Crown Service Enterprise ( CSE ) Tax Policies. GST, FBT, PAYE and Withholding Tax

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1 Crown Service Enterprise ( CSE ) Tax Policies GST, FBT, PAYE and Withholding Tax Last updated: 8 February 2018 Disclaimer: This document is intended only as a general guide, and should not be used or relied upon as a substitute for specific professional advice. No liability is accepted for loss or damage incurred by persons who rely on this document. Tax Policies - GST FBT and PAYE

2 CONTENTS 1 Introduction Goods and Services Tax Overview GST policy Revenue from the Crown Fee income Services provided overseas Income in advance Fees charged for seconded staff Insurance claim proceeds Equity transactions Capital charge Tax invoices Credit notes Bad debts Expenditure accruals Prepayments Koha payments Employee expenditure reimbursements Allowances paid to employees Overseas travel costs Imported goods Imported services Entertainment expenditure adjustment Employee contributions Petrol and gift vouchers Tax Policies - GST FBT and PAYE

3 2.25 Lease payments Australian GST Fringe Benefit Tax Overview FBT policy Employee contributions and salary sacrifices Motor vehicles Low-interest loans Life, health and accident insurance Overseas superannuation funds GST on fringe benefits Exemption for business tools Health and safety exemption On-premises exemption Exemption for minor benefits Car parks Fixed assets sold or given to employees Gifts to staff Clothing Subscriptions and membership fees Private travel Course fees Entertainment expenditure Group discounts Airpoints Accommodation PAYE and Withholding Tax...19 Tax Policies - GST FBT and PAYE

4 4.1 Overview PAYE and withholding tax policy Distinction between employees and independent contractors Accommodation benefits Travel allowances Mileage allowances Reimbursements for relocation costs Reimbursements for capital items Redundancy and exit inducement payments Payments for hurt and humiliation Eye care payments Child care reimbursements Course fee reimbursements Reimbursements for subscriptions and membership fees Clothing allowances and reimbursements Reimbursement of car parking expenses Home telephone and internet costs Superannuation fund contributions Payments to contractors Payments to members of boards and committees Payments to guest speakers and presenters Koha payments Payments to non-resident contractors Certificates of exemption Tax Policies - GST FBT and PAYE

5 1 Introduction Although CSE is not subject to income tax, it has the same obligations as other businesses and employers to correctly account for GST, FBT, PAYE and withholding tax. It is also subject to the same potentially significant penalty and interest charges for non-compliance. This document provides an overview of each of these taxes, and guidance regarding tax treatment of specific items. Further information regarding these taxes is available on the IRD website. The policies set out below specifically deal with the taxes and issues that are considered to be applicable to CSE. 2 Goods and Services Tax 2.1 Overview GST is charged on the supply of goods and services made by a registered person in the course or furtherance of a taxable activity. GST is imposed on imported goods, and in some cases, it is also imposed on imported services. GST is generally charged at 15%. However, zero rated supplies (e.g. exported goods and services, land transactions, overseas travel) are taxed at 0%, and exempt supplies (e.g. financial services, residential accommodation) are not subject to GST. Prior to 1 October 2010, the rate of GST was 12.5%. A registered person must account for any GST charged but may claim a deduction for GST paid on inputs used to make taxable supplies (including zero-rated supplies). An input tax deduction cannot be claimed on expenses or purchases used to make exempt supplies. Where expenses or purchases are used to make both taxable and non-taxable supplies, an input tax deduction can only be claimed for the portion relating to taxable supplies. In most cases, an input tax deduction cannot be claimed unless it is supported by a valid tax invoice. Public authorities (such as CSE) are required to account for GST on an invoice basis. Under this basis, GST should be generally be accounted for in the period in which an invoice is issued or any payment is received, whichever is earlier. The standard taxable period for GST purposes is two months. However, registered persons with annual taxable supplies of more than $24m are required to file GST returns on a monthly basis. 2.2 GST policy CSE will comply fully with GST legislation. This means that CSE will: Tax Policies - GST FBT and PAYE

6 return all GST on taxable supplies of goods and services and claim all available GST input tax credits; file GST returns in a complete and timely fashion; ensure all GST payments are made by the due date; retain all accounting records for seven years. 2.3 Revenue from the Crown For GST purposes, a public authority (such as CSE) is deemed to supply goods and services where any amount is brought to charge as revenue from the Crown for a supply of outputs. The supply is deemed to take place in the period in which the income is brought to charge. As a result, CSE must account for GST on revenue from the Crown in the period that the funding is recognised as income in monthly financial statements. For example, Crown funding recognised as income in the financial statements for the month ended 31 May 2016 should be included in the GST return for the period ended 31 May CSE will account for GST on revenue from the Crown in the period in which the funding is recognised as income in the monthly financial statements. 2.4 Fee income Under the invoice basis, a registered person is required to account for GST on any supplies that are made or deemed to be made during the taxable period. In general, a supply is deemed to take place in the period in which an invoice is issued or any payment is received, whichever is earlier. As CSE does not receive payments in advance of invoice, GST on fee income should be recognised in the period in which an invoice is issued. CSE will account for GST on fee income in the period in which an invoice is issued. 2.5 Services provided overseas Services performed overseas may be zero-rated for GST purposes (i.e. charged with GST at 0%). Services provided to non-residents may also be zero-rated, provided that the recipient of the supply is outside of New Zealand. CSE will charge GST at 0% on services provided overseas, where applicable. 2.6 Income in advance GST on fee income should generally be recognised when an invoice is issued, irrespective of whether the services have been provided. As a result, any accounting adjustments for income in advance should exclude GST. CSE will ensure that accounting adjustments for income in advance exclude GST. Tax Policies - GST FBT and PAYE

