If you supply telecommunications tools to your New Zealand employees and pay for Internet plans you should be mindful of an announcement by Inland Revenue with regard to income tax deductibility of phones and phone plans.
Unlike in Australia, there is no opportunity to salary sacrifice in New Zealand.
Reimbursements or allowances paid to New Zealand employees for the use of their telecommunication tools and usage plans are taxable and subject to PAYE withholdings unless they are specifically exempt.
New Zealand’s Income Tax Act only allows reimbursements or allowances to be paid tax-free in certain circumstances. It’s very important that if you are making payment to a New Zealand employee or paying them an allowance, and you are not taxing that payment, that you ensure you have documentation on hand to support your claim showing a real correlation between incurring that expenditure and the expenditure earning your New Zealand company income.
If you are paying allowances you should really contact us as the rules are very different between New Zealand and Australia. If you are paying based on an estimate of the expenditure you need to keep sufficient documentation detailing how the estimate was determined in order to substantiate the amount paid.
In an effort to reduce compliance costs on New Zealand businesses Inland Revenue are providing options of applying certain percentages to make an allocation between business and private use for usage plans that can apply to mobile phones, iPads, laptops, etc.
The new rules apply to 3 different types of situations. There is “Class A” where the use of the device and the associated plan is principally for business use, “Class B” which is where the devices are principally used for private purposes and a third class known as a “De Minimus Class” where the employer contribution is no more than $5 per week for each employee.
Class A covers situations where the employee provides their own tools and usage plan and the employee therefore incurs the cost in the first instance or the employer makes a reimbursing allowance based on a reasonable estimate of the likely expenditure. Although the plan is used principally for the New Zealand business there is an element of private benefit that can be expected.
Class B covers situations where the employee provides the tools and the plan which they are reimbursed for, or an allowance is paid based on a reasonable estimate of the likely expenditure but it is accepted that the plan is principally for the benefit of the employee.
Irrespective of the class, you must satisfy all of the following:
- an employer enters into an arrangement with the employee whereby the employee will provide their own telecommunications tools and usage plan, or the arrangement involves the employee using their own usage plan, and
- the employee incurs the cost of the telecommunications tools and the usage plan or the cost of the usage plan alone and there is reimbursement, or
- a reimbursing allowance represents a reasonable estimate of the likely expenditure to be incurred by the employee.
In the case of Class A, employers can treat 75% of the total bill as exempt income and therefore tax-free. Therefore, if the employer pays 75% of the bill that will be regarded as tax-exempt. If the employer pays the entire bill then 25% of the payment will be subject to PAYE withholdings in the hands of the employee.
In the case of Class B, employers can treat 25% of the bill as a reimbursing allowance. If the employer pays the whole account then 75% of that will need to be included as a taxable allowance and subject to PAYE withholdings.
With the De Minimus Class, an employer can make a payment of up to NZ$5 per week, amounting to no more than NZ$265 per annum, per employee, as a reimbursement and therefore tax-free. The employee must still be using the device for the benefit of the employer. If the benefit is solely for the employee then the whole amount will be taxable.
You can give us a call on 1300 791 600 for a quick chat.
The information in this article is indicative of NZ tax rules and changes and not intended to be complete for all intents or purposes and does not constitute advice. It is recommended that you obtain professional advice, suited to your particular circumstances, from us before acting on anything you read.