During the COVID-19 pandemic many employees will be working from home. Employers may have, or may intend to, make payments to employees during this time.
The following questions and answers, existing Determination EE001 and new Determination EE002 provide guidance on when:
- such payments can be made to employees tax-free
- PAYE obligations arise
- the employer can claim income tax or GST deductions.
We acknowledge that many employers will not be in a financial position to make additional payments to employees during the COVID-19 pandemic. This guidance is not intended to suggest that employers should make such payments to employees.
Determination EE002 was issued to explain the allowances that could be paid for the first 6 months of the COVID-19 pandemic.
To provide certainty to employers and employees for the period beyond 17 September 2020, the Commissioner has now issued Determination EE003. This determination varies and extends Determination EE002 by removing all reference to the need for an employee to be working from home as a result of the COVID-19 pandemic, and extending the payment period of reimbursing payment through until 1 October 2021 to 31 March 2023.
I have decided to pay my employees, who are essential workers, additional amounts to recognise the additional risk that they are bearing and to recognise that they are working hard. Is that additional amount subject to tax?
Yes. The amount would form part of those employees’ income and be subject to PAYE. The payment would be deductible to the employer.
If you want your employee to have a certain amount in their hand after tax, for the taxable portion of any payment you make you will need to pay a larger amount to the employee to take into account the amount that will be deducted for tax (this is known as 'grossing up').
I have decided to pay an allowance to my employees to recognise the inconvenience of working from home for an extended period. Is that amount subject to tax?
Yes. This would be taxable as an amount derived by the employee in connection with their employment. If the payment is to cover costs incurred by the employee, refer to question 3.
The payment would be subject to PAYE and deductible to the employer.
For tax purposes, how should I treat a payment to employees to cover costs arising from working from home?
If all the requirements below are satisfied, then the payment may be treated as:
- tax-free (as exempt income) for the employee.
- not subject to PAYE.
- deductible for the employer.
The requirements are that:
- an employer makes a payment to an employee or on account of an employee.
- the payment be for expenditure or a loss incurred by the employee, or for expenditure or a loss that is likely to be incurred by the employee.
- the expenditure or loss be incurred by the employee in deriving their employment income and not be private or capital in nature (however, this capital limitation does not apply to an amount of depreciation loss).
- the payment is made because the employee is doing their job and the employee is deriving employment income from doing their job.
- the expenditure or loss be necessary in the performance of the employee’s job.
Costs could include:
- increased electricity and other utility costs arising from working from home.
- the cost of telecommunication tools and usage plans.
- the cost of acquiring home office furniture or equipment (see the Low-value asset note below).
Can I estimate the reimbursement amount I pay to my employees?
Yes. You may make a reasonable estimate of the amount of expenditure likely to be incurred by an employee or a group of employees. If you do this, you need to retain sufficient information about how you calculated and supported the estimate.
Is there a simple way of estimating my employee’s working from home costs?
Yes. You can apply Determinations EE001 and EE002.
Determination EE001 was issued by the Commissioner in December 2019. It provides guidance on arrangements where employees agree to use their own devices (for example, phones) and usage plans (including phone and internet) for their employment. EE001 sets out proportions of expenditure or loss that the Commissioner will accept as being exempt income of an employee. The proportions differ depending on whether a device or usage plan is used by the employee principally for employment. Where an employer pays a regular amount to an employee, the simplest option is to treat up to $5 per week of the amount paid as exempt income of the employee. See Determination EE001 for other options and details.
Determination EE002 is a new Determination issued as a temporary response to the COVID-19 pandemic. Determination EE002 applies to payments made for the period from 17 March 2020 to 17 September 2020. Determination EE002 applies to working from home costs generally. Under EE002, where an employer pays an employee an allowance for general working from home costs, up to $15 of the amount paid can be treated as exempt income of the employee.
You can apply EE002 in addition to EE001. You do not have to apply either of these Determinations. Instead, you can pay amounts based on your own reasonable estimates.
The options available under Determinations EE001 and EE002 are summarised in the following table. Note that the table does not detail all the requirements of the Determinations. The table must be read together with the Determinations themselves.
|What is the payment for?||How much is treated as exempt income?||When can I use this option?||What evidence do I need to keep?|
|Furniture or equipment||Up to $400 maximum ('safe harbour').||The safe harbour amount is the only amount paid for furniture and equipment.||No evidence required.|
|25% of cost of item.*||Item is used at least partly for job.||
|75% of cost of item.*||Item is used mainly for job.||
|100% of cost of item.*||Item is used exclusively for job.||
|Telecommunication usage plan costs||Up to $5 per week.||Plan used for job.||No evidence required.|
|25% of employee's costs.||Cost is at least partly for job.||
|75% of employee's costs.||Cost is mainly for job.||
|100% of employee's costs.
||Cost is exclusively for job.||
|Other expenditure||Up to $15 per week.||The $15 per week amount is the only amount paid for other expenditure.||No evidence required.|
* Assuming the item is a low-value asset. For items that are not low-value assets, the percentage is applied to the amount of depreciation loss.
Can I pay an allowance (that is, an estimated amount) to my employees for equipment and furniture that they may have purchased or intend to purchase?
Yes. You can make a reasonable estimate of the amount likely to have been spent or will be spent by an employee or a group of employees. This answer assumes that the employee will own the furniture or equipment. If you are paying for equipment that you will take ownership of, see question 10.