7 2.7 Fees charged for seconded staff Where an employee is seconded to another organisation, the employer would usually continue to pay the employee through their payroll system, and issue an invoice the other organisation for the salary costs of the seconded employee. A registered person is generally required to account for GST on all supplies of goods and services (other than exempt or zero-rated supplies). A charge for the use of a seconded employee is therefore subject to GST, even if it only covers the cost of the employee s salary. CSE will account for GST on charges for seconded staff. 2.8 Insurance claim proceeds In general, insurance proceeds constitute a deemed supply for GST purposes, and are therefore subject to GST. However, in general, this only applies if GST was charged and claimed on the insurance premiums. As a result, GST would not apply to the proceeds from a life insurance policy. In some cases, GST would also not apply to insurance proceeds received from a non-resident insurer. The GST component of the insurance receipt would generally be specified on the remittance advice. CSE will return GST on insurance claim proceeds, where applicable. 2.9 Equity transactions Equity transactions, such as capital contributions and capital repayments, are not subject to GST. CSE will not account for GST on equity transactions Capital charge The capital charge paid to the Crown is a financing charge, and is therefore not subject to GST. CSE will not claim GST on the capital charge Tax invoices In general, a registered person is not permitted to claim an input tax deduction unless a valid tax invoice is held at the time the return is filed. A valid tax invoice must contain the words tax invoice, the name and registration number of the supplier, the name and address of the recipient, the date the invoice was issued, and a description of the goods and services supplied. It must also contain either: the GST-exclusive amount, the amount of GST and the GST-inclusive amount, or Tax Policies - GST FBT and PAYE

8 the total consideration (including GST) and a statement that it includes GST. For supplies under $1,000, a simplified tax invoice (excluding the name and address of the recipient) may be used. Where the consideration for a supply does not exceed $50, a tax invoice is not required. If CSE does not receive a valid tax invoice, one may be requested from the supplier. The supplier must comply with such a request within 28 days. A tax invoice may be issued in electronic form. All the minimum requirements outlined above must still be satisfied. All dollar amounts should be expressed in NZ dollars. If the price of a supply is set in a foreign currency, the NZ dollar equivalent as at the time of supply is to be included in the tax invoice. CSE will not claim an input tax deduction for supplies exceeding $50 unless a valid tax invoice is held Credit notes If the price of a supply is reduced after a tax invoice is issued, CSE may claim a deduction for the GST applicable to the price adjustment, provided that a valid credit note is issued. A credit note must contain the same particulars as a tax invoice (see above). However, the words tax invoice would be replaced by the words credit note. CSE will issue credit notes that meet the above requirements Bad debts A person registered on the invoice basis may claim an input tax deduction for any bad debts written off. The deduction effectively recovers the GST that has previously been recognised on the sale. However, the debt must actually be written off before a deduction can be claimed. An input tax deduction is not permitted for doubtful debts. When a person subsequently recovers all or part of the bad debt, GST is payable on the amount of the recovery. CSE will claim an input tax deduction for any bad debts written off Expenditure accruals CSE is entitled to claim an input tax deduction for any invoices dated in period. However, an input tax deduction cannot be claimed for expenditure accrued at the end of the period, if the invoices will be dated after period end. As a result, expenditure accruals should generally be recognised net of GST. CSE will not claim GST on expenditure accruals. Tax Policies - GST FBT and PAYE

