EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
Deadline for comment: 12 February 2010. Draft Reference: IG3162.
INTERPRETATION GUIDELINE: TREATMENT OF EMPLOYEERELATED PAYMENTS – SECTIONS CE 5(3)(C) AND CW
17(1)–(3) OF THE INCOME TAX ACT 2007
This draft interpretation guideline sets out the Commissioner’s view on the
interpretation and application of sections CE 5(3)(c) and CW 17(1)–(3) of the
Income Tax Act 2007. An earlier version of this guideline was released for
external consultation on 24 October 2007.
The Commissioner has taken into account the submissions received on the
earlier version of this interpretation guideline. The scope of the guideline has
been extended as a result of the submissions received. This version of the
guideline includes further analysis of section CE 5(3)(c), which deals with the
reimbursement of employer expense payments. This version of the guideline
also takes into account recent legislative changes (sections CW 17B and
CW 17C), although the detailed application and interpretation of the new
provisions are beyond the scope of this guideline.
When this interpretation guideline is finalised, it will replace any previous
public statement by the Commissioner concerning the interpretation and
application of what are now sections CE 5(3)(c) and CW 17(1)–(3) insofar as
those statements relate to the treatment of:

reimbursing allowances;

reimbursing payments;

expenditure on account payments; and

employer expense payments.
Contents
Scope of this interpretation guideline ..................................................... 2
Meaning of terms used in this interpretation guideline ........................... 2
Summary ................................................................................................ 3
Employee-related payments .........................................................................3
Exemptions under sections CW 17B and CW 17C ............................................4
Meaning of “in connection with” ....................................................................4
Employment income – expenditure on account of an employee ........................5
Meaning of “allowance” ...............................................................................5
Deductibility test for reimbursing allowances, reimbursing payments, and
expenditure on account payments ................................................................5
History of section CW 17 exemptions and section CE 5(3)(c) exclusion . 6
Legislation .............................................................................................. 8
Analysis ................................................................................................ 12
Section CE 1 – employment income ............................................................ 13
Meaning of “in connection with” .................................................................. 13
Section CE 5 – meaning of “expenditure on account of an employee” .............. 16
Employer expense payments – section CE 5(3)(c) exclusions ......................... 17
Reimbursing allowances, reimbursing payments, and expenditure on account
payments – section CE 5(3)(a) exclusion and section CW 17 exemptions ......... 22
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Expenditure on account payments – section CW 17(1) .................................. 32
Reimbursing allowances and reimbursing payments – section CW 17(2) and
(3) .......................................................................................................... 34
Additional exemptions – relocation payments, overtime meal payments, and
sustenance allowances .............................................................................. 39
Relationship of section CW 17 with other sections ......................................... 41
Additional examples – section CW 17(2) and (3) .......................................... 41
All legislative references are to the Income Tax Act 2007 unless otherwise
stated.
This interpretation guideline will apply from the 2010/11 income year.
Scope of this interpretation guideline
This interpretation guideline addresses the income tax treatment of four types of
payment made by employers to or on behalf of their employees. In this
interpretation guideline, these four types of payments are referred to as:

reimbursing allowances;

reimbursing payments;

expenditure on account payments;

employer expense payments.
In this interpretation guideline, the four payments collectively are
referred to as the ‘employee-related payments’.
Meaning of terms used in this interpretation guideline
For the purposes of this interpretation guideline, the four types of payment have
the following meanings:
Reimbursing allowance: an amount paid by an employer to an
employee as a regular or one-off payment that is related to expenditure
the employee is likely to incur in connection with the employee’s
employment or service.
Reimbursing payment: an amount paid by an employer to an employee
that represents a reimbursement of expenditure the employee has
incurred in connection with the employee’s employment or service
Expenditure on account payment: an amount paid by an employer (or
the employer has assumed the liability to pay) direct to a third party for
expenditure incurred (but not yet paid) by the employee in connection
with the employee’s employment or service.
Employer expense payment: an amount paid by an employer to an
employee that reimburses the employee for expenses the employee has
paid on behalf of the employer.
Under the Act, employers include those liable for making a schedular payment,
and employees include people who receive or are entitled to receive a
schedular payment. This means the approach in this interpretation
guideline applies to a person receiving a schedular payment insofar as it
relates to that person receiving a payment of the type under
consideration.
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EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
Summary
Employee-related payments
In some circumstances, each of the four employee-related payments will not be
subject to tax because the payment falls within a statutory provision that
provides an exclusion or an exemption from tax.
A reimbursing allowance is exempt income of an employee. Therefore, a
reimbursing allowance is not subject to tax if it satisfies the requirements
of section CW 17(2) and (3). For section CW 17(2) and (3) to apply to a
reimbursing allowance, the following must be satisfied:

The employee is likely to incur some expenditure,

The employer has paid an allowance to the employee based on a
reasonable estimate of the amount of expenditure likely to be
incurred by the employee.

The payment is in connection with the employee’s employment or
service.

The employee would be entitled to a deduction for the expenditure if
the employment limitation did not exist.
A reimbursing payment is exempt income of an employee. Therefore, a
reimbursing payment is not subject to tax if it satisfies the requirements
of section CW 17(2). For section CW 17(2) to apply to a reimbursing
payment, the following must be satisfied:

The employee has incurred some expenditure.

The employer has reimbursed the employee for the expenditure
incurred.

The payment is in connection with the employee’s employment or
service.

The employee would be entitled to a deduction for the expenditure if
the employment limitation did not exist.
An expenditure on account payment is exempt income of an employee.
Therefore, an expenditure on account payment is not subject to tax if it
satisfies the requirements of section CW 17(1). For section CW 17(1) to
apply to an expenditure on account payment, the following must be
satisfied:

The employee has incurred expenditure for which the employer has
paid (or assumed the liability to pay).

The expenditure is in connection with the employee’s employment or
service.

The employee would be entitled to a deduction for the expenditure if
the employment limitation did not exist.
The common requirement that the employee would be entitled to a deduction for
the expenditure is discussed in paragraphs 0 and 0 in relation to the
private and capital limitations.
For each of the above three payments, it may be that the employee would be
entitled to a deduction for only a portion of the expenditure when
applying the deductibility test in section CW 17(1) and (2). Therefore,
only the portion that would be deductible is the amount that is exempt
under section CW 17. This means the remaining portion is subject to tax.
An employer expense payment is not subject to tax if it is excluded from the
definition of “expenditure on account of an employee” because of section
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EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
CE 5(3)(c). For section CE 5(3)(c) to exclude an employer expense
payment from the definition of “expenditure on account of an employee”
and, therefore, not be income of the employee, the following must be
satisfied:

The employee has paid for expenses in connection with the
employee’s employment or service.

The employer must be liable for the expenses.

