Tax Bites #22 - Working at home during Covid-19 lockdown – THE TAX ISSUES
About the Author:
MURRAY McCLENNAN
Director at Tax Central
A chartered accountant and a member of the International Fiscal Association and the Society of Trust and Estate Practitioners, Murray has over 30 years experience in tax.
I have received several queries in respect of “working at home” costs during Covid-19 lockdown. A summary of the position is:
Employees cannot claim deductions incurred in deriving employment income. That includes shareholder-employees.
However, employers may reimburse costs. Inland Revenue has issued a determination relating to reimbursements.
Reimbursements paid by employers to employees for home office costs are not taxable to employees and are deductible for employees. However, if the reimbursements are excessive, the excessive amount is taxable income and is subject to PAYE.
A sole trader or partner in a partnership may claim deductions for home office costs incurred in deriving income. Many of these taxpayers will already be familiar with claiming “home office costs”.
Employees
Employees may not claim home office or workspace costs as there is a prohibition on claiming costs incurred in deriving employment income, see subsection DA 2(4) of the Income Tax Act 2007.
Employers may reimburse employees who are working from home.
| WHAT IS PAYMENT FOR? | HOW MUCH IS TREATED AS EXEMPT INCOME? | WHEN CAN I USE THIS OPTION? |
|---|---|---|
| FURNITURE EQUIPMENT or | Up to $400 maximum “safe harbour” | This is the only amount paid for furniture & equipment |
| 25% of cost of item | Item is used at least partly for job | |
| 75% of cost of item | Item is used at 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 |
| 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 | $15 is the only payment made for other expenditure |
No evidence is required for the “safe harbour” furniture and equipment or the $15 per week other expenditure payment. In respect of all other payments, the employer must have evidence of the employee’s costs AND the degree to which the item is used in the employee’s job.
Please note, if the reimbursements are excessive, the excessive amount is taxable income and is subject to PAYE.
Many self-employed taxpayers will have been claiming home office costs. This can be based on either:
Methodology prescribed in section DB 18AA; OR
Apportionment of actual costs.
Section DB 18AA methodology requires two steps:
The area primarily used for the home office or workspace is identified. That area is then multiplied by the Inland Revenue rate ($41.70), which excludes mortgage interest, rates or rent.
Separate deductions for mortgage, rates or rent. These costs are calculated on an apportionment basis.
The alternative approach is an apportionment of actual costs.
Director
Tax Central Ltd
027 244-5365
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