9 2.15 Prepayments GST on expenses should generally be claimed in the period in which the invoice is dated, regardless of whether all or part of the expense is regarded as prepaid. As a result, any accounting adjustments for prepaid expenditure should exclude GST. CSE will ensure that accounting adjustments for prepaid expenditure exclude GST Koha payments As with donations, genuine koha payments are not subject to GST, as the payment does not constitute consideration for a supply of goods and services. Even if the payment relates to services provided, it is unlikely that a valid tax invoice would be issued. As a result, CSE would not be able to claim an input tax deduction in relation to these payments. CSE will not claim GST on koha payments unless it receives a valid tax invoice Employee expenditure reimbursements In general, an employer is permitted to claim an input tax deduction in relation to a reimbursement paid to an employee for business related expenses, provided that the invoicing requirements are satisfied. For example, CSE would be able to claim GST in relation to the reimbursement of professional membership fees, provided that a valid tax invoice supports the reimbursement request. GST cannot be claimed on reimbursements for private expenditure (e.g. eye care payments). CSE will claim GST on the reimbursement of business related expenses, provided that the invoicing requirements are satisfied Allowances paid to employees The IRD does not allow an input tax deduction in relation to allowances paid to the employees as there is an insufficient connection between the payments made by the employer and the expenditure incurred by the employee. For example, CSE should not claim GST on travel allowances or mileage allowances. CSE will not claim GST on allowances paid to employees Overseas travel costs Overseas travel costs do not include GST because either the supply takes place outside New Zealand or the supply is zero-rated for GST purposes. As a result, CSE cannot claim an input tax deduction in relation to overseas travel expenditure. Invoices from local travel agents should specifically mention the amount of GST included in the travel charges, if any. CSE will not claim GST on overseas travel costs. Tax Policies - GST FBT and PAYE

10 2.20 Imported goods Where goods are imported into New Zealand, the New Zealand Customs Service will impose GST at the rate of 15% (along with any other importation fees). CSE can claim GST input tax in respect of these goods where a valid tax invoice is held. A Customs import entry form is regarded as a valid tax invoice. GST should not be claimed on the payment to the overseas supplier. CSE will claim GST on imported goods when it holds a valid tax invoice from Customs Imported services GST must be returned on imported services acquired by an organisation that makes less than 95% taxable supplies (e.g. 20% exempt supplies and 80% taxable supplies). However, in general, this is only an issue for organisations that cannot claim a full input tax deduction on the acquired services, such as financial institutions. As CSE can claim an input tax deduction for all of the GST it is charged, it should not return or claim GST on imported services. CSE will not account for GST on imported services Entertainment expenditure adjustment For income tax purposes, certain entertainment expenditure (e.g. client lunches, Friday drinks, Christmas parties) is only 50% deductible. A registered person is deemed to have made a supply of the entertainment for the amount of the deduction disallowed. Consequently, most taxpayers are required to account for GST on non-deductible entertainment expenditure. However, as CSE is exempt from income tax as a public authority, it has no disallowed deductions for entertainment expenditure, and is therefore not required to make any GST adjustment for entertainment expenditure. CSE will not make any GST adjustment for entertainment expenditure Employee contributions Where employees contribute towards the cost of a private benefits provided by CSE (e.g. private use of cell phones), the contribution received from the employee is generally subject to GST. CSE will return GST on employee contributions Petrol and gift vouchers GST on vouchers may be recognised when the voucher is issued or when the voucher is redeemed. If the invoice for the voucher states that there is no GST on the transaction, it means that the supplier accounts for GST when the voucher is redeemed, rather Tax Policies - GST FBT and PAYE

11 than when it is issued. In this situation, an input tax deduction cannot be claimed for the purchase of the voucher. CSE will claim input tax on the purchase of vouchers based on the GST component specified on the invoice Lease payments A lease is regarded as an agreement for hire for GST purposes. As a result, GST is claimed on each instalment, regardless of whether it is considered to be an operating lease or a finance lease. In addition, if the total lease payments exceed the cost of the asset, GST only applies to the non-interest element of the consideration (i.e. the principal component). The GST component of each lease payment is generally specified in the lease agreement. CSE will claim GST on lease payments based on the GST component specified in the lease agreement Australian GST Any GST charged by other countries on expenses such as meals, accommodation or conferences fees cannot be claimed as an input tax deduction in a New Zealand GST return. CSE will not claim Australian GST as an input tax deduction. 3 Fringe Benefit Tax 3.1 Overview FBT is a tax paid on the value of fringe benefits provided to employees. Fringe benefits are non-cash benefits provided to employees in addition to their normal cash salary. Common examples include motor vehicles, life and medical insurance, private travel and gifts. For FBT purposes, an employee includes any individual that receives payments subject to PAYE or withholding tax. This could include a board member or committee member. However it would generally not include a contractor or a staff member seconded from another organisation. Benefits provided to a person associated with an employee (e.g. a spouse) are deemed to be provided to the employee. Benefits will only be subject to FBT where the employer is invoiced for the benefit. If the employee is invoiced, and the employer pays the invoice or reimburses the employee, the benefit is subject to PAYE. The value of a fringe benefit is generally based on the GST inclusive cost of the good or services to the employer, less any contributions received from the employee. However, in some cases (e.g. fixed assets sold to staff), the market value of the goods or services must be used to value the fringe benefit. Tax Policies - GST FBT and PAYE