The employee has paid the expenses in consideration of the employer
making payment to the employee for the expenses.
For an employer expense payment, the employer may be liable for only a portion
of the expenses, in which case it would be this portion that is not subject
to tax and the remaining amount may still be taxable as “expenditure on
account of an employee”.
Employer expense payments are excluded from being “expenditure on account
of an employee” under section CE 5(3)(c) if the employee has paid for
expenses that are the employer’s liability on the basis that the employee
will be reimbursed for the amount paid. The Commissioner considers that
this type of expenditure will be for expenses of the employer’s business
where the employee is acting as the agent of the employer in paying for
the expenses, thereby creating a debtor–creditor relationship between the
employee and the employer.
The Commissioner also considers that for an employer expense payment to be
excluded from the definition of “expenditure on account of an employee”,
the employee must have the necessary authorisation from their employer
to pay for the expenses on behalf of their employer on the understanding
that the employee will be reimbursed for the amount paid. This
authorisation may be referred to in the employee’s employment or service
documentation or may be implied through the employer’s established
practice of reimbursing employees for business expenses.
An employer expense payment excluded from “expenditure on account of an
employee” under section CE 3(5)(c) and therefore not subject to tax, may
be subject to fringe benefit tax (FBT) if the expenditure results in the
employee receiving a fringe benefit.
Exemptions under sections CW 17B and CW 17C
Sections CW 17B and CW 17C provide further exemptions for particular
reimbursing payments, reimbursing allowances, and expenditure on
account payments. Where the payment relates to relocation costs for an
employee, section CW 17B should be considered, because it provides a
specific exemption for certain relocation payments. Where the payment
relates to an overtime meal or a sustenance allowance, section CW 17C
should be considered because it provides a specific exemption for certain
payments related to overtime meals and sustenance allowances.
Meaning of “in connection with”
The phrase “in connection with ... employment or service” is common to all four
of the employee-related payments because it appears in sections CW
17(1) and (2) and CE 5(3)(c). The Commissioner considers this phrase to
have a wide meaning. If the payment under consideration is a
consequence of or comes about because of the employee’s employment
or service, the payment will generally be considered to be “in connection
with … employment or service”.
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EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
Employment income – expenditure on account of an employee
The Commissioner’s view is that section CE 1, which lists amounts that are
income of a person if they are derived in connection with employment or
service, has a wide scope. Prima facie most payments from an employer
to an employee will fall within the scope of section CE 1. Therefore, these
payments will be employment income. “Expenditure on account of an
employee” is employment income under section CE 1(b) and is defined in
section CE 5.
The four employee-related payments are all related to the definition of
“expenditure on account of an employee”: a payment made by an
employer relating to expenditure incurred by an employee. However, the
definition of “expenditure on account of an employee” also lists payments
that are excluded from the definition. The exclusion in section CE 5(3)(a)
relates to reimbursing allowances, reimbursing payments, and
expenditure on account payments. The exclusion in section CE 5(3)(c)
relates to employer expense payments.
Meaning of “allowance”
Section CE 1 includes the term “allowance” in paragraph (a). The
Commissioner’s view is that the reference to “allowance” in this
paragraph covers all types of allowances, including reimbursing
allowances. However, reimbursing allowances meeting the requirements
of section CW 17(2) and (3) will be exempt income. Therefore,
section CE 1(a) does not apply to those reimbursing allowances. It is
considered that the purpose of including “allowance” in section CE 1(a) is
to ensure that allowances that result in a monetary benefit akin to salary,
wages, bonus, extra pay, or gratuity are subject to tax. This includes
allowances that historically have been referred to as a “benefit
allowance”. An example of a benefit allowance is a “dirt allowance” paid
to an employee to compensate them for working in a particularly dirty or
uncomfortable work environment. The employee does not necessarily
incur any expenditure related to the payment of the allowance. In this
case, the allowance would be treated as employment income of the
employee under section CE 1(a).
Deductibility test for reimbursing allowances, reimbursing payments,
and expenditure on account payments
Unlike an employer expense payment, a reimbursing allowance, a reimbursing
payment, and an expenditure on account payment may be exempt
income of the employee and therefore not subject to tax under section
CW 17(1) or section CW 17(2). The commonality between these three
payments is that in order for the payment to be exempt, the employee
must be able to claim a deduction for the expenditure that the payment
relates to, if the employment limitation did not exist. Ordinarily, the
employment limitation would deny an employee a deduction for
expenditure incurred in deriving income from employment.
An employee may claim a deduction for the expenditure that the payment
relates to, if the expenditure meets the general permission in
section DA 1(1) and none of the general limitations in section DA 2
applies (excluding the employment limitation).
When dealing with employee-related expenditure, it is considered the most
applicable general limitation is the private limitation. The private
limitation denies a deduction for expenditure of a private or domestic
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EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
nature. Additionally the nature of the expenditure might also give rise to
considering the capital limitation. The capital limitation denies a
deduction for expenditure of a capital nature. If the private limitation or
capital limitation applies (or any of the other general limitations in
section DA 2 apply), then the payment by the employer will not be
exempt income to the employee under section CW 17.
Private limitation
The Commissioner has formulated three requirements to assist in determining
whether the private limitation applies. These requirements are based on
analysis of the leading Court of Appeal decisions considering employmentrelated expenditure in conjunction with considering the general approach
to deductibility. If the following three requirements are met, then the
Commissioner considers that the private limitation will not apply:
(i)
The employee must be (or will be) performing an obligation under
the contract of employment or service at the time the expenditure is
(or is likely to be) incurred.
(ii)
The obligation must serve the purpose of the employee’s incomeearning process of deriving income from employment or service.
(iii)
The expenditure is necessary as a practical requirement of the
performance of the obligation.
Capital limitation
Several of the judicially accepted tests that are used to assist in determining
whether expenditure is capital in nature are not relevant when
considering whether the capital limitation applies to employment-related
expenditure. However, the identifiable asset test, whether the
expenditure is recurrent in nature, and the enduring benefit test may be
relevant. Therefore, the final step in determining whether a reimbursing
allowance, a reimbursing payment, or an expenditure on account
payment is exempted under either section CW 17(1) or section CW 17(2)
is to consider whether the expenditure that the payment relates to is
capital in nature. To the extent that the expenditure is capital in nature,
the payment will not be exempt income of the employee.
History of section CW 17 exemptions and section CE 5(3)(c)
exclusion
This section gives a brief history of the exemptions in section CW 17 and the
exclusion in section CE 5(3)(c).
Generally, amounts derived by a person in connection with their employment or
service are income of that person under the general income provisions in
section CA 1 and the more specific employment income (section CE 1).
Therefore, these amounts are subject to tax. However, there are some
exceptions to this where amounts are not income or are exempt income.
The four employee-related payments under consideration in this
interpretation guideline may not be subject to tax because they are not
income or are exempt income.
The provisions that govern the treatment of the four employee-related payments
have been subject to various legislative changes. As a result of these
changes, some payments that were previously treated as tax free are
now subject to tax under the Act.
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EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
Before 1985, the tax treatment of income “in respect of or in relation to the
employment or service of the taxpayer” was governed by section 65(2)(b)
of the Income Tax Act 1976. Under section 65(2)(b), “allowances
(whether in cash or otherwise)” with the necessary connection to an
employee’s employment or service were treated as assessable income.
However, the Commissioner had the power to exempt certain allowances
under section 73 of the Income Tax Act 1976 where the allowance
constituted a reimbursement of expenditure incurred by the employee in
gaining or producing assessable income. Section 73 was the predecessor
