the converse approach of allowing any expenses other than those on an ineligible list or having a list that provides just examples of the main items that would be included. This is why the legislation provides for a list that covers all eligible expenses.

Submissions on an earlier version of the list indicated a preference for more detail rather than broadly defined items – for example, whether an amount includes GST, or specifying insurance separately rather than referring to just removal costs.

We agree that there should not be an overall cap on the amount of relocation expenditure and none is included in the legislation. A concern with placing a cap on the amount of exempt expenses is that it could preclude some socially optimal relocations because it would not recognise variations in employees’ costs, which can be significant, depending on factors such as an employee’s family size. Also, with the exception of the catch-all for miscellaneous relocation expenditure, no dollar limits are contemplated for individual items on the list.

Recommendation

That the submission that the list just provide an indication or examples of the types of expenditure that would be eligible be declined.

That the submission that there should not be an overall cap on the amount of relocation expenditure be accepted, and note that none is included in the legislation.

Issue: Mechanism for claiming overpaid tax in previous periods

Clauses 35, 548 and 616

Submissions

(35 – PricewaterhouseCoopers)

A special legislative mechanism should be introduced so employers can claim overpaid tax.

Inland Revenue should provide guidance on what will constitute “corroborating material” when making a claim.

Inland Revenue should establish a simple procedure for employers to claim past overpaid FBT and provide guidance to employers on how to claim a refund.

Comment

Given that the legislative changes in relation to relocation and overtime meal payments are being backdated to the 2002–03 income year, some taxpayers will be entitled to a credit for over-paid tax if they paid tax on past qualifying payments. These adjustments will be handled through Inland Revenue’s standard administrative practices. Section 113 of the Tax Administration Act enables the Commissioner to amend the relevant assessments. Our information is that adjustments are likely to be claimed only in relation to some relocation payments.

There was general agreement with the suggestion in the officials’ issues paper of November 2007 that employers should receive the credit for over-paid PAYE when they have grossed-up the payment to compensate the employee for the tax impost. The issues paper also noted that a special legislative mechanism might be needed to achieve this. On further consideration, a special legislative mechanism was decided not to be necessary. Inland Revenue already has administrative practices in place that enable credits to be given for over-payments of PAYE. An employer can request an adjustment to a past employer monthly schedule, which the Commissioner will do on the receipt of corroborating material.

Similarly, as would normally occur, employers receiving these credits should be adjusting their taxable income when they have treated the past PAYE payment as a cost of business.

This process may involve employers incurring some additional compliance costs but our assumption is that there are not many employers who have paid tax on the payments and not significant numbers of employees involved. Trying to set up a special process for employers proved to be too complicated given the need to also give some employees adjustments to redress the fact that they will have received lower entitlements (for example, for family assistance) and had higher liabilities (for example, child support) as a result of the payments being previously subject to income tax.

Employers who have overpaid fringe benefit tax on relocation benefits will be able to obtain a credit for that overpaid fringe benefit tax by amending the relevant FBT returns. We consider this to be a relatively simple mechanism.

Guidance on what would be expected, including in terms of corroborating evidence, will be provided in Inland Revenue’s Tax Information Bulletin which will be published once the bill has been enacted.

Recommendation

That the submission for a special legislative mechanism to enable employers to claim overpaid tax be declined.

That the submission that Inland Revenue provide guidance on what will constitute “corroborating material” when making a claim, be accepted and note that this will be covered in a Tax Information Bulletin.

That the submission that Inland Revenue establish a simple procedure for employers to claim past overpaid FBT and provide guidance to employers on how to claim a refund be accepted, and note that the mechanism will be through the standard approach of an employer revising its relevant FBT returns.

Issue: Application to expatriate employees

Clauses 35, 548, 616 and 619

Submission

(32 – KPMG)

Further consideration should be given to expatriate employees who have been relocated from one jurisdiction to another. For example, the treatment of additional taxes payable as a consequence of the employee being assigned.

Comment

The proposed legislative changes in relation to relocation payments are intended to cover not only relocations within New Zealand but also relocations out of and into New Zealand. The changes are of relevance to those employees who are relocating out of New Zealand if they retain their tax residence in New Zealand, which is the case for public servants who are posted overseas. The draft list of eligible relocation expenses reflects this wide range of possible relocations. Submissions on that list will be considered over the coming months.

Tax-free reimbursement of ongoing costs is not considered, however, to be appropriate as these are more akin to salary and wages substitutes. There is a range of allowances that employees receive that are currently treated as taxable and should continue to be treated as such. Cost of living allowances and tax equalisation allowances are two examples. The fact that taxes and/or living costs are higher in a country would normally be reflected in the salaries paid in those countries and should not be considered a relocation expense.

Recommendation

That the submission be declined.

Issue: Interrelationship with accommodation element of employment income

Clause 21

Submission

(32 – KPMG)

In relation to accommodation, there should be an exemption provided under section CE 1(c) to mirror the amendments to section CX 19(1)(b) to exempt amounts that, if they had been paid, would be exempt income under section CW 17B.

Comment

Section CE 1(c) ensures that the market value of accommodation provided by an employer to an employee is income to the employee. If the provision of accommodation would qualify as an eligible relocation expense, it should be excluded from being income to the employee. Consequently, officials agree with the submission that section CE 1(c) should be amended accordingly.

Recommendation

That the submission be accepted.

Issue: Interrelationship with entertainment tax

Clauses 35, 548 and 616

Submissions

(35 – PricewaterhouseCoopers, matter raised by officials)

The limitation rule in the entertainment tax rules that limits entertainment expenditure deductions to 50 percent should not apply to payments for overtime meals. Section DD 4(3) of the Income Tax Act should be amended so that it refers also to new section CW 17C. (PricewaterhouseCoopers)

Expenditure on meals that qualifies as eligible relocation expenditure should also be exempted from the limitation on entertainment expenditure deductions. (Matter raised by officials)

Comment

Officials agree that section DD 4(3), which specifically excludes expenditure on overtime meals from the limitation on entertainment expenditure deductions should, as a consequence of the changes in the bill, refer to section CW 17C rather than section CW 17 as it currently does.

Furthermore, we consider that the expenditure on meals that qualifies as eligible relocation expenditure should also be exempt from the limitation on entertainment expenditure deductions.

Recommendation

That the submission be accepted.

That expenditure on meals that qualify as eligible relocation expenditure should also be exempt from the limitation on entertainment expenditure deductions.