12 In general, FBT applies to any motor vehicles that are taken home at night by employees, other than work related vehicles. The quarterly value of a motor vehicle fringe benefit is based on 5% of the GST exclusive cost of the vehicle. The FBT regime includes exemptions for private use of business tools (e.g. cell phones), benefits enjoyed on the premises (e.g. car parks), benefits arising from health and safety obligations (e.g. eye tests), and minor unclassified benefits (e.g. small gifts). The standard rate of FBT is based on the top marginal tax rate for individuals. At present, the standard rate of FBT is 49.25%. Prior to 1 October 2010, the rate was 61%. Employers have the option of paying FBT at a lower rate, and completing an alternate rate (formerly multi-rate) calculation in the fourth quarter. Tax savings can be achieved by using the alternate rate calculation if benefits are attributed to individuals on lower marginal tax rates, or if the employer provides non-attributed benefits. The FBT return also includes an adjustment for GST on fringe benefits. Essentially, this adjustment pays back the GST claimed on the fringe benefits provided. The adjustment is calculated based on 3/23 of the value of the fringe benefits provided. 3.2 FBT policy CSE will comply fully with tax legislation applicable to FBT. This means CSE will: identify and record all fringe benefits it provides; file any FBT returns in a complete and timely fashion; ensure all FBT payments are made by the due date; retain all accounting records for seven years. 3.3 Employee contributions and salary sacrifices The taxable value of any fringe benefit provided by CSE will be reduced by any amount paid by an employee for the use or enjoyment of that benefit. If contributions from the employee equal the cost to the employer, the taxable value of the benefit will be nil. It is important to note that employee contributions are different to salary sacrifices. An employee may choose to sacrifice part of their cash salary to receive a fringe benefit, such as a car. This is not regarded as an employee contribution. A salary sacrifice reduces the employee s cash salary and therefore reduces the amount subject to PAYE. However, in most cases, it will increase the employer s FBT liability by a similar amount. An employee contributions is an amount charged to the employee or possibly deducted from their after tax salary. Common examples of employee contributions include charges for private use of vehicles or cell phones Tax Policies - GST FBT and PAYE

13 CSE will reduce the taxable value of a fringe benefit by any amount paid by the employee for that benefit. 3.4 Motor vehicles In general, FBT applies when an employer makes a motor vehicle available to an employee for their private use. For FBT purposes, private use specifically includes travel between home and work. As a result, most vehicles that are taken home at night by employees would be subject to FBT. However, FBT may not apply to travel between home and work if the vehicle is a work related vehicle or the employee uses their home as a work base. Calculating the value of the motor vehicle fringe benefit The quarterly value of a motor vehicle fringe benefit is calculated as follows: Y x Z 90 Y is the lesser of: The number of days in the quarter on which the vehicle was available for private use reduced by the number of days on which the vehicle was exempt as a work-related vehicle (see below), or 90 days. Z is calculated using 5% of the GST inclusive cost price of the motor vehicle. The cost of the vehicle for FBT purposes includes the purchase price, the initial registration and licence plate fees, and the cost of accessories (other than separately depreciable assets). Where the vehicle has been acquired for no cost or the cost cannot be determined, the cost price will be treated as being the same as the market value of the vehicle. The basis for calculating FBT on vehicles applies regardless of whether the vehicle is owned, leased or rented by the employer. In relation to leased vehicles, the cost of the vehicle for FBT purposes would generally be specified in the lease agreement. Employers also have the option of calculating Z based on 9% of the GST inclusive tax book value of the vehicles. However, in general, this option only results in FBT savings if the employer owns the vehicle for more than five years. Employers may qualify for certain daily exemptions, which reduce the number of FBT liable days. This includes emergency calls, 24-hour business travel, and other times when the vehicle is unavailable, such as breakdowns (see below). Days available for private use The calculation of the number of days available for private use should exclude the following: Tax Policies - GST FBT and PAYE

14 Any day when the employee uses the vehicle on business travel, if the duration of the trip exceeds 24 hours. This would include using the vehicle for travel to or from the airport. The day the employee leaves and the day the employee returns should be counted as exempt days. Any day when the employee makes an emergency call from home. This is defined as an after-hours visit made by an employee from home in the course of employment to provide essential or emergency services. Attending a meeting after hours would not qualify as an emergency call. Any full day when the vehicle is not available for private use. This would include the situation where the vehicle is being repaired, or where the employee is away on business travel and the vehicle is parked at the airport or at the office. Any full day when private use of the vehicle is not permitted. For example, if private use was restricted to travel between home and work, private use would not be permitted on weekends or public holidays. An FBT day is a 24-hour period starting at midnight, unless the employer elects that the day starts from another time. Work related vehicles Work related vehicles are generally exempt from FBT. The definition of a work related vehicle refers to a vehicle that is not principally designed for the carriage of passengers, such as a van, a utility, and a station wagon or hatchback with the rear seat removed or fixed down. The vehicle must also have the employers name or logo affixed to the exterior. In general, private use of the vehicle must be restricted to travel between home and work, in the course of and as a condition of employment. CSE will calculate the value of a motor vehicle benefit as indicated above. 3.5 Low-interest loans The provision of loans to employees for low or nil interest is subject to FBT. The taxable value of a low-interest loan is the difference between the interest calculated on the daily balance of the loan for the quarter using the IRD-prescribed interest rate, and the interest actually charged to the employee on that loan for the quarter. The IRD-prescribed interest rate is reviewed periodically in light of market rates, and the applicable rates are available on the IRD website. An advance of salary and wages is not a fringe benefit if the advance does not exceed $2,000 and the advance is not a requirement under the contract of employment. CSE will account for FBT on low-interest loans. Tax Policies - GST FBT and PAYE

