Employee accommodation – determining taxable value
Issue: Accommodation provided where the employee normally works shifts at a distant workplace for regular periods from which they cannot return home on a daily basis
Submission
(Corporate Taxpayers Group, KPMG, Petroleum Exploration and Production Association of New Zealand, PricewaterhouseCoopers, Seaworks)
Submitters have raised concerns about particular situations when an employee is required to stay at their workplace because they are unable to return home to their normal residence at the end of their working shift.
It should be made clear how to treat these situations when accommodation is provided where no alternative is available – for example, oil rigs or overnight ferries. (Corporate Taxpayers Group)
Confirmation is sought that shift workers accommodated on drilling rigs or offshore platforms for the length of their shifts (which are often multi-week) are not taxable under the new rules, or if they are then a change to the bill is sought. (Petroleum Exploration and Production Association of NZ)
Clarification is sought over whether unusual situations such as oil rig workers are going to be addressed via legislation or determinations issued by Inland Revenue. (PricewaterhouseCoopers)
A specific exemption is required for workers when it is not possible to return to their normal residence at the end of the shift – for example, employees who work on ships. (Seaworks)
Comment
Officials agree that accommodation in these types of situations should be exempted on the basis that the accommodation does not constitute normal long-term living premises. Other examples might include double-cab trucks which may be used occasionally for sleeping in, and accommodation provided for workers in Antarctica. The private benefit in such cases is likely to be small or hard to measure. We therefore consider accommodation provided for employees on oil rigs, ships, trucks or other similar workplaces or at Scott Base should be excluded from the definition of “accommodation” if, because of the requirements of their employment, the employee is unable to return home during the period of the performance of their duties. Similarly, such things as beds provided at a fire or ambulance station should not be considered accommodation (and therefore exempted) as their use by an employee is confined to the employee’s shift and therefore not available as a normal residence.
While we have endeavoured to identify all such cases, there may be some identified after the legislation is passed. To deal with specific cases, we recommend the Governor-General having a regulatory power to exempt on a case-by-case basis through an Order in Council.
Recommendation
That the submission be generally accepted. Officials recommend a specific exemption of identified cases and an exemption mechanism via an Order in Council be used to deal with any similar cases that are subsequently identified.
Issue: FIFO workers’ accommodation
Clause 20
Submission
(KPMG)
Related to the above submission, concerns arise in respect of fly-in fly-out (FIFO) workers where an employee is flown to the work site for a number of days and is then flown back to their home base/country for a number of days of rest. This is common in mining industries. FIFOs should be included in the multiple workplace rule.
Comment
Officials note there will be a range of situations that could be described as FIFO. There will be some FIFO workers who fall within one of the proposed accommodation exemptions, in which case they can apply those rules. For example, an employee who is sent to work on a roading project in the Pacific Islands for a period of 18 months and who works two weeks on and one week off, and flies home for that one week off. This situation would be covered by the “project of limited duration” exemption and therefore the Pacific Island accommodation would be exempt.
The issue of FIFO workers is likely to be confined to those who are either employed directly in a FIFO role (rather than a secondment or project situation) and/or those undertaking long-term FIFO work. The issue for FIFO workers working at overseas locations is more one of compliance costs given there will be no PAYE deduction as their employers are non-resident) and therefore the employee will need to include the accommodation in their tax return and establish its value. However, this is arguably a result of the employee’s decision to reside well away from their place of employment. As a general rule, therefore, their accommodation should be taxed at market value.
We do not consider it appropriate to extend the multiple workplace rule as suggested. As we understand the submission, it would involve extending the rule to cover workers who have only one workplace and that workplace is distant from their home. While the submission refers to workers in mines overseas, we do not consider this situation is any different to a worker who lives in Wellington and accepts a permanent job in Auckland but chooses to keep their family in Wellington and commute. In these situations, accommodation should be taxable as the employee has chosen to work well away from their place of residence. We note also however, that in situations when the accommodation provided to the FIFO worker is of the type discussed in the preceding submission (for example, oil rigs) they will be exempt on that basis.
