Revert to previous legislative test

Clauses 35, 548 and 616

Submissions

(38 – New Zealand Council of Trade Unions, 67 – New Zealand Institute of Chartered Accountants)

The current test of whether an allowance or reimbursement can be paid tax-free (as per section CW 17) should be returned to an “incurred” test and the government should consult under the generic tax policy process to determine what allowances should be tax-free. In the event that this submission is not accepted, then the law should be returned to an “incurred” test with an exclusion for capital items. (New Zealand Institute of Chartered Accountants)

In the event that the submission for a general review is not accepted, then the law should be returned to an “incurred test”, with an exclusion for capital test. (New Zealand Council of Trade Unions)

Comment

In 1995, changes were made to the tax treatment of allowances. The need for the Commissioner to determine whether an allowance was taxable or exempt was removed, putting the onus instead on the taxpayer to determine this. Also the test was changed from whether the expenditure was incurred as a necessary part of the employee’s earning their income to one based on whether the expenditure would have been deductible by the employee were it not for the prohibition in the Income Tax Act that employees cannot claim expenses in relation to their employment.

The New Zealand Institute of Chartered Accountants has suggested that this change went beyond what was intended. Officials consider that beyond precluding reimbursements for capital expenditure as intended, any difference between the two tests is largely semantic and of little practical difference in determining whether an allowance or reimbursement is taxable or non-taxable. This is because an incurred test would still require the expenditure to be incurred in deriving the employee’s income. Consequently, reverting to an incurred test would be unlikely to achieve an outcome materially different from continuing with the current law supplemented by the interpretation guideline.

Recommendation

That the submissions be declined.