Safe Harbour guidance released for working from home costs

Richard AshbyPartner, Gilligan Sheppard

The Alert Level 4 response to Covid-19 has seen all but essential workers required to work from home, a requirement which has now continued under Alert Level 3 (unless that is not possible and the workplace can operate ‘safely’), and is recommended once the Country moves to Alert Level 2.

For those employees working from home, there have naturally been cost exposures they would not otherwise have incurred, whether that be the initial set-up of the office at home, or additional home running costs due to the person’s presence in the home for a longer duration than normal – increased electricity and gas costs for example.

In this regard, employers have already been making, or intend to make, payments to their employees to reimburse some of these costs. Since the payments will relate to the employment relationship of the parties, the tax treatment of the amounts paid needs to be considered.

The first point of reference for employers, is section CW 17 of the ITA07, which provides that expenditure on account of an employee or a reimbursement amount an employer pays to an employee, is exempt income to the extent that the employee would be allowed a tax deduction if the employment limitation (prohibits any deductions by employees in their income tax returns for expenditure they incur in connection with their employment activity) did not exist. In other words, if the employee could show a nexus of the home running/office set-up costs to the derivation of their income (which like most home office claims we do for self-employed/business clients involves apportioning the costs incurred on a basis that reflects business use versus personal use of the home), then they could claim an expense for tax purposes for the business related proportion of the expenditure.

Application of the section CW 17 provision however, requires the employer to duly consider how much of the payments they are making to the employee, would satisfy the legislative criteria (‘to the extent the employee would be allowed a deduction’) and therefore qualify as being exempt income in the employee’s hands (so not subject to any PAYE deductions etc). IR has now come to the party in an attempt to ease the employer’s administration difficulties and associated additional compliance costs therefore, by releasing Determination EE002 – ‘Payments to employees for working from home costs during the COVID-19 pandemic.’

DET EE002 can be applied to any payments made during the period 17th March 2020 to 17th September 2020. The Determination has two main components, amounts paid in respect of furniture or equipment costs (reflecting either cost for low value asset (“LVA”) purchases or a depreciation loss otherwise), and amounts paid in respect of other expenditure (electricity costs for example) with the exception of telecommunication usage plans costs (employees use of own telecommunication devices and/or usage plans). These latter costs are excluded due to IR’s release of Determination EE001 in December 2019, which provided specific guidance to employers who were making payments to employees in respect of these costs being incurred by the employee.

Employers can now apply DET EE001 and DET EE002 together, however there is no requirement to apply either Determination, employers still entitled to apply section CW 17 to determine the exempt nature of payments made to their employees.

Summarising both Determinations:

  • Furniture/Equipment – items not identified – safe harbour of up to $400 maximum – no evidence required to be kept (note if this option used, then you cannot use the next option as well);
     
  • Furniture/Equipment – specific items – 25% of cost (partly used for work), 75% of cost (mainly used for work), 100% of cost (exclusively work) – cost refers to either cost for LVA or depreciation loss otherwise – evidence must be retained of both cost and basis for % claimed;
     
  • Other Expenditure (non-telecommunication) – up to $15 per week – no evidence required;
     

Telecommunication Usage Plan Costs – up to $5 per week (safe harbour, no evidence) or same percentage basis above with same evidential requirements.

Second round of Covid-19 tax relief measures now law

Passed under urgency, the second round of tax relief measures are now effective immediately and include:

  • A tax loss carry-back regime;
     
  • Greater flexibility for IR to stretch deadlines and other procedural requirements for those taxpayers impacted by the effects of Covid-19;
     
  • Treat benefits and pensions paid to those presently stranded overseas identical to those paid to persons in NZ; and,
     
  • Introduce a small business cashflow loan scheme.

With respect to the tax loss carry-back regime, main components I dissected from the Bill’s commentary –

  • Applies to basically any taxpayer type – company, limited partnership, trust or individual (other than “qualifying individuals” – those with only reportable income sources);
     
  • Final estimation date (would usually be 7th May) for 2020 provisional tax now extended to earlier of date 2020 income tax return filed or due to be filed;
     
  • If you do over-estimate your potential loss carry-back, exposure to UOMI (naturally you will not be permitted to claim the new UOMI remission concessions in this regard);
     
  • Usual shareholding continuity rules apply (49% or 66% for groups) and imputation credit rules for tax refunds – so tax refunds generated by a loss carry-back will be withheld by IR to extent insufficient ICA balances;
     
  • Loss companies in corporate group must offset group profits within loss year first before applying the carry-back rules;
     
  • Shareholders who have paid 2020 provisional taxes on basis were expecting a shareholder salary allocation, also eligible to file a re-estimate of their final instalment and receive a refund of taxes already paid on basis that quantum of expected salary will no longer be received;
     
  • A ring-fenced residential property loss is not one eligible for loss carry-back; and,
     
  • IR will not use any tax refund generated via the tax loss carry-back regime to offset any other tax debts presently payable by the taxpayer.

A reminder that the present regime is a temporary one with application to the 2020 and 2021 income years, with a more permanent regime to apply to the 2022 income year to be included in a tax Bill to be introduced later this year. In this regard, Officials have already suggested that the permanent regime could have a two year carry-back period as opposed to the present one year rule.

In relation to the new small business cash flow loan scheme, commencing 12th May:

  • businesses employing up to 50 full-time staff may apply to IR for loans of $10,000 plus $1,800 per employee; and,
     
  • The loans:
    • carry no interest if repaid within 12 months;
    • require no repayments for two years; and,
    • accrue interest at the rate of 3% if repaid over five years.

With respect to the new loan regime, the legislation included:

  • Provisions to ensure that any business expenditure paid for with the loan funds, remains tax deductible should any part of the loan at some point be converted to a government grant; and,
     

Provisions to ensure that if a grant conversion does occur, the amount converted does not trigger debt forgiveness income under the financial arrangement rules.