Recommendation
That the submission be declined.
Issue: Mobile workers and multiple workplace rule
Clause 20
Submission
(Council of Trade Unions)
The circumstances of mobile workers (workers on passenger or freight road, rail, ships and aeroplanes) should be more clearly addressed with respect to the exemption of accommodation. For these workers it is not their place of work that changes as they drive, sail or fly from place to place, but rather their position relative to their usual residence. It is not clear from the current wording that these workers could access the multiple workplace exemption. We suggest expressing the entitlement in terms of changes in “accommodation base” or similar, rather than “workplace”.
Comment
This submission also relates to the earlier submission regarding workers who cannot return home at the end of their shift. The multiple workplace rule is intended to cover situations when an employee has to work at more than one workplace on an on-going basis. In some of the cases referred to it is possible the multiple workplace rule as drafted will apply – for example, if they have duties at the location they travel to, as well as on the vehicle they travel on. In other cases, for example, if all their employment duties are carried out on the vessel, the multiple workplace rule would not apply.
Officials agree these situations should be exempt as the accommodation provided is not what would be considered to be normal/long-term living accommodation. As discussed above, we consider accommodation at workplaces provided when the employee is unable to leave at the end of their shift should be exempted. This exemption should deal with the situations raised in this submission.
Recommendation
That the submission accepted in part, in terms of agreeing that these types of accommodation should be exempt.
Issue: Valuation of accommodation when the employer requires the employee to live “on the job”
Submission
(Dilworth Trust Board, Ernst & Young, Independent Schools of New Zealand, KPMG, New Zealand Institute of Chartered Accountants)
Certain employees, such as boarding school staff, are required to live in particular accommodation on their employer’s premises as part of their employment. In many cases these premises are located in high-value areas. Obligations placed on these staff, such as health and safety requirements, and the location of the accommodation (for example, in close proximity to, or within, boarding schools) hinder the “quiet enjoyment” of the accommodation. Submitters consider that such accommodation has only an incidental private benefit, and therefore taxation on the full market rental value is not appropriate.
Submitters’ preference is for a legislative exemption from taxation in circumstances when:
- the employee is required to live in particular employer-provided accommodation in order to perform their employment duties;
- there are health and safety rules and regulations imposed on an employer in conducting its business which require the employee to live in employer-provided accommodation;
- the employee has significant restrictions imposed which restrict their freedom and enjoyment in occupying the employer-provided accommodation; and
- there is no salary sacrifice arrangement.
(Dilworth, Independent Schools, KPMG)
If a total exemption is not provided, submitters alternatively seek (in order of preference) and in the above circumstances:
- a cap on the taxable benefit – capped at a percentage of the employee’s salary, similar to the approach proposed in the bill for ministers of religion; or
- a discount to the market rental value.
(Dilworth, Independent Schools)
Dilworth Trust Board, in supplementary submissions, has made clear that it considers the only appropriate option to be a complete exemption.
Ernst & Young suggests the issue should be dealt with by way of providing an additional adjustment when accommodation is “on the job” and does not provide full, uninterrupted possession, use and enjoyment because the employee is on call or needs to be available to attend to others’ needs.
New Zealand Institute of Chartered Accountants also submitted that a discount should be applied when the employee did not have “quiet enjoyment”, citing examples of Department of Conservation workers in a DOC hut, wardens in student hostels, caretakers or live-in managers of a lodge, hotel, or motel, and live-in care providers in care facilities and rest homes. “Quiet enjoyment” is a key factor in determining market value – it would be normal commercial practice to reduce rents if quiet enjoyment cannot be provided or is impaired.
If the primary submission regarding an exemption or special valuation rule for “on the job” accommodation is not accepted, there should be a power for the Commissioner of Inland Revenue to determine the taxable value of employer-provided accommodation.