15 3.6 Life, health and accident insurance In general, FBT applies to any life, health or accident insurance taken out by the employer for the benefit of the employee or his/her family. The value of the benefit is based on the insurance premiums paid by the employer. Income protection insurance is not subject to FBT if the premiums would have been deductible to the employee. CSE will account for FBT on insurance benefits provided to employees. 3.7 Overseas superannuation funds Most contributions to superannuation funds are subject to employer superannuation contribution tax. However, contributions to overseas superannuation funds are generally subject to FBT. CSE will account for FBT on contributions to overseas superannuation funds, where applicable. 3.8 GST on fringe benefits A fringe benefit provided by a registered person is deemed to be a supply of goods and services. As a result, a registered person is generally required to return GST based on 3/23 of the value of fringe benefits provided to staff. Prior to 1 October, the calculation was based on 1/9 of the fringe benefit value. However, GST does not apply if the fringe benefit arose by virtue of an exempt supply (e.g. life insurance) or zero-rated supply (e.g. international travel), or if GST cannot be claimed on the fringe benefit (e.g. vouchers). Essentially, this adjustment pays back the GST claimed on the fringe benefits provided. The adjustment for GST on fringe benefits should be charged to FBT expense, rather than the input tax account. The disclosure and payment of GST on the value of fringe benefits forms part of the FBT return. CSE will account for GST on the provision of fringe benefits, where applicable. The adjustment for GST on fringe benefits will be charged to FBT expense. 3.9 Exemption for business tools Benefits arising from the private use of business tools (such as cell phones and laptop computers) are not subject to FBT, provided that the tools are provided primarily for business purposes. The cost of each business tool must not exceed $5,000. CSE will not account for FBT on the private use of cell phones, laptops or other business tools. Tax Policies - GST FBT and PAYE

16 3.10 Health and safety exemption Benefits arising from an employer s health and safety obligations are not subject to FBT. To qualify for the exemption the benefits must be aimed at eliminating work place hazards. This exemption would apply to eye tests, health checks, flu vaccinations, and employee counselling. CSE will not account for FBT on health and safety benefits On-premises exemption Benefits that are provided on the premises of the employer are excluded from FBT. To be eligible for the exemption, the benefits must also be used or enjoyed by the employee on the premises. This exemption would generally apply to car parks that are owned or leased by the employer. It could also apply to an on-site gym or crèche. CSE will not account for FBT on benefits provided on the premises Exemption for minor benefits For most employers, minor unclassified benefits provided to staff are generally exempt from FBT. FBT is only payable if the total value of minor benefits provided to an employee in the quarter is more than $300, or the total value of all unclassified benefits provided to all employees in the last four quarters is more than $22,500. Once either of these limits is exceeded, the full value of the benefit is subject to FBT. This exemption does not apply to classified benefits such as motor vehicles, lowinterest loans or insurance. However, it would apply to benefits, such as gifts, that are not covered by the other exemptions. Note that the disposal of a vehicle to an employee for below market value is an unclassified benefit. CSE will apply the exemption for minor benefits Car parks Car parks provided to employees are not subject to FBT if they fall under the exemption for benefits provided on the employer s premises. In general, this requires to employer to have substantially exclusive rights to use the parking space. Car parks on land owned by the employer would be exempt from FBT. In most cases, leased parking spaces would also be exempt from FBT. However, licensed car parks are more likely to be subject to FBT, unless the agreement provides for an allocated parking space. CSE will only account for FBT on car parks provided employees where the onpremises exemption does not apply. Tax Policies - GST FBT and PAYE