You will need to support your estimate with evidence. This could be based on standard equipment prices and a survey of your employees’ equipment needs (taking into account equipment they already have). If you have many employees, surveying a sample of employees will be sufficient. You must also estimate the extent to which the equipment will be used by employees for their employment.
If you would rather avoid the administrative cost of estimating this amount, you can use the safe harbour option provided in Determination EE002. Under the safe harbour option, an employer may treat up to $400 of an amount paid to an employee for furniture and equipment costs as exempt income.
These payments are not subject to PAYE and are deductible to you as the employer.
Note that you cannot claim back GST on the purchase of furniture and equipment if it belongs to your employee.
Are payments made to reimburse my employee for buying office furniture or equipment tax-free?
Part or all of a reimbursement paid to an employee for the cost of furniture or equipment may be paid tax-free. This answer assumes that the employee will own the furniture or equipment. If you are paying for equipment that you will take ownership of, see question 10.
The amount that you can reimburse tax-free is based on the depreciation loss that the employee could claim as a deduction on the assets (if the rule that normally prevents this did not apply). For low-value assets purchased by employees, the depreciation loss is based on the cost of the goods (see the note on low-value assets below). The amount that you can reimburse tax-free also depends on the extent to which the furniture and equipment is used by your employees for their employment.
Determination EE002 provides two options to help you to determine the amount that can be paid tax-free: the safe harbour option and the reimbursement option.
Under the safe harbour option, an employer may treat up to $400 of an amount paid to an employee for furniture and equipment costs as exempt income.
Under the reimbursement option, check the following scenarios.
- Where there is evidence that an asset will be used exclusively for employment purposes, 100% of the depreciation loss on the asset (the cost of the asset, in the case of a low-value asset) can be paid as exempt income of the employee.
- For an employee who uses an asset principally for their employment, an amount of up to 75% of the depreciation loss on the asset depreciation loss on the asset (the cost of the asset, in the case of a low-value asset) can be paid as exempt income of the employee.
- For an employee who does not use an asset principally for their employment, an amount of up to 25% of the depreciation loss on the asset (the cost of the asset, in the case of a low-value asset) can be paid as exempt income of the employee. See Determination EE002 for conditions and further details.
These payments are not subject to PAYE and are deductible to you as the employer. Note that you cannot claim a GST deduction for the purchase of furniture and equipment if it belongs to your employee.
Furniture or equipment assets are likely to be low-value assets. If so, the depreciation loss for the assets will be equal to their cost.
For an asset purchased before 17 March 2020 to be a low-value asset, it must have cost $500 or less. For an asset purchased on or after 17 March 2020 and before 17 March 2021 to be a low-value asset, it must have cost $5,000 or less. Note that on 17 March 2021, the low-value asset threshold will decrease to $1,000.
What if an employee works partly from home and partly outside of home?
Determinations EE001 and EE002 can be applied in full to an employee who works partly from home and partly outside of their home, provided the home-based activity is more than minor.
I have supplied my employee with business tools such as a laptop to use at home and they are permitted incidental private use. Is that subject to FBT?
Generally no. If the tools are supplied mainly for business use and the cost of the business tool to the employer (including the amount of any deduction for the cost of the business tool that the employer may make under section 20(3) of the Goods and Services Tax Act 1985) is no more than $5,000 including GST then the provision of that tool will not be subject to FBT.
My employee purchased home office equipment and I reimbursed them on the condition that the equipment would belong to the business. What are the tax implications of this?
It seems that you may have effectively purchased the asset from your employee, or they may have purchased the asset on your behalf. If so, the asset now belongs to you as the employer. As a result, the payment to the employee will not be income of the employee, it will be a capital receipt. For you, as the employer, the tax treatment of the business tool will be the same as if you bought it directly. For example, you will be able to claim an income tax deduction for depreciation loss and a GST deduction for the purchase in the usual way. The Commissioner accepts that a tax invoice in the name of the employee in such situations is sufficient for claiming back the GST paid: Tax Information Bulletin Vol 11, No 9 (October 1999) at 82.
As an employee, can I claim any deductions for the cost of setting up my home office?
No. An employee cannot deduct costs incurred in deriving income from employment.
There are a very limited number of expenses that can be claimed as deductions by individuals who are not in business. The expenses are limited to income tax return preparation fees, income protection insurance premiums, commission charged on interest and dividends, interest on money borrowed to buy shares and UOMI on late paid tax. You can learn more about types of individual expenses in the income tax section.
Can I backpay my employee a lump sum amount to catch up on payments of the $15 weekly payment - going back to the beginning of the period covered by the determination, ie 17 March 2020?
Is there a time limit for making payments?
Determination EE002 (which provides for the $15 weekly payment) applies to payments made for the period from 17 March 2020 to 17 September 2020. There is no stated time limit for when the payments must be made, but delay could make it harder to satisfy the requirements. The payments must be made for expenditure incurred "...as a result of the employee being required to work from home because of the COVID-19 pandemic". As usual with tax matters, the onus is on taxpayers to show that this requirement is met. The longer employers delay before making these payments, the more doubt arises as to whether this requirement is met. Also, note Determination EE002 does not apply to a payment made as part of a salary sacrifice arrangement.