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How to tax a benefit allowance

Definition

Benefit allowances are the provision of the benefit or payments made in addition to salary or wages that benefit the employee. Examples include:

  • food allowances
  • clothing allowances
  • accommodation allowances
  • farm or cottage board.

What the taxable value of the benefit is

Unless it is exempted the taxable value of the benefit is the difference between the market value of the benefit provided, and any amount the employee actually pays.

Find out more about exempted benefits

Note

If you are providing free board you need to take into account what is being supplied when calculating the taxable value. For example meals, own room, power and phone.

How it is taxed

The taxable value of the benefit is added to the employee's wages each pay period it's paid in and PAYE is deducted from the total. Include this in the gross earnings when you complete your Employer monthly schedule (IR348).

Example

Regan works on a farm with a farm house on the property. His employer lets him rent the farm house for less than the market value. Regan will have to connect and pay for any of his own utilities, eg, power, phone, internet, etc.

Market value of accommodation $150 per week
Rent paid by Regan $100 per week
Taxable value (to be added to wages and taxed) $50 per week

If Regan is paid a weekly rate of $500 each week, the calculation is:

Weekly gross $500
Taxable value of accommodation $50
Total gross $550
PAYE on $550 $85.37
Regan would be paid the following:
Weekly gross $550
Less taxable value of the accommodation $50
less PAYE $85.37
Net amount paid to the employee $414.63

When completing your Employer monthly schedule (IR348) Regan's gross will be listed as $550 (inclusive of the taxable value of the accommodation).

 

Note

In the above calculation any child support or student loan deductions would be assessed on the gross amount of $550. KiwiSaver would be calculated on the gross of $500 as KiwiSaver isn't calculated on accommodation allowance. See our "KiwiSaver for employers" page for more information.

Expenditure on account of an employee

Previously whether an accommodation, meal or clothing allowance was taxable was also dependent on how it was paid, that is:

  • as an allowance
  • employer provided, or
  • reimbursed.

When an employer reimburses or otherwise meets a specific employee expense, this payment is known as "expenditure on account of an employee" and could be considered non-taxable.

This definition has been amended so that any accommodation or food, regardless of whether they're paid as an allowance, employer provided or reimbursed, will now come under their own rules and can no longer be treated as "expenditure on account of an employee".

Find out more about benefit allowances (accommodation, food and clothing)

Find out more about the changes to benefit allowances in the Special report on employee allowances on our Tax Policy website