17 3.14 Fixed assets sold or given to employees Where a fixed asset (such as a motor vehicle) is sold to an employee at less than market value, the difference between the market value and the amount paid by the employee will be subject to FBT. This may occur if the employee has the option of by an asset at book value, rather than market value. It could also occur when an employee is given certain assets (such as their company car) as part of a severance package. CSE will account for FBT on any fixed assets sold or given to employees at less than market value Gifts to staff Non-cash gifts provided to staff (e.g. movie tickets, gift vouchers) are subject to FBT. However, the exemption for minor benefits may eliminate any FBT liability. CSE will account for FBT in relation to gifts provided to staff, where applicable Clothing In general, the provision of clothing is subject to FBT. However, if the clothing can be regarded as protective clothing or distinctive work clothing the benefit is not subject to FBT. The definition of distinctive work clothing refers to any clothing that forms part of a uniform. The exemption for minor benefits may eliminate any FBT liability. CSE will account for FBT on clothing provided to employees, where applicable Subscriptions and membership fees Professional subscriptions are not subject FBT, provided that membership is related to employment duties. The provision of Koru Club membership is not subject to FBT, provided that the employee is required to travel for work purposes. Non-work related subscriptions and membership fees (e.g. gym fees) are subject FBT. However, the exemption for minor benefits may eliminate any FBT liability. CSE will not account for FBT on work related subscriptions and membership fees Private travel Private travel benefits provided to staff are subject to FBT. This would include the cost of travel for private purposes, and the cost of any private excursions or extended stays while away on business travel. It could also include the cost of an accompanying spouse on a business trip. CSE will account for FBT on any private travel benefits. Tax Policies - GST FBT and PAYE

18 3.19 Course fees In general, course fees will not subject to FBT provided that the course is work-related or the course is held on the employer s premises. Course fees paid for an employee as part of a severance package cannot be regarded as work-related, as there is no benefit to the employer. These payments should be taxed. CSE will not account for FBT on any courses that are work related or are held on the premises Entertainment expenditure In general, FBT only applies to entertainment expenditure (e.g. food and beverages) if the employee can enjoy the benefit at a time of their choosing and not as a consequence of their employment duties. For example, restaurant vouchers given to employees would be subject to FBT. However, the cost of morning teas, Friday drinks, Christmas lunches and other staff functions would not be subject FBT. The exemption for minor benefits may eliminate any FBT liability on entertainment benefits. CSE will not account for FBT on entertainment expenditure at staff functions Group discounts Discounts provided to a group of employees by a non-associated third party (e.g. Southern Cross) are generally not subject to FBT. However, if the discount involved a cost to the employer, the benefit would be subject to FBT. CSE will not account for FBT on group discounts received by employees Airpoints An employer is not subject to FBT on Airpoints Dollars received by an employee as a result of work-related travel. CSE will not account for FBT on Airpoints Dollars received by employees Accommodation Although free or discounted accommodation would normally be regarded as a noncash benefit, accommodation benefits are generally subject to PAYE, rather than FBT. Further information regarding PAYE on accommodation is set out below in the PAYE section. CSE will not account for FBT on accommodation benefits. Tax Policies - GST FBT and PAYE

19 4 PAYE and Withholding Tax 4.1 Overview In general, an employer is required to account for PAYE in relation to all payments made to employees, other than reimbursements for work-related expenses and genuine payments for hurt and humiliation. Accommodation benefits provided to employees may also be subject to PAYE. Reimbursements and allowances in relation to expenses incurred in deriving employment income are treated as exempt income (i.e. tax free). Employers are permitted to calculate a tax-free allowance based on a fair and reasonable estimate of work-related expenditure likely to be incurred by an employee. Allowances that exceed a fair and reasonable amount are partially taxable. Reimbursements or allowances in relation to private expenditure or capital expenditure (e.g. fixed assets) are subject to PAYE. Allowances in relation to extra effort, additional responsibilities or unpleasant tasks are also taxable. Employers may also be required to deduct tax from payments made to contractors and from superannuation contributions. 4.2 PAYE and withholding tax policy CSE will comply with tax legislation applicable to PAYE and withholding tax. Consequently CSE will: ensure that tax is deducted and accounted for, where applicable; ensure that all payroll returns are filed in a complete and timely manner; ensure that all payments are made by the due date; retain all accounting records for seven years. 4.3 Distinction between employees and independent contractors Payments made to employees are subject to PAYE. However, in many cases, payments made to contractors are not subject to tax deduction. An employment relationship can only exist if there is a contract between an employer and an individual. As a result, individuals engaged through a temping agency, their own company or another organisation (i.e. seconded staff) would generally not be treated as employees of CSE. An individual who performs the same work as other employees, is paid based on an hourly rate, accepts no business risk under their contract and works under the direct control of other staff would generally be regarded as an employee. Tax Policies - GST FBT and PAYE