Alternatively, or additionally, the Commissioner should issue guidance on the factors to be taken into account in determining market rental valuations to provide practical guidance to taxpayers.
There will be cases when it is impractical to use or ascertain market value in some situations – for example, when an employer provides accommodation to a large number of employees across a wide geographic area or when accommodation provided is in excess of the employee’s everyday needs. In such cases, taxpayers should be able to seek a determination of the taxable value from the Commissioner of Inland Revenue.
Comment
The general issue of accommodation for employees that is situated at their place of work was considered in the course of the allowances review. Officials considered that taxing the accommodation benefit in these situations at its market value would be appropriate, on the basis that even though there may be some significant drawbacks to “living on the job”, an employee for whom the work premises are their permanent residence may still obtain a substantial private benefit, even if there is a work need for them to live on the property.
Other options that were considered for the treatment of such accommodation were:
- taxing the full market value adjusted for a range of factors;
- capping the taxable element at a benchmark value; and
- capping the taxable element as a proportion of salary.
These three options were not preferred because they risked not capturing the full private benefit, leading to risks of salary substitution. Each also had administrative and compliance cost issues – for example, benchmark values require appropriate reference properties to be identified and agreed, and capping at a proportion of salary would mean that employees with variable reward structures (such as overtime or performance pay) would likely need an end-of-year adjustment to the taxable amount.
The preferred option, and that contained in the bill, is to tax the market rental value. While this type of accommodation may be affected by a number of factors that make it less attractive than a similar property nearby, factors that are specific to the property would affect the market rental value and should be able to be factored in by a valuer.
There may also be factors linked to the employee and their job, such as the obligation to live in a particular property not of their choosing. These factors are unlikely to be reflected in the market value of the property as they can vary between individuals, depending on their perceptions and personal circumstances. However, an employee will often take into account the provided accommodation in their decision to take a job. An employer will also often factor this in when setting the overall remuneration package.
One of the policy criteria for the treatment of allowances is ensuring the overall private benefit to the employee is recognised. A market rental value should take account of the value of the particular property (including factors specific to that property) and the wider remuneration package should reflect any disadvantages particular to the employee. Therefore, no further adjustment should be necessary to the market value of the property or to the taxable amount of any accommodation payment.
For these reasons, officials do not consider it necessary to include a special rule to deal with employees who are provided with accommodation on or near the workplace, as a result of a business need of the employer. If the property is subject to particular factors or restrictions on the employee’s use or enjoyment of the property, these factors and restrictions should affect the market rental value and be able to be factored in by valuers.
With regard to the submissions on providing a determination-making power or guidelines, officials note that Inland Revenue is intending to issue guidelines on the factors to be taken into account when undertaking a market rental valuation.
Officials do not consider a power to determine the taxable value, or approve taxpayers’ determinations of the taxable value is appropriate. This would potentially involve significant administrative costs.
Recommendation
That the submission regarding special legislative treatment of “on the job” accommodation be declined. However, to help taxpayers understand what sorts of factors and restrictions might affect market rental value assessments, Inland Revenue is intending to issue operational guidance in this area.
Issue: Total exemption should be granted for ministers of religion
Clause 24
Submission
(Inter-Church Working Party on Taxation)
The proposal in clause 24, inserting a new section CW 25B, continues with some adjustments the administrative position regarding accommodation for ministers of religion that has been in place since 1957. This position caps the taxable value of such accommodation at 10 percent of the minister’s remuneration. A total exemption is sought, consistent with the position in Australia, the USA, Canada and the United Kingdom. This would avoid administrative complexity with little revenue effect.
Comment
Officials’ preference regarding valuation is for a market rental value approach to be applied generally. In relation to ministers of religion however, as the submission indicates, there has been a longstanding administrative practice that has capped the benefit of church-owned accommodation at 10 percent of stipend. This practice has been codified in proposed section CW 25B, on the basis that removing the existing practice would place significant additional cost at relatively short notice on individual churches at a time when they have other significant financial obligations, such as making earthquake strengthening repairs. Ministers’ social assistance entitlements (such as Working for Families tax credits) and obligations (such as the repayment of student loans) would also be affected.