to the exemption provided for in section CW 17(2). Section 73 also
allowed the Commissioner to determine an average amount of
expenditure incurred by an employee or a group of employees for the
purposes of paying a reimbursing allowance. Even though the word
“allowances” was not defined in the legislation (as is the case under the
Income Tax Act 2007), allowances were divided into taxable and exempt
allowances (though this distinction was not specifically recognised in the
legislation).
Taxable allowances provided a benefit or monetary gain to an employee where
the employee was not required to make any outlay of expenditure to
obtain the allowance. Instead, the allowance was often paid to
compensate employees for working in difficult or unpleasant work
environments. These types of allowance are still taxable under section CE
1(a).
Exempt allowances were paid to employees to reimburse them for expenditure
they incurred in deriving their income from employment. These
allowances conferred no monetary gain on the recipient and were
payments to recognise that employees had incurred some expenditure in
gaining or producing assessable income. The exemption provided under
section 73 differed from the equivalent exemption provided in
section CW 17(2), in that, in order for the allowance to be exempt, it
needed to represent a reimbursement of expenditure that the employee
had incurred in gaining or producing assessable income.
Section CW 17(2) applies the general deductibility provisions and requires
the employee to be entitled to a deduction for the expenditure if the
employment limitation did not exist.
A new legislative regime relating to income from employment was introduced
into the Income Tax Act 1976, with effect from 1 April 1985. This new
regime coincided with the introduction of FBT. These changes were
intended to ensure that employment-related benefits (cash and non-cash)
were subject to FBT or income tax, but not to both.
The expressions “employment income”, “monetary remuneration”, and
“expenditure on account of an employee” were also introduced into the
legislation at this time. Employment income had a wide scope and
covered most payments between an employer and an employee, including
all monetary remuneration. Monetary remuneration was defined to
include “any expenditure on account of an employee”. Importantly, the
definition of “expenditure on account of an employee” included a list of
certain payments that were not considered “expenditure on account of an
employee”. One exclusion related to allowances exempted by the
Commissioner under section 73 of the Income Tax Act 1976. Another
exclusion related to payments by an employer in respect of expenditure
incurred and discharged by an employee in the course of the employee’s
employment where the Commissioner was satisfied the expenditure was
the liability of the employer and not of the employee and the undertaking
by the employee of the discharging of that liability was in consideration of
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EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
the employer making the payment to the employer. This exclusion was
aimed at employer expense payments and was the predecessor to the
exclusion in section CE 5(3)(c).
In 1995, there were further legislative changes in this area. These changes
removed the requirement for the Commissioner to approve exempt
allowances and required employers to determine the tax treatment of
employee allowances. The changes introduced the requirement for these
types of payments to meet the general deductibility tests in order for an
employee allowance or reimbursing payment to be exempt. Effectively,
this meant these payments would not be exempt if the payment
represented a payment for expenditure of a capital or private or domestic
nature – these being the most relevant general limitations affecting
employee allowances and reimbursing payments. These changes did not
affect the exclusion (now section CE 5(3)(c)) relating to employer
expense payments.
The definition of “expenditure on account of an employee” in section CE 5 has
retained the two exclusions. Section CE 5(3)(a) excludes amounts that
are exempted under section CW 17 from “expenditure on account of an
employee”. Section CE 5(3)(c) excludes certain employer expense
payment amounts. This interpretation guideline focuses on the four
employee-related payments covered by these two exclusions.
Legislation
Section CA 1 provides:
CA 1
Amounts that are income
Amounts specifically identified
(1)
An amount is income of a person if it is their income under a provision in this
Part.
Ordinary meaning
(2)
An amount is also income of a person if it is their income under ordinary
concepts.
Section CE 1 provides:
CE 1
Amounts derived in connection with employment
Income
The following amounts derived by a person in connection with their
employment or service are income of the person:
(a)
salary or wages or an allowance, bonus, extra pay, or gratuity:
(b)
expenditure on account of an employee that is expenditure on account
of the person:
(c)
the market value of accommodation that the person receives in
connection with their employment or service other than an amount paid
under section CW 17B (Relocation payments):
(d)
a benefit received under a share purchase agreement:
(e)
directors’ fees:
(f)
compensation for loss of employment or service:
(g)
any other benefit in money.
Meaning of accommodation
(2)
For the purposes of this section and section CX 28 (Accommodation),
accommodation means board or lodging, or the use of a house or living
premises, or the use of part of a house or living premises.
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EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
Section CE 5 provides:
CE 5
Meaning of expenditure on account of an employee
Meaning
(1)
Expenditure on account of an employee means a payment made by an
employer relating to expenditure incurred by an employee.
Inclusion
(2)
Expenditure on account of an employee includes a premium that an
employer pays on a life insurance policy taken out for the benefit of the
employee, or their spouse, civil union partner, de facto partner, or their child.
This subsection is overridden by subsection (3)(f) to (i).
Exclusions
(3)
Expenditure on account of an employee does not include—
(a)
expenditure for the benefit of an employee, or a payment made to
reimburse an employee, under section CW 17 (Expenditure on account,
and reimbursement, of employees):
(b)
an allowance for additional transport costs under section CW 18
(Allowance for additional transport costs):
(bb)
an amount paid under section CW 17B (Relocation payments) or
section CW 17C (Payments for overtime meals and certain other
allowances):
(c)
expenses that an employee pays in connection with their employment
or service to the extent to which the expenditure is their employer’s
liability, if the employee undertakes to discharge the liability in
consideration of the making of the payment by the employer:
(d)
expenditure on an employment-related loan to which the fringe benefit
tax (FBT) rules apply:
(e)
an employer’s superannuation contribution:
(f)
a premium that an employer pays on a life insurance policy taken out
for the benefit of the employee, or their spouse, civil union partner, de
facto partner, or their child, if—
(i)
the premium cannot be refunded to, or converted to cash by,
the employee or an associated person; and
(ii)
the only benefits that are payable under the policy are those
payable on the death of the employee, or their spouse, civil
union partner, de facto partner, or their child, or those payable
because of accident, disease, or sickness of the employee, or
their spouse, civil union partner, de facto partner, or their child:
(g)
a premium that an employer that is a close company pays on a life
insurance policy taken out for the benefit of the employee, or their
spouse, civil union partner, de facto partner, or their child, to the
extent to which the expenditure is treated as a dividend under subpart
CD (Income from equity):
(h)
a premium that an employer pays on a life insurance policy taken out
for the benefit of the employee, or their spouse, civil union partner, de
facto partner, or their child, if the policy is, or is included in, a
superannuation category 1 scheme, a superannuation category 2
scheme, or a superannuation category 3 scheme:
(i)
a premium that an employer pays on a life insurance policy taken out
for the benefit of the employee, or their spouse, civil union partner, de
facto partner, or their child, if the policy is held by or for the trustees of
a superannuation category 3 scheme:
(j)
a premium for income protection insurance that an employer is liable to
pay or make a contribution towards for the benefit of an employee.
Section CW 17 provides the following.
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CW 17 Expenditure on account, and reimbursement, of employees
Exempt income: expenditure on account
(1)
Expenditure on account of an employee incurred by an employer in connection
with the employee’s employment or service is exempt income of the employee
to the extent to which the expenditure is expenditure for which the employee
would be allowed a deduction if they incurred the expenditure and if the
employment limitation did not exist.
Exempt income: reimbursement
(2)
An amount that an employer pays to an employee in connection with the
employee’s employment or service is exempt income of the employee to the
extent to which it reimburses the employee for expenditure for which the
employee would be allowed a deduction if the employment limitation did not
exist.
Estimated expenditure of employees
(3)
For the purposes of subsection (2),—
(a)
the employer may make, for a relevant period, a reasonable estimate
of the amount of expenditure likely to be incurred by the employee or a
group of employees for which reimbursement is payable; and
(b)
the amount estimated is treated as if it were the amount incurred
