16 Aug Jonanthan Cartu Writes The Week in Tax; home office deductions, when is developmen…
The big news this week, obviously, is the reintroduction of the Level 3 Lockdown restrictions in Auckland and Level 2 around the country in general. Under Level 3 the requirement is people must work from home where possible unless they’re an essential worker. So, of course, this comes back to something we looked at in some detail several months ago, which is what is the position for employees claiming a deduction for home office expenditure?
Now, this turned out to be quite a matter of great interest to a lot of people, understandably. And Inland Revenue came to the party with the Determination EE002 Payments to employees for working from home costs during the Covid-19 pandemic.
Now, the Determination laid out the rules that apply where employers have either made or intend to make payments to employees to reimburse costs incurred by employees as a result of having to work from home during the pandemic.
And a reminder is that only the employer can claim a deduction for such expenditure, but they can reimburse employees for the costs and such payments would be exempt income for employee. The Determination is not binding on employers who can work out their own allocations within the rules.
Now, remember, the Determination also sets out the amount of allowances that Inland Revenue thought to be acceptable. Under the Determination an employer paying an allowance covering general expenditure to an employee working from home during the pandemic can treat up to $15 per week as exempt income. This applies in a pro-rata basis: $30 per fortnight or $65 per month. Anything above that threshold, the excess would be taxable income and subject to PAYE, unless the employer can show that the costs are higher.
Additional payments can be made for the cost of furniture and equipment. And these are to recognise the fact that an employee would have suffered a depreciation loss on furniture and equipment used in a home office. But because of the employee limitation rule they can’t claim a deduction. Instead, there’s a safe harbour option where the employer can pay up to $400 dollars to the employee and it would be treated as exempt income. Alternatively, the employer, can reimburse employees for the actual cost of furniture and equipment used purchase for use in a home office.
This is all great stuff with generally simple rules. The one caveat is this determination was initially a temporary response, and it applied to payments made for the period from 17th of March to 17th of September. Now, 17th of September isn’t that far off. So, I would hope we’d see soon Inland Revenue issuing an extension to this determination if the lockdown is extended.
Regardless of that, this Determination is a useful set of rules for future lockdowns, if any, to cover the position for working from home. But just note the Determination is temporary and expires in just over five weeks’ time.
“Minor” development work
Moving on, as is well known. New Zealand does not have a general capital gains tax, but and it’s a very big but, there are a number of transactions which would normally be treated as capital gains that are taxed. And there’s a whole series of transactions in particular which relate to the taxation of land.
One of these provisions is Section CB 12 of the Income Tax Act 2007. Under that provision an amount a person receives from the disposal of land is taxable if the development or division work carried out as part of the sale is “not minor”.
This provision highlights one of the key problems of our current taxation of capital which is that many of the provisions which would tax capital are very subjective in their approach. For example, the general provision in section CB 6 taxes the sale of land where the land was acquired with a purpose or intent of sale.
During last year’s debate over taxing capital gains, I was always frustrated to hear when people said capital gains taxes were complicated. There are definitely complexities in it, but at least the imposition of a general capital gains tax clarifies the position. We’re not then relying on matters of subjectivity as to intent or in this particular section CB 12 what is the meaning of the word “minor”.
Now, in this context, Inland Revenue has just released an Interpretation Statement, IS 20/08, which sets out when development work or division work is “minor”. This Interpretation Statement is an update and replaces a previous Interpretation Guideline, IG0010 “Work of a minor nature” which was issued in February 2005.
The main conclusions in the 2020 Interpretation Statement are unchanged from that previous Interpretation Guideline. But some parts have been updated for clarity and, extremely importantly, also identified safe harbour figures for absolute cost and relative cost to assist with compliance.
And this is a big, big step forward because the previous Interpretation Guideline wasn’t very specific as to what would represent work of a minor nature. Under that guideline, work of a minor nature was very relative and the cases, some of which went back to the 1970s before the massive inflation in property prices took off, involved what seem relatively small sums being deemed to be not of a minor nature.
So to just quickly recap the provision here. Section CB 12 deems an amount from the disposal of land to be income when the person carries on an undertaking or scheme (that doesn’t necessarily mean in the nature of a business), and this undertaking or scheme involves the development of the land or the division of the land into lots; the development of division work is carried on by the person or another person for them, this work is not minor, and the undertaking or scheme was begun within 10 years of the date on which the person acquired the land.
So the 10 year time limit is the often critical part of this provision. People are probably well aware of the bright-line test, which now applies for five years from the date of acquisition. However, people are less aware that these set of rules in section CB 12 have a ten-year clock on them. And by the way, just a reminder that the bright line test in section CB 6A only applies if any other taxing provision doesn’t apply. Remember it’s a fallback provision.
So as I said these these rules are complex. They provide plenty of work for tax advisors let’s put it like that. And the key takeaway I want to bring out today is about the safe harbour figures that have been introduced into this Interpretation Statement.
Now, under the case law relating to this provision, and there’s plenty of it, there are four factors that have to be considered when you’re trying to assess whether work is minor. Firstly, what is the total cost of the work done in both absolute and relative terms? What are the natures of the professional services used, the extent of the physical work undertaken and the significance of the changes to…