20 CSE will only engage individuals as contractors in situations where it could not be argued that an employment relationship exists. 4.4 Accommodation benefits Free or discounted accommodation provided to employees is subject to PAYE, unless one of the following exemptions applies: Accommodation provided to staff working away from home is generally exempt from tax if the employee is expected to be working in the new location for less than 2 years. Accommodation provided to staff working in more than one location on an on-going basis is exempt from tax without an upper limit. Temporary accommodation provided to an employee as part of a relocation package is generally exempt from tax for up to three months after arrival. The taxable value of accommodation is generally based on the market rental for the accommodation provided, less the amount paid by the employee (if any). CSE will account for PAYE on accommodation benefits provided to employees, where applicable. 4.5 Travel allowances CSE pays a travel allowance of $65 per day for meal costs incurred by employees while travelling away from home on business. As this is considered to be a reasonable estimate of work-related expenditure likely to be incurred by an employee, the allowance is treated as non-taxable. The exemption for meal payments for staff working away from home is subject to a three-month limit at a particular location. After this period, the payments are taxable. CSE will treat travel allowances as non-taxable, where applicable. 4.6 Mileage allowances Employers may pay a tax-free mileage allowance to employees for business use of private vehicles. The reimbursement may be based the actual expenditure incurred by the employee, a reasonable estimate of expenditure incurred, rates published by the IRD, or rates published by a reputable independent source (such as the AA mileage rates). CSE calculates motor vehicle reimbursements based on the lower of the AA mileage rates or the rental car equivalent. As a result, these reimbursements can be treated as exempt from tax. CSE will not deduct tax from motor vehicle reimbursements paid to employees. Tax Policies - GST FBT and PAYE

21 4.7 Reimbursements for relocation costs In general, reimbursements of relocation costs paid to new or existing employees working in a new location are not subject to tax, provided that the employee s existing home is not within reasonable travelling distance of the new work place. The amount paid must be no more than the actual amount incurred by the employee on eligible relocation expenditure. The determination of eligible expenditure is available on the IRD website. It provides a very comprehensive list of relocation expenditure, including airfares, transport of personal effects, and temporary accommodation for up to three months after arrival. The exemption does not apply to relocation allowances paid to an employee who is leaving the organisation. CSE will not account for PAYE on eligible relocation costs for new or existing employees. 4.8 Reimbursements for capital items In general, a reimbursing payment made to an employee is only non-taxable to the extent that it reimburses expenditure which would have been deductible to the employee. For tax purposes, expenditure is not deductible if it is private or capital in nature. As a result, reimbursements for capital items (e.g. computers, smartphones) are taxable, even if the asset will be partly used for work purposes. CSE will account for PAYE on any reimbursements for capital items. 4.9 Redundancy and exit inducement payments Inducement payments may be made to encourage employees to leave an office or position. These payments are subject to PAYE. Redundancy payments are also subject to PAYE. CSE will account for PAYE on redundancy payments and exit inducement payments Payments for hurt and humiliation Payments that are genuinely and entirely for compensation for humiliation, loss of dignity, or injury to feelings are non-taxable. However, payments that in reality relate to lost income, redundancy entitlements or exit inducements are taxable, and subject to PAYE. Simply classifying the payment as hurt and humiliation in the settlement agreement signed by the mediator does not make the payment nontaxable. In an IRD review or investigation, the employer would need to be able to show that the employee had a genuine personal grievance (as defined), and that the amount paid was reasonable based on the hurt and humiliation suffered by the employee. It should be noted that most of the amounts awarded by the Courts for hurt and humiliation are under $10,000, and only a small percentage are over $15,000. Tax Policies - GST FBT and PAYE

22 In general, it would be difficult to convince the IRD that any payments over $25,000 are not at least partially taxable. Tax liabilities may also exist in relation to smaller payments. In cases where there is no evidence of a genuine personal grievance, the IRD may consider that the entire payment is taxable. CSE will not account for PAYE on genuine payments for hurt and humiliation Eye care payments Many employers in the public sector make eye care payments to their employees. This can include reimbursements for eye tests and reimbursements for new spectacles. The IRD considers that eye care payments made to office staff are generally taxable, as the costs are private in nature. PAYE should be deducted from reimbursements for spectacles or eye tests, and GST should not be claimed on these payments. CSE will account for PAYE on eye care payments Child care reimbursements The reimbursement of the child-care costs is subject to PAYE, as the costs are considered to be private in nature. CSE will account for PAYE on the reimbursement of child-care costs Course fee reimbursements In general, a reimbursement of course fees will not subject to PAYE, provided that the course is work related. However, a course fee reimbursement negotiated as part of an exit package would be taxable, as the employer would receive no benefit from the former employee attending the course. CSE will account for PAYE on the reimbursement of non-work related course fees Reimbursements for subscriptions and membership fees The reimbursement or payment of professional subscriptions is not subject PAYE, provided that membership is related to employment duties. Non-work related subscriptions and recreational fees (e.g. gym fees) are considered to be private expenses. The reimbursement of these costs would therefore be subject to PAYE. CSE will account for PAYE on the reimbursement of non-work related subscriptions and membership fees Clothing allowances and reimbursements Clothing is usually regarded as a private expense. Consequently, a reimbursement or allowance in relation to clothing costs would generally be subject to PAYE. However, Tax Policies - GST FBT and PAYE