Continuation of this practice would be subject to the tax-exempt amount being capped at a reasonable rental value to reflect the original expectation inherent in the administrative practice that the accommodation provided to ministers would be modest. This proposal was not intended to be a general tax exemption for ministers of religion. By simply codifying current practice, compliance costs should not be materially changed and the 10 percent of stipend rule represents a significant discount to market value in most cases.
Recommendation
That the submission be declined.
Issue: Simplification of proposed section CW 25B
Clause 24
Submission
(Inter-Church Working Party on Taxation)
If a total exemption is not provided to ministers of religion, proposed new section CW 25B could be simplified. The formula approach is unnecessarily complex and reference to rental value is not required. Rather, it is possible to just calculate the deemed income that is liable to tax.
Comment
Officials agree that the same outcome can be achieved by including a simplified formula in the taxing provision without reference to market value.
Recommendation
That the submission be accepted.
Issue: Adjustment for work use of church-provided accommodation
Clause 24
Submission
(Inter-Church Working Party on Taxation)
The adjustment component of the valuation formula for accommodation provided to ministers of religion gives rise to unnecessary administrative costs. Past practice has been to use a 15 percent adjustment where a study or office is provided in the house. The new rules will require measurements to be taken in every property to apportion the floor area between private and work use. Continuation of the 15 percent approach would be appropriate.
In addition, the adjustment as drafted applies only to areas used “exclusively” for work purposes. We submit that this should be “predominantly” as areas used for work will also have some element of private use.
Comment
Officials consider that the “adjustment for work” use should apply only when such use occurs rather than as a uniform 15 percent across all properties. We do, however, agree that requiring the area to be used exclusively for work purposes is too restrictive. We note that other submitters have also raised the issue of the word “exclusively” in the general accommodation taxing provision (discussed later in this section). We agree that the word “exclusively” should be replaced, but recommend using “wholly” or “mainly” as “predominantly” is not a commonly used term in the Income Tax Act.
Recommendation
That the submission regarding a 15 percent adjustment be declined, but that the submission in relation to “exclusively” be partly accepted, subject to officials’ comments.
Issue: Adjustment for employee contribution to church-provided accommodation
Clause 24
Submission
(KPMG)
New section CW 25B(4) should include an adjustment to market rental value if there is a contribution towards rent by the employee (that is, an adjustment that would otherwise be made under section CW 16B(4)(b)).
Comment
The 10 percent of stipend rule is generous relative to market value and reducing the taxable amount further for any contribution from the minister does not seem appropriate. Furthermore, the recommended drafting will not refer to market value.
Recommendation
That the submission be declined.
Issue: Ministers of religion employed by charities
Clause 24
Submission
(KPMG, The Selwyn Foundation)
As drafted, the rule regarding valuation of accommodation provided to ministers of religion will not be applicable when the accommodation is provided directly by a charitable organisation. This means some hospices and rest homes run by charitable organisations with in-house chaplains will not qualify. Proposed section CW 25B should be amended to ensure these situations are covered. (KPMG)
Proposed section CW 25B relates to accommodation provided by a religious body or organisation, however, this is not defined. Certain charities affiliated with churches engage ministers to work with residents of retirement villages, and similar situations arise in regard to hospices and rest homes with in-house chaplains. A definition of “religious society or organisation” should be included in the bill to ensure these situations are covered. (The Selwyn Foundation)
Comment
The focus of the 10 percent rule is those situations previously covered by the longstanding administrative practice, which is accommodation provided by the churches. The specific provision is for reasons of the financial disruption that might arise in relation to the housing already provided if market value was suddenly applied. While there may arguably be some equity issues relative to chaplains in hospices, schools and rest homes, there is also a counter equity argument in relation to other employees who do not receive discounted housing. Including these affiliated groups would widen the coverage beyond the longstanding practice and open up scope for additional housing benefits to be provided to employees in the charitable sector, instead of salary increases.
