News & Thinking
Deductibility of home office expenses and employee reimbursements
On 17 March, Government announced their relief package for the financial fallout from COVID-19. This included various business tax concessions.
- The re-introduction of tax depreciation on commercial and buildings at a diminishing value rate of 2% – this is designed to encourage continued investment in such buildings including hotels and motels;
- The ability to fully write off fixed assets with a book value of up to $5,000 (previously $500) for the 2020 income year and then reduce to $1,000 for 2021 onwards;
- Relief from interest charged on late payments of tax including provisional tax, GST and PAYE if you are struggling financially due to COVID-19;
- From 1 April 2020 you only need to pay provisional tax if your tax bill at the end of the year from your last return was $5,000 or more meaning fewer businesses will need to pay provisional tax instalments.
We highlight in this article other ways you could reduce your taxable income or obtain some tax relief.
Are you going to have to work from home in the coming weeks and months?
With the increasing requirements to self-isolate and possibly work from home you may be asking what, if any, of your home running costs you can offset against your income.
If you are required to work from home and you are an employee, you cannot deduct any home “office” expenditure against your salary and wage income. However, if you run your business from home or are a contractor working remotely, there are various home running costs you can deduct against your income. These taxpayers who use their homes as an “office” in conducting their business may be able to claims a tax deduction for some of the following outgoings of the home:
- A proportion of premises costs such as
- mortgage interest
- A fair and reasonable proportion of other costs such as
- repairs and maintenance
- home building and contents insurance
- home internet plan charges
- Depreciation on equipment you use – computer, printer, office furniture, air conditioning, security alarms, carpets and curtains
- Telephone costs – 50% of home landline rental costs and full deduction for overseas toll calls; full deduction for a dedicated work landline.
How do you work out what proportion to claim?
In relation to premises costs (mortgage interest, rates and rent) you may claim a proportion of the costs relating to the separate areas of your home used primarily for business purposes.
Broadly, provided that area is used 50% or more of the time for work purposes that area will represent the “business square meters” of your home. Multiply your premises costs by the proportion of business square meters to the total square meter area of your home.
In relation to utility costs, you can apply the simplified IRD square meter rate method as a compliance cost saving. The square meter rate is currently set at $41.70 and is multiplied by the business square meters calculated above. This average rate of $41.70 covers gas, electricity, phone, mobile, internet services and house and contents insurance costs. No other costs may be claimed if you are using this method.
Alternatively, you can decide the proportion of actual costs incurred that you claim but the result must be fair and reasonable and you need to keep detailed records of your utility costs. If you are not using the IRD square meter rate you may also claim depreciation on your business assets.
To be able to claim these costs, it’s not necessary to physically change the home to accommodate the business or set aside any specific area. However, it’s important to be able to demonstrate a legitimate relationship between the costs being claimed and the business venture.
If GST-registered you may also be able to claim the GST on a proportion of your invoices for services such as power, telephone, internet, water, rates etc. in your GST returns. Adjustments for private use can be complicated so be sure to consult with your tax advisor or us for clarification
A word of caution
Finally, a word of caution on where the home and business are owned by separate entities. For example where a trust owns the home and say your company owns the business, you should ensure the correct party is claiming the business deductions for home office expenditure.
What can employers pay to employees to alleviate the costs of working from home?
If your employees incur expenditure on home office expenses when working from home and are reimbursed by the employer, that reimbursement is exempt to the employee, provided your employee would have been entitled to a tax deduction for that expense were they not an employee.
Also if you pay a cost on behalf of your employee that they incur in connection with their employment or pay them an allowance to reimburse them for such a cost, that payment may be exempt to your employee, provided your employee would have been entitled to a tax deduction for that expense were they not an employee. Three questions to be answered are:
- Is your employee incurring a cost because he or she is performing an obligation required by their employment or service?
- Does the employee earn income through performing that obligation? and
- Is the expenditure necessary for the performance of the obligations?
If the answer is yes then they can be reimbursed or paid a reasonable allowance to cover such costs on a tax free basis, provided the payment is not a substitute for salary and wages. These reimbursements or allowances should be tax deductible to the employer.
If you reimburse your employees for expenses incurred for his or her benefit (i.e. for private or domestic purposes) the amount would form part of their salary and wages and would not be exempt.
A recent determination from Inland Revenue has provided guidance around the proportion of phone costs and usage plans that can be reimbursed on an exempt basis depending on whether the phone is to be used predominantly for work or private use.
These reimbursing allowances may also be paid to shareholder-employees of companies with five or fewer shareholders where the employee does not receive a salary as such.
Payment of reimbursing allowances could cover the costs of home tools required to be used such as computers, printers and home internet plans where the employee is required to acquire these items in order to work from home, where work from an office is not possible. An allowance or reimbursement for the cost of consumables such as paper, printer ink, some reasonable electricity costs could also be provided.
As an employer, you may wish to put in place a policy document setting out what costs would be reimbursed or covered by an allowance, what the allowance would be and what supporting documentation is required.
For information on tax relief measures for COVID-19, read our article here.
If you’d like some advice around your specific circumstances please contact us.