Besides normal salaries and wages, you may make other payments to, or on behalf of, your workers. This section covers the most common of these and explains the tax treatment for each.
Allowances can be taxable or tax-free, and are usually paid as a result of:
- an industrial collective or agreement, or
- an agreement made between the employer and employees—commonly known as an in-house agreement
Taxable allowances must have PAYE deducted, along with the employee’s wages. If you do not do this, you could be liable for the PAYE that should have been deducted, as well as penalties. Tax-free allowances should be added to your employees’ net wages (wages after PAYE) when you pay them. Show the total amount of tax-free allowances paid in your Wage book. You do not need to apply for IRD approval to pay tax-free allowances to your employees. You can decide for yourself (using IRD guidelines) whether the allowance you want to pay will be tax-free or not.
To help you work this out IRD has set out the 3 types of allowances commonly paid.
- Benefit allowances
- Reimbursing allowances, and
- Travelling allowances.
IRD can also issue binding rulings on which allowances may be paid tax-free.
Benefit allowances are payments made in addition to salary or wages, which benefit the employee. A benefit allowance is taxed with the employee’s wages in the pay period it is paid.
Food or accommodation provided to employees may also be a benefit allowance. The taxable benefit is the difference between the market value of the benefit provided, and any amount the employee pays. Add the taxable value of the benefit to the employee’s wages each pay period, and deduct PAYE from the total.
- Market value of accommodation $150 per week
Less rent paid $ 90 per week
Value to be added to wages and taxed – $ 60 per week
If the employee paid no rent, the value to be taxed would be $150 per week.
Any allowance you pay to an employee instead of providing them with accommodation is fully taxable.
Reimbursing allowances are payments made to employees to compensate them for expenses they have had while doing their job—such as meal allowances, mileage allowances or tool money. Reimbursing allowances are not taxable. However, if the payment is more than the employment-related expenses, the excess is taxable.
A cash allowance paid to an employee for travel between home and work may be tax-free. It is tax-free if the amount paid reimburses an employee’s additional transport costs and one or more of the following special circumstances exist:
- the employee is working outside the normal hours of work (e.g, overtime, shift or weekend work)
- the employee needs to transport work-related tools and equipment (eg, the employee normally takes the bus to work but has to use some other type of transport to carry work-related gear)
- there is a temporary change in workplace
- the employee is travelling to fulfil an obligation for the employer
- there is some other condition of the employee’s job
- there is no adequate public transport system serving the workplace
For all the special circumstances above, except the lack of adequate public transport, the tax-free amount is the actual cost of travelling between home and work, less the employee’s usual transport costs.