Recommendation
That the submission be declined.
Issue: Definition of “minister of religion”
Clause 24
Submission
(Inter-Church Working Party on Taxation)
The definition has been broadened from traditional definitions to incorporate ministers of non-Christian religions, as it should be. However, the new wording has the potential to create uncertainties and departs from that which has been accepted since 1993. The 1993 definition should continue in the legislation, with references to “church” replaced with “religion”, and restricted to charities registered under the Charities Act.
Comment
Officials agree that the definition could be further refined, but consider that the definition proposed by the submitter can be simplified.
Recommendation
That the submission be partly accepted, subject to officials’ comments.
Issue: Meaning of “market rental value commensurate with duties”
Clause 24
Submission
(KPMG)
Clarification is needed on the meaning of a market rental value that is “reasonably commensurate with the duties of the person as a minister and for the location in which they perform their duties” in proposed section CW 25B(3)(a)(iii).
Comment
The intention of the provision is to ensure that the accommodation provided to a minister of religion that is subject to the special valuation rule of limiting taxable value to 10 percent of stipend is of a standard and in a location that is appropriate for the minister’s role. As noted earlier, this reflects the original expectation inherent in the administrative practice that the accommodation would be modest. For example, it would be expected that the accommodation is located within or close to the area in which the minister’s congregation resides, rather than in an expensive suburb some distance away.
Recommendation
That the submission be noted.
Issue: Adjustment for use of accommodation for business purposes
Clause 12
Submission
(Corporate Taxpayers Group, Deloitte)
The legislation as drafted allows an adjustment to the taxable market rental value of accommodation where part of the accommodation is used “exclusively” for business purposes. The standard of “exclusively” is too high and should be changed to “predominantly”.
Comment
Officials agree that there may be problems with the use of “exclusively”. However we recommend using the words “wholly or mainly” instead as “predominantly” is not a commonly used term in the Income Tax Act.
Recommendation
That the submission be partly accepted, with the word “exclusively” being replaced by “wholly or mainly”.
Issue: Adjustments to taxable value of accommodation and accommodation payments
Clause 12
Submissions
(Ernst & Young, New Zealand Institute of Chartered Accountants)
Proposed new section CE 1B(4) allows adjustments to reduce the taxable value where employees are sharing the accommodation, employees make a contribution towards the accommodation, or when part of the premises is used exclusively for work purposes. Similar adjustments should be able to be made, as appropriate, when allowances or other payments are made – for example, when part of the premises is used for work. (Ernst & Young)
Section CE 1B(4)(b) as currently worded implies an adjustment for an employee contribution would only be made when an employer incurred external costs in providing accommodation and seems to assume these costs would equate to a market rental value. All employee contributions or payments should be taken into account when determining the taxable income amount. (Ernst & Young)
Apportionments under section CE 1B(4)(a) for employees sharing the premises should be allowed to be made on an alternative reasonable basis. As drafted the bill requires equal apportionment between employees. This may not always produce the most appropriate result. Allowing an alternative approach would allow appropriate distinctions to be made – for example, when there is not equal sharing in terms of space, facilities or time used. (Ernst & Young, New Zealand Institute of Chartered Accountants)
Comment
As the submissions note, proposed section CE 1B(4) specifically provides for adjustments to reduce the taxable amount to take into account employees sharing accommodation, employee contributions and use of the property for work purposes. These adjustments are already available under existing law but are not stated in the provisions determining the value of the accommodation benefit. Accordingly, section CE 1B(4) is intended to provide greater certainty for taxpayers. It is not the intention to tighten the adjustments that are currently available. These adjustments are primarily relevant when accommodation is directly provided by the employer. However, as the Ernst & Young submission notes, it may be appropriate to take into account business use of the premises even when the employer provides an allowance or reimbursement. Ernst & Young have also indicated that an employee may also make a contribution when they receive an allowance. Accordingly, we recommend these situations be reflected in the proposed legislation.