during the period to which the estimate relates.
Depreciation loss included
(4)
In this section, expenditure includes an amount of depreciation loss
Sections DA 1 and DA 2 provide:
DA 1
General permission
Nexus with income
(1)
A person is allowed a deduction for an amount of expenditure or loss,
including an amount of depreciation loss, to the extent to which the
expenditure or loss is—
(a)
(b)
incurred by them in deriving—
(i)
their assessable income; or
(ii)
their excluded income; or
(iii)
a combination of their assessable income and excluded income;
or
incurred by them in the course of carrying on a business for the
purpose of deriving—
(i)
their assessable income; or
(ii)
their excluded income; or
(iii)
a combination of their assessable income and excluded income.
General permission
(2)
Subsection (1) is called the general permission.
DA 2
General limitations
Capital limitation
(1)
A person is denied a deduction for an amount of expenditure or loss to the
extent to which it is of a capital nature. This rule is called the capital
limitation.
Private limitation
(2)
A person is denied a deduction for an amount of expenditure or loss to the
extent to which it is of a private or domestic nature. This rule is called the
private limitation.
…
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Employment limitation
(4)
A person is denied a deduction for an amount of expenditure or loss to the
extent to which it is incurred in deriving income from employment. This rule is
called the employment limitation.
…
Relationship of general limitations to general permission
(7)
Each of the general limitations in this section overrides the general
permission.
Section YA 1 defines “employee”, “employer”, and “expenditure on account of an
employee”:
employee—
(a)
means a person who receives or is entitled to receive a PAYE income
payment:
(b)
in sections CW 17, CW 17B, CW 17C, and CW 18 (which relate to expenditure,
reimbursement, and allowances of employees) includes a person to whom
section RD 3(2) to (4) (PAYE income payments) applies:
(c)
in the FBT rules, and in the definition of shareholder-employee
(paragraph (b)), does not include a person if the only PAYE income payment
received or receivable is—
(i)
a payment referred to in section RD 5(1)(b)(iii), (3), (6)(b) and (c) and
(7) (Salary or wages):
(ii)
a schedular payment referred to in schedule 4, parts A and I (Rates of
tax for schedular payments) for which the person is liable for income tax
under section BB 1 (Imposition of income tax):
(d)
is defined in section DC 15 (Some definitions) for the purposes of sections
DC 12 to DC 14 (which relate to share purchase schemes):
(e)
for an employer, means an employee of the employer
employer—
(a)
means a person who pays or is liable to pay a PAYE income payment:
(b)
includes,—
(c)
(i)
for an unincorporated body of persons other than a partnership, the
manager or other principal officer:
(ii)
for a partnership, each partner:
(iii)
for the estate of a deceased person, a trust, a company in liquidation,
an assigned estate, or for any other property vested or controlled in a
fiduciary capacity, each person in whom the property has become
vested or to whom control of the property has passed:
(iv)
the Crown:
in the FBT rules, does not include a person if the only PAYE income payment
that they pay or are liable to pay is—
(i)
a payment referred to in section RD 5(1)(b)(iii), (3), (6)(b) and (c),
and (7) (Salary or wages):
(ii)
a schedular payment referred to schedule 4, parts A and I (Rates of tax
for schedular payments)
(d)
is defined in section RD 45(6) (Unclassified benefits) for the purposes of that
section:
(e)
for an employee, means the employer of the employee
expenditure on account of an employee is defined in section CE 5 (Meaning of
expenditure on account of an employee)
Section RD 3 provides:
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EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
RD 3
PAYE income payments
Meaning generally
(1)
The PAYE rules apply to a PAYE income payment which—
(a)
(b)
means—
(i)
a payment of salary or wages, see section RD 5; or
(ii)
extra pay, see section RD 7; or
(iii)
a schedular payment, see section RD 8:
does not include—
(i)
an amount attributed under section GB 29 (Attribution rule:
calculation):
(ii)
an amount paid to a shareholder-employee in the circumstances
set out in subsection (2):
(iii)
an amount paid or benefit provided, by a person (the claimant)
who receives a personal service rehabilitation payment from
which an amount of tax has been withheld at the rate specified
in schedule 4, part I (Rates of tax for schedular payments) or
under section RD 18 (Schedular payments without notification),
to another person for providing a key aspect of social
rehabilitation referred to in paragraph (c) of the definition of
personal service rehabilitation payment in section YA 1
(Definitions).
When subsections (3) and (4) apply: close companies
(2)
Subsections (3) and (4) apply for an income year when a person is a
shareholder-employee of a close company, and—
(a)
(b)
they do not derive as an employee salary or wages of a regular amount
for regular pay periods—
(i)
of 1 month or less throughout the income year; or
(ii)
that total 66% or more of the annual gross income of the person
in the corresponding tax year as an employee; or
an amount is paid as income that may later be allocated to them as an
employee for the income year.
Income in current tax year
(3)
The person may choose to treat all amounts paid to them in the income year
in their capacity as employee of the close company as income other than from
a PAYE income payment.
Income in later tax years
(4)
All amounts paid to the person in later income years in their capacity as
employee of the close company are treated as income other than from a PAYE
income payment.
If questions arise
(5)
If a question arises whether the PAYE rules apply to all or part of a PAYE
income payment, other than an amount referred to in subsections (2) to (4),
the Commissioner must determine the matter
Analysis
To determine whether an employee-related payment is not subject to tax, it is
necessary to first analyse the general employment income provisions
(section CE 1) that include amounts that are expenditure on account of an
employee. It is also necessary to consider the meaning of “in connection
with” because for an amount to be income under section CE 1, the
amount must be derived in connection with a person’s employment or
service.
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EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
“Expenditure on account of an employee” is defined in section CE 5, which
contains exclusions. Two exclusions relate to the four employee-related
payments. The exclusion in section CE 5(3)(c) relates to employer
expense payments. The second relevant exclusion is in
section CE 5(3)(a) and relates to reimbursing allowances, reimbursing
payments, and expenditure on account payments exempted by
section CW 17. Section CW 17(1) provides an exemption for expenditure
on account payments, and section CW 17(2) provides an exemption for
reimbursing allowances and reimbursing payments.
Section CE 1 – employment income
Section CA 1(1) states that an amount is income if it is included in a person’s
income under Part C of the Act. Section CE 1 lists items that are income
derived by a person in connection with their employment or service.
These items are treated as employment income under the definition of
employment income in section YA 1. Included in section CE 1 is
“expenditure on account of an employee”. This expression is central to
the analysis in this interpretation guideline. Before considering the
meaning of “expenditure on account of an employee”, it is helpful to
consider the meaning of the phrase “in connection with … employment or
service” in section CE 1 because for an amount to be employment income
it must be “derived by a person in connection with their employment or
service”. The issue to be considered is whether the payment is linked
sufficiently to the employment or service relationship. The phrase “in
connection with” also appears in sections CE 5(3)(c) and CW 17 (1) and
(2). Therefore, the following analysis applies equally to these provisions
insofar as the phrase “in connection with” is used in those provisions.
Meaning of “in connection with”
The phrase “in connection with” in section CE 1 is not defined in the Act. The
phrase was introduced in the Income Tax Act 2004. The corresponding
words in the Income Tax Act 1994 were “in respect of or in relation to” in
the definition of “monetary remuneration”. Under the transitional
provisions in the Income Tax Act 2007 (section ZA 3) and the Income Tax
Act 2004 (section YA 3), and even though the wording has changed,
section CE 1 are the provisions of the Income Tax Act 1994 in rewritten
form unless a specific policy change is listed in schedule 51. No policy
change in relation to section CE 1 is listed in schedule 51. Therefore, the
presumption is that the adoption of the term “in connection with” was not
intended to give rise to an interpretation that differs from the
interpretation that would apply to the term “in respect of or in relation to”
as used in the definition of “monetary remuneration” in the Income Tax
Act 1994. It is, therefore, appropriate to consider the meaning of the
phrase “in respect of or in relation to” in the interpretation of the phrase
“in connection with” in section CE 1.
The courts have considered the meaning of “in respect of or in relation to” on
several occasions: Shell New Zealand Ltd v CIR (1994) 16 NZTC 11,303;
Paterson v Chadwick [1974] 2 All ER 772; Trustees, Executors & Agency
Co Ltd v Reilly [1941] VLR 110; State Government Insurance v Rees
(1979) 144 CLR 549; Nowegijick v R (1983) 144 DLR (3d) 193; Smith v
FCT 87 ATC 4883; FCT v Rowe 95 ATC 4,691; CIR v Fraser (1996) 18
NZTC 12,607. In summary, these cases explain the meaning of the
phrase as follows:

The words “in respect of or in relation to” have a wide meaning.
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EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY

There must be a sufficient connection between the subject-matters to
which the words refer.

The words must be interpreted according to the context in which the
words are used.
Three public rulings consider the meaning of “in respect of or in relation to” and
the analysis in these rulings is consistent with the above cases. The three
rulings are:

“Employment Court awards for lost wages or other remuneration –
employers’ liability to make tax deductions” Tax Information Bulletin
Vol 18, No 7 (August 2006) (BR Pub 06/06);

“Taxability of payments under the Human Rights Act 1993 for
humiliation, loss of dignity, and injury to feelings” Tax Information
Bulletin Vol 17, No 6 (August 2005) (BR Pub 05/12); and

“Federal Insurance Contributions Act (FICA) – fringe benefit tax (FBT)
liability” Tax Information Bulletin Vol 21, No 4 (June 2009)
(BR Pub 09/02).
Application of the above meaning of “in respect of or in relation to” gives the
expression “in connection with” a similarly wide interpretation. The
Concise Oxford Dictionary (Oxford University Press, 11th ed, revised
2006) defines “connection” as a link or relationship between people or
things. Therefore, in the context of section CE 1, the relationship
between the payment by the employer and the employment or service
may be wide but there must still be a sufficient relationship or nexus
between the payment and the person’s employment or service.
In considering whether such a connection exists in the context of the meaning of
“in respect of or in relation to” in the definition of “monetary
remuneration”, the courts have focused on whether the payment is a
consequence of the employment or service: Shell New Zealand Ltd v CIR;
Smith v FCT; FCT v Rowe; CIR v Fraser.
In Shell New Zealand Ltd v CIR, the Court of Appeal considered the meaning of
the words “in respect of or in relation to” in terms of considering whether
lump-sum payments Shell made to employees who transferred at Shell’s
request were monetary remuneration. McKay J held that even though the
payments Shell made were not made under a contract of employment,
they were still made because of the employment relationship.
In Case L92 (1989) 11 NZTC 1,530, Barber DJ considered the term “monetary
remuneration” in relation to a payment of compensation for unjustified
dismissal under the Industrial Relations Act 1973. The compensation was
calculated on the basis of the personal hurt and procedural unfairness
suffered by the objector. Barber DJ found that, even though the payment
was compensatory in nature, it was money received in respect of the
objector’s employment. Barber DJ stated that the expressions
“compensation for loss of office or employment”, “emolument (of
whatever kind), or other benefit in money”, and “in respect of or in
relation to the employment or service of the taxpayer” have a wide
embrace and go beyond the narrower concept of the words “salary, wage,
allowance, bonus gratuity, extra salary” that precede them. On the
particular facts Case L92, Barber DJ held that “monetary remuneration”,
interpreted widely, covered the payment in issue.
Three further examples of a court holding the payment to be a consequence of
the employment relationship are as follows:

An employee received a lump-sum payment from a new employer to
compensate the employee for a possible loss of a capital gain on
14
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
share options in the employee’s former employer company: Pickford
v FCT 98 ATC 2,268. The Administrative Appeals Tribunal found that
the $20,000 payment was an inducement to enter into the
employment of the new employer and its source was in the service to
be rendered by the taxpayer. The payment was an incident of the
taxpayer’s income-earning activities as an employee.

An employee received payments for successfully completing a course
of study that was related to the employee’s employment: Smith v
FCT.

A soccer player received a payment from the player’s current club to
transfer to another club. The transfer fee was deemed to be “an
emolument from employment”: Shilton v Wilmshurst (Inspector of
Taxes) [1991] 3 All ER 148 (HL).
In all three cases, the court effectively held that the employment
relationship was a substantial enough reason for the respective
payments. Therefore, the payments had the necessary connection with
employment.
It is acknowledged that not all payments by an employer to an employee will be
considered as being amounts derived in connection with employment or
service: BR Pub 06/06. However, when an employer makes a payment to
an employee, it will generally be taken to be “in connection with” the
employee’s employment or service, unless the parties can establish that
the particular facts are otherwise.
Two examples of a court holding that a payment to an employee had not arisen
as a consequence of an employment relationship are as follows:

An ex gratia payment by the Queensland government to an excouncil employee as reparation for legal costs the employee had
incurred defending his dismissal proceedings were not sufficiently
related to the income-earning activities: FCT v Rowe.