23 if a particular occupation required an employee to wear a uniform or protective clothing, a reimbursement of these costs could be treated as non-taxable. CSE will account for PAYE on clothing allowances Reimbursement of car parking expenses The cost of travelling to work and the cost of car parking are usually regarded as private expenses. As a result, a reimbursement for cost of car parking would generally be subject to PAYE. However, the reimbursement of car parking expenses incurred while on business travel would not be subject to PAYE. CSE will account for PAYE on any reimbursements for private parking expenses Home telephone and internet costs Where employees are required to use their home telephone or internet connection for work purposes, the IRD will generally accept that 50% of the connection cost is business-related. However, if the employee is provided with a work cell phone, it may be difficult to convince the IRD that any portion of the home telephone rental is business-related. PAYE will apply to any reimbursements that exceed the business-related portion of these costs. CSE will account for PAYE on the private portion of any reimbursements of home telephone and internet costs Superannuation fund contributions Contributions to a superannuation fund may be subject to employer superannuation contribution tax (ESCT). Contributions to a superannuation fund would generally include both an employer contribution and an employee contribution. Only employer contributions are subject to ESCT. Employee contributions are deducted from tax paid income and are therefore already net of PAYE deductions. Compulsory employer contributions to Kiwisaver were originally exempt from ESCT. However, with effect from 1 April 2012, all employer contributions to Kiwisaver are now subject to ESCT. Contributions to overseas superannuation funds are generally subject to FBT rather than ESCT. CSE will deduct ESCT from employer contributions, where applicable Payments to contractors Schedular payments made to contractors are subject to tax deduction. An abridged list of these payments and the applicable deduction rates can be found on the IR330C tax rate notification form. Common examples include payments to board Tax Policies - GST FBT and PAYE

24 members, gardeners, cleaners and entertainers. Tax must be deducted from these payments unless: the contractor has an exemption certificate from the IRD, or the contractor is a company (other than a non-resident contractor), a Maori authority, a public authority or a local authority. It is not relevant whether the contractor is registered for GST. Payments to a GST-registered contractor can still be subject to tax deduction. Where the gross amount of the payment to a contractor includes GST, tax should be calculated based on the GST-exclusive amount. Contractors now have the option of choosing their deduction rate, but in most cases, it cannot be lower than 10%. Contractors can also apply to the IRD for a special tax rate certificate or an exemption certificate. Contractors who are not receiving schedular payments can request to have tax deducted from their payments. If the payer agrees, the payments are treated as voluntary schedular payments. Both parties must agree in writing. Higher deduction rates apply to payments made to contractors who have not completed the IR330C tax notification form. If applicable, CSE should ask the contractor to complete an IR330C before any payment is made. CSE will ensure withholding tax is deducted from payments to contractors, where applicable Payments to members of boards and committees In general, payments for work or services performed by members of boards, councils and committees are subject to withholding tax, unless the IRD has issued an exemption certificate, or the services are provided by a company or another public authority. CSE will deduct withholding tax from fees paid to members of boards, councils and committees, where applicable Payments to guest speakers and presenters The list of schedular payments specifically includes payments for making speeches or giving lectures or talks for any purpose. As a result, payments made to guest speakers and presenters are generally subject to withholding tax, unless the IRD has issued an exemption certificate, or the services are provided by a company. CSE will deduct withholding tax from payments made to guest speakers and presenters, where applicable Koha payments In certain situations, koha payments made to individuals may be subject to withholding tax. For example, koha payments made to individuals for attending meetings, cultural performances or giving speeches would be subject to tax deduction. Tax Policies - GST FBT and PAYE

25 CSE will deduct withholding tax from koha payments made to individuals for attending meetings, cultural performances or giving speeches, where applicable Payments to non-resident contractors Non-resident contactor tax (NRCT) must be deducted from payments made to non-resident contractors for services performed in New Zealand, unless: the non-resident contractor holds an exemption certificate from the IRD, the payments are cost reimbursing payments to non-associated parties (e.g. travel and accommodation), the non-resident contractor is in New Zealand for less than 92 days within any period of 12 months, and the income is exempt from tax pursuant to a double tax agreement, or the total amount of contract payments made to the non-resident contractor is $15,000 or less in any 12-month period. NRCT does not apply to services performed by a non-resident contractor outside of New Zealand. However, for any proposed agreement involving services performed in New Zealand, it is important that the tax implications are considered by both parties before the contract is finalised. If necessary, CSE should contact the Non-resident Contractor Team at the IRD to confirm the correct tax treatment of the proposed payments. Where possible, CSE should ask the non-resident to obtain an exemption certificate from the IRD before any payment is made. Alternatively, CSE may apply for the exemption certificate on behalf of the non-resident. It should be noted that the non-resident contractor may be required to file a tax return in New Zealand, and may also be required to account for PAYE on salary payments made to employees present in New Zealand. CSE will deduct tax from payments to non-resident contractors, where applicable Certificates of exemption If a contractor has an exemption certificate, then CSE is not required to deduct withholding tax. The certificate must be current and valid, and the work performed must be the same as that shown on the certificate. CSE must hold a copy of the certificate at the time the payment is made. CSE will retain a copy of any exemption certificates provided by contractors. Tax Policies - GST FBT and PAYE

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