With regard to section CE 1B(4)(b) (employee contributions), the intention is that all employee contributions should be recognised.
With regard to section CE 1B(4)(a) (shared accommodation), officials initially considered allowing apportionment between employees on an equal or unequal basis. However, for simplicity, an approach of equal apportionment is preferred.
Recommendation
That the submission in relation to employee contributions and business use be accepted.
That the submission regarding allowing unequal apportionment be declined.
Issue: Valuation of overseas accommodation
Clause 12
Submissions
(Ernst & Young, KPMG, New Zealand Institute of Chartered Accountants)
As currently worded, proposed section CE 1C appears to give employers the choice of median or average market rental values. These may differ significantly. The rules need to be made clearer. (Ernst & Young, KPMG)
One of these terms should be removed or, if the intention is to give a choice, an explanation should be given. (New Zealand Institute of Chartered Accountants)
Inland Revenue should provide guidance on acceptable New Zealand market rental benchmarks. (KPMG)
The current drafting is unclear about whether the New Zealand equivalent value can be determined with reference to just one of the three factors set out in the proposed section, rather than all three. It is also unclear whether the New Zealand value to be considered is to be a proxy for the employee living within a reasonable travelling distance of their place of employment and for comparable accommodation. The wording needs to be amended to clarify the policy intention. (KPMG)
Comment
The section is intended to give employers the choice of median or average market values. Officials understand that some employers use the average market rental but there are also employers who use the median, hence the choice. The fact that there is a choice could be made clearer in the legislation.
We agree the proposed section is unclear about whether one or all of the three factors set out in the provision must apply and recommend amending the section to make clear that it is intended all three factors are applied.
The cap on the value is the median or average value where the employee would be living if they were working for their employer in New Zealand – for example, if the employer is based in Wellington, the New Zealand value to be used would be a Wellington value, unless the value of the overseas accommodation is less. Officials do not consider that clarification is needed in the legislation but will include some discussion in the Tax Information Bulletin, including sources such as the Ministry of Business, Innovation and Employment’s data on market rental values.
Recommendation
That the submissions be noted and that section CE 1C be made clearer that there is a choice of using average or median values. Officials also recommend amending proposed section CE 1C to make clear that the three factors set out in the section must all be met, rather than just any one of the three.
Issue: Defence valuation rule should be extended to cover police housing
Clause 12
Submission
(Police Association)
Proposed section CE 1D provides an exception to the general rule that the taxable value of accommodation is the market rental value of that accommodation. This exception applies to housing provided by the New Zealand Defence Force. We submit that police housing, particularly in hard-to-fill, remote locations, should also be covered by the specific Defence rule in proposed section CE 1D. There are around 250 houses in hard-to-fill locations.
Comment
As a general rule officials consider all accommodation should be valued on a market rental value basis, which under normal circumstances should take into account any factors specific to the property. However, given the compulsion on New Zealand Defence Force personnel to accept a posting anywhere in New Zealand, the New Zealand Defence Force has historically considered it appropriate to take a national approach to considering market rental value of New Zealand Defence Force accommodation. Additionally, the New Zealand Defence Force had an historic administrative arrangement with Inland Revenue over how market value was to be discounted to take into account the range of specific restrictions applying to their housing. The Government agreed that these arrangements should be reflected in the proposed legislation given the unique nature of the accommodation arrangements.
While, as the submitter has noted, there are a number of similarities between the Police and the Defence Force, we consider there are sufficient differences given the historical positions and the level of compulsion associated with accepting postings to different locations. We do not therefore consider that the exemption should be extended to police housing.
Recommendation
That the submission be declined.