A payment to compensate for the giving up of a vocation as a
television current affairs presenter was not sufficiently related to the
income-earning activities: CIR v Fraser.
These two examples illustrate that the circumstances where a payment
from an employer to an employee (or to a third party on behalf of an
employee) is not “in connection with” the employee’s employment or
service are limited. Therefore, it is unlikely that a commonly occurring
payment such as one of the employee-related payments under
consideration would not have the necessary connection to an employee’s
employment or service.
It is the Commissioner’s view, supported by case law, that for the purposes of
section CE 1 (and sections CE 5(3)(c) and CW 17(1) and (2)), a payment
made “in connection with … employment or service” has a wide meaning
and includes payments made in respect of future, present, or past
employment or service. However, this broad interpretation still requires
there to be a sufficient link between the payment and the employee that
arises from the employment or service relationship. The nature of the
payment is critical in determining this.
The broad scope of the items listed in section CE 1 supports the wide
interpretation given to the meaning of “in connection with” because
Parliament intended that the extensive list of items would be treated as
employment income with the exception of specific exclusions. In other
words, section CE 1 is intended to capture most payments between an
employer and an employee or made on an employee’s behalf. Therefore,
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EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
it can be said that prima facie these payments are treated as employment
income because they fall within the wide class of items listed in
section CE 1 because they arise out of the employment relationship.
However, some payments are then specifically excluded under the
exclusions in section CE 5(3). This means payments that have the
characteristics of other relationships such as principal–agent or debtor–
creditor relationships can still be “in connection with” the employee’s
employment or service because the other relationship has arisen or came
about because of the employee’s employment or service. The payments
resulting from these other relationships may ultimately be excluded from
employment income because they fall outside the definition of
“expenditure on account of an employee” not because they are not “in
connection with employment or service”.
Section CE 5 – meaning of “expenditure on account of an employee”
Reimbursing payments and expenditure on account payments prima facie fall
within the definition of “expenditure on account of an employee” in
section CE 5 because they are payments by an employer relating to
expenditure incurred by an employee. Reimbursing allowances and
employer expense payments do not necessarily meet this requirement.
Irrespective of this, the specific exclusions in section CE 5(3) need to be
considered. Section CE 5(1)–(3)(c) provides:
CE 5
Meaning of expenditure on account of an employee
Meaning
(1)
Expenditure on account of an employee means a payment made by an
employer relating to expenditure incurred by an employee.
Inclusion
(2)
Expenditure on account of an employee includes a premium that an
employer pays on a life insurance policy taken out for the benefit of the
employee, or their spouse, civil union partner, de facto partner, or their child.
This subsection is overridden by subsection (3)(f) to (i).
Exclusions
(3)
Expenditure on account of an employee does not include—
(a)
expenditure for the benefit of an employee, or a payment made to
reimburse an employee, under section CW 17 (Expenditure on account,
and reimbursement, of employees):
(b)
an allowance for additional transport costs under section CW 18
(Allowance for additional transport costs):
(bb)
an amount paid under section CW 17B (Relocation payments) or
section CW 17C (Payments for overtime meals and certain other
allowances):
(c)
expenses that an employee pays in connection with their employment
or service to the extent to which the expenditure is their employer’s
liability, if the employee undertakes to discharge the liability in
consideration of the making of the payment by the employer:
A payment made by an employer relating to expenditure incurred by an
employee is “expenditure on account of an employee” unless excluded
under section CE 5(3). As mentioned, the relevant exclusions for the
employee-related payments are section CE 5(3)(a) and (c). The
exclusion in section CE 5(3)(a) relates to the exemptions provided in
section CW 17, including reimbursing allowances, reimbursing payments,
and expenditure on account payments. The exclusion in
section CE 5(3)(c) relates to employer expense payments. Employer
expense payments are considered first as the other three payments have
some common features.
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EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
Employer expense payments – section CE 5(3)(c) exclusions
This section deals with what is required to make an employer expense payment
not subject to tax. This means that section CE 5(3)(c) will apply to the
employer expense payment. The effect of this is that the payment is not
treated as “expenditure on account of an employee” in section CE 1(b), so
is not subject to tax.
Section CE 5(3)(c) states that expenditure on account of an employee does not
include:
(c)
expenses that an employee pays in connection with their employment or
service to the extent to which the expenditure is their employer’s liability, if
the employee undertakes to discharge the liability in consideration of the
making of the payment by the employer:
This exclusion originates from the introduction of the definition of “expenditure
on account of an employee” into the Income Tax Act 1976 as a result of
the introduction of FBT. This paragraph was intended to cover the
employer expense payment situation where an employee pays the
expenses of their employer’s business and is subsequently reimbursed for
that amount by their employer. This was recognised in the Public
Information Bulletin 136 (February 1986), which explained the meaning
of the definition of “expenditure on account of an employee”:
the legislation also provides exclusions from the definition for certain types of business
related reimbursing payments which should not be liable to income tax.
…
Subparagraph (iii) [now section CE 5(3)(c)] excludes payments which consist of
reimbursement, by the employer, of business expenditure paid for by the employee on
the employer’s behalf.
Also, unlike the terms used in the other exclusions in section CE 5(3), the use of
the word “expenses” in section CE 5(3)(c) supports the view that this
exclusion is intended to cover situations where an employee pays for
some expenses of their employer’s business and is subsequently
reimbursed by their employer. Consequently, employer expense
payments are distinguishable from reimbursing payments that are
exempt under section CW 17(2) because employer expense payments
relate to expenses of the employer’s business and reimbursing payments
under section CW 17(2) relate to employee’s expenditure.
For employer expense payment to be excluded under section CE 5(3)(c) three
requirements must be met:
(i)
The expenses must have been paid by the employee in connection
with the employee’s employment or service.
(ii)
The employer must be liable for the expenditure (or a portion of the
expenditure).
(iii)
The employee is paying for the expenses in consideration for the
employer making payment to the employee.
This means that for an employer expense payment from an employer to
an employee to be excluded under section CE 5(3)(c), the payment must
represent a reimbursement for expenses the employee has paid for in
connection with their employment or service for which the employer is
liable and the employee has paid for the expenses in consideration of the
employer making the payment to the employee. These three
requirements are analysed further in paragraphs 0–78.
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EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
Requirement 1 - Expenses must have been paid by the employee in
connection with the employee’s employment or service
The Commissioner considers that in the case of an employer expense payment,
the employee must have paid for something in order for the employer to
reimburse the employee. However, in addition to this, the payment must
be “in connection with the employee’s employment or service”. The
meaning of this expression has been discussed above, and it is the
Commissioner’s view that this expression has a broad meaning. In the
context of an employer expense payment, there must be a sufficient
relationship or nexus between the payment by the employee and the
employee’s employment or service. It is considered that this link exists
because the employee is paying the expenses as a result of the
employment relationship with their employer. In other words, the
payment by the employee has come about as a result of the employment
relationship.
It is sometimes suggested that the relationship between the employer and the
employee in this case is more akin to an agency relationship where the
employee, as agent, is paying the expenses on behalf of their employer,
as principal. Therefore, the payment is removed from the employment
context and the necessary connection with the employee’s employment or
service does not exist. However, the Commissioner’s view is that the
wide meaning of the term “in connection with” (as discussed previously)
does not support the idea that this agency relationship removes the
connection with the employee’s employment or service. This view is
supported by the statutory scheme of the employment income provisions
in terms of the wide range of items listed in section CE 1 and the specific
nature of the exclusions listed in the definition of “expenditure of account
of an employee” in section CE 5, including the employer expense payment
exclusion.
Cases that have considered the meaning of “in connection with” indicate that the
two things under consideration (in this case the payment of the
employer’s business expenses by the employee and the employee’s
employment or service) must be related in some way. As is discussed in
more detail below, the payment results from the employee having explicit
or implicit authority from their employer to pay the expenses on the
understanding that the employee will be reimbursed for the amount paid.
This arrangement is clearly related to the employee’s employment or
service as evidenced by these reimbursing arrangements being often
referred to in employment terms. Consequently, it is considered that for
the purposes of employer expense payments, the payment by the
employee is in connection with the employee’s employment or service.
Requirement 2 - Employer must be liable for the expenditure
Section CE 5(3)(c) contains the words “to the extent to which the expenditure is
[the] … employer’s liability”. These words mean that the employer must
be liable for the expenditure. The words “to the extent” indicate that the
employer may be liable for only a portion of the expenses. Therefore, it
would be only that portion that section CE 5(3)(c) would apply to. The
word “liability” is not defined in the Act. Ordinarily it means “the state of
being liable” where “liable” means “responsible by law; legally
answerable” (Concise Oxford Dictionary Oxford University Press, 11th ed,
revised 2006). This needs to be considered in terms of the context of the
use of word “liability” in section CE 5(3)(c). The use of the word “liability”
in this section suggests that the employer has the legal responsibility for
the expenditure and because the employee has paid, a debtor–creditor
18
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
type relationship has been created where the employee as debtor is owed
an amount by the employer as creditor. In a sense, the employee is
acting as the agent of the employer and settling the liability of the
employer with a third party on behalf of the employer, thereby resulting
in the debtor–creditor relationship.
This type of expenditure was referred to in Case M23 (1990) 12 NZTC 2,142
where the court was dealing with a potential failure to deduct PAYE on
certain employee payments under legislation before the enactment of the
“expenditure on account of an employee” definition. In Case M23 the
employee reimbursed herself from company funds for expenses such as
vehicle and entertaining costs that the employee paid for whilst her
employer was away from work. The employer and employee then agreed
to the payment of a weekly allowance to cover these costs. An allowance
payment would have been subject to PAYE under the definition of “source
deduction payment” in the Income Tax Act 1976. Bathgate DJ made a
distinction between allowances including reimbursing allowances and a
payment to an employee to reimburse them for an amount they had paid
on behalf of their employer (that is, an employer expense payment):
I do not think the payments made to [the employee] were an allowance as could be
recognised under s 73(2) of the Act. An allowance generally is paid by way of a benefit
to an employee, sometimes as remuneration or extra remuneration. The expenditure
with which s 73(2) is concerned is expenditure of an employee ... incurred by that
person in gaining or producing his assessable income, ... the payments to [the
employee] were not payments of an allowance in the sense of being additional
remuneration or to reimburse her for expenditure she incurred in gaining or producing
her assessable income in the sense used in s 73(2). The payments to [the employee]
were to repay her or reimburse her for money she had paid for and on behalf of the
objector. In a sense they may have been paid by her in the course of her gaining or
producing her own income from employment, but that was only incidental. She had
paid the money out or incurred the expenditure for [her employer]. … [The payments]
were not made for [the employee’s] remuneration and were not received by her as
such. They were not payments of salary, wages or extra emolument because of the
nature of the payments being for reimbursement and nothing else. There was a
debtor-creditor relationship between the employer and employee, not for
wages, salary, or remuneration of any kind, but simply for money the employee had
expended for the employer from the employee's own pocket that was reimbursed by
the employer.
[Emphasis added.]
Case M23 illustrates that the courts have recognised that a debtor–creditor
relationship can exist within an employment context. However, this case
was decided before the “expenditure on account of an employee”
definition was introduced. Therefore, it cannot be said that this case is
authority for debtor–creditor type payments being outside of the
employment income net.
DA Norton v CIR (1995) 17 NZTC 12,207 (and its predecessor in the Taxation
Review Authority Case Q42 (1993) 15 NZTC 5,200) are additional
decisions that provide assistance in identifying the types of payments
covered by section CE 5(3)(c). The case concerned the recharacterisation
of a real estate agent’s commission payment following a High Court
decision (Challenge Realty Ltd v CIR (1990) 12 NZTC 7,022) that
determined real estate salespersons were employees rather than
independent contractors. The result of the Challenge decision meant that
real estate salespersons were unable as employees to claim a deduction
for expenditure incurred in deriving their commission income.
In Norton, both the Taxation Review Authority and the High Court found for the
Commissioner. The cases identify two types of reimbursing payment:
“genuine reimbursements” and “personal reimbursements”. In the
Taxation Review Authority Barber DJ noted (at page 5,208):
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EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
I accept that, at common law, the nature of genuine reimbursing payments must
be non revenue. However, that common law approach must be overridden by section
73. The Act is a code.
[Emphasis added.]
In the High Court, Henry J also referred to “genuine reimbursements” (at page
12,211):
There is a further reason for holding that these payments were not genuine
reimbursement of expenditure incurred on behalf of Harcourts. It may often be
difficult to draw the line on which side of it a particular case falls, but the position here
is I think relatively clear. The expenses were incurred personally by the
appellant, not “on behalf of” Harcourts. The availability of a car and telephone are
included in the services to be provided by the salesperson. The original form of
contract as evidenced by the document produced at the hearing before the Authority
expressly records these obligations as being at the expense of the salesperson. … the
reimbursement is of the salesperson’s expenses, and therefore revenue. The
fact that the expenses were incurred in fulfilling the appellant’s contractual
obligations does not alter their character or convert them into the employer’s
expenses.
[Emphasis added.]
Both Barber DJ and Henry J identified a difference between payments
made to reimburse expenditure incurred in deriving the employee’s
income (personal expenditure) and that incurred in deriving the
employer’s income (referred to as “genuine reimbursements”). However,
as the court was not required to consider the income tax treatment of a
genuine reimbursing payment, the decisions can be said to only recognise
the difference in the two types of reimbursing payment. In terms of the
employee-related payments, this case illustrates the difference between
employer expense payments (“genuine reimbursements”) and
reimbursing payments (“expenses incurred personally”).
Both Case M23 and Norton show that “genuine reimbursements” stem from the
liability of the employer to pay for their business expenses. A “genuine
reimbursement” occurs when the employee has paid for some of the
employer’s expenses on behalf of the employer on the assumption they
will be reimbursed for the payment amount and the employer reimburses
the employee for the amount paid. This arrangement represents a
debtor–creditor relationship within the wider employment relationship.
Evidence of this debtor–creditor relationship is often found (overtly or implicitly)
in documentation establishing the employment or service relationship or it
may be the employer’s established practice to reimburse employees for
expenses of the employer’s business paid for on behalf of their employer.
However, essential to this arrangement is the necessary authorisation
from the employer to the employee to pay for the employer’s expenses
on behalf of the employer on the understanding that the employee will be
reimbursed for the amount of the payment. For an employee to pay for
expenses on behalf of their employer, this authorisation must have been
given (explicitly or implicitly) before the employee pays for the expenses.
This authorisation is also likely to be found in the documentation
establishing the employment or service relationship.
Requirement 3 - Employee is paying for the expenses in consideration
for the employer making payment to the employee
The third requirement to be met for an employer expense payment to be
excluded under section CE 5(3)(c) is reflected in the following words in
the section:
the employee undertakes to discharge the liability in consideration of the making of the
payment by the employer:
20
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
It is considered that these words mean that the reason the employee agreed to
pay the expenses is because the employer would be reimbursing the
employee for that amount as was the case in Norton and Case M23. It is
also noted that these words do not contemplate any apportionment in the
reimbursing payment. In other words, the amount the employee pays is
the amount that the employee is reimbursed. This suggests that the type
of expenditure meant by the word “expenses” is expenses of the
employer’s business.
Example 1 – employer expense payment
An employer asks one of his employees to purchase a morning newspaper for
the staffroom on the way to work each morning. The employee is
reimbursed for the cost of the newspaper as per the company’s policy on
the reimbursement of business expenses. The amount of the
reimbursement paid to the employee is an employer expense payment.
The reimbursement is not subject to tax as it is not “expenditure on
account of an employee” because as a result of the employment
relationship the employee has been asked by his employer to purchase
and pay for the newspapers that are an expense of the employer’s
business on the understanding that the employee will be reimbursed for
this expenditure.
Example 2 – employer expense payment
An employer has received an invoice for office stationery and has asked one of
her employees to go and collect the stationery and pay the invoice at the
same time. The employee is reimbursed for the cost of the stationery
after he submits a business expense reimbursement form. The amount of
the reimbursement paid to the employee is an employer expense
payment. The reimbursement is not subject to tax as it is not
“expenditure on account of an employee” because, as a result of the
employment relationship, the employee collected and paid for the
stationery that is an expense of the employer’s business on the
understanding that the employee would be reimbursed for the amount
paid.
Summary of examples 1 and 2 – “employer’s liability”
Examples 1 and 2 illustrate that “employer’s liability” in section CE 5(3)(c) can
mean both:

liability as a result of the debtor–creditor relationship with the
employer being liable for the amount of the payment to the
employee; and

an employer’s liability with a third party that the employee pays on
behalf of the employer on the understanding that they will be
reimbursed for the amount paid.
Fringe benefit tax liability
If the three requirements of section CE 5(3)(c) have been met, the employer
expense payment is not “expenditure on account of an employee” and is
not income to the employee and therefore not subject to tax. However,
the employer may still be liable for FBT if the expenses that the employer
expense payment relates to result in the employee receiving a benefit
that is subject to FBT. “Employee” in this context does not include
employees who are treated as employees because they are receiving a
21
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
schedular payment under part A (payments to non-contractors) or part I
(personal service rehabilitation payments) of schedule 4 to the Act.
Example 3 – employer expense payment and fringe benefit tax
An employer orders rugby tickets for his three employees and asks one of them
to collect and pay for them on the basis that the employee will receive an
employer expense payment covering the cost of the tickets. The
employer expense payment to the employee is not “expenditure on
account of an employee” because it is excluded under section CE 5(3)(c)
and therefore not subject to tax. However, the employer is liable for FBT
on the value of the rugby tickets provided to the employees.
Reimbursing allowances, reimbursing payments, and expenditure on
account payments – section CE 5(3)(a) exclusion and section CW 17
exemptions
This section deals with what is required to make reimbursing allowances,
reimbursing payments, and expenditure on account payments not subject
to tax.
Section CE 5(3)(a) provides for an exclusion from the definition of “expenditure
on account of an employee” for amounts exempted under section CW
17(1) and (2). Section CW 17 provides an exemption for the following
types of payments to (or on behalf) of employees:

Expenditure on account payments to the extent to which the
employee would be entitled to a deduction for the expenditure
incurred if the employment limitation did not exist: section CW 17(1).

Reimbursing allowances to the extent the employee would be entitled
to a deduction for the expenditure likely to be incurred if the
employment limitation did not exist: section CW 17(2) and (3).

Reimbursing payments to the extent the employee would be entitled
to a deduction for the expenditure incurred if the employment
limitation did not exist: section CW 17(2).
For an expenditure on account payment to be exempted under
section CW 17(1), so not subject to tax, three requirements must be met:

The employee must have incurred expenditure for which the
employer has paid (or assumed the liability to pay).

The expenditure is in connection with the employee’s employment or
service.

The employee would be entitled to a deduction for the expenditure
(or a portion of the expenditure) if the employment limitation did not
exist.
For a reimbursing allowance to be exempted under section CW 17(2) and
therefore not subject to tax, four requirements must be met:

The employee is likely to incur some expenditure.

The employer has paid an allowance to the employee based on a
reasonable estimate of the amount of expenditure likely to be
incurred by the employee.

The payment is in connection with the employee’s employment or
service.

The employee would be entitled to a deduction for the expenditure
(or a portion of the expenditure) if the employment limitation did not
exist.
22
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
For a reimbursing payment to be exempted under section CW 17(2) and
therefore not subject to tax, four requirements must be met:

The employee must have incurred some expenditure.

The employer has reimbursed the employee for the expenditure
incurred.

The payment is in connection with the employee’s employment or
service.

The employee would be entitled to a deduction for the expenditure
(or a portion of the expenditure) if the employment limitation did not
exist.
Section CW 17(1) and (2), therefore, provides for the exemption of expenditure
on account payments, reimbursing allowances, and reimbursing payments
when the expenditure (or a portion of the expenditure) that the payment
is made in respect of would be deductible from the employee’s
employment income if the employment limitation did not exist. In effect,
section CW 17 provides that employees are entitled to an exemption for
these types of expenditure on the same basis that deductibility of
expenditure applies to all taxpayers without the operation of the
employment limitation. Given that this deductibility requirement is a
requirement common to expenditure on account payments, reimbursing
payments, and reimbursing allowances, this requirement is considered
first, then the individual requirements of each type of payment are
considered.
Deductibility of expenditure
Subpart DA sets out the general rules relating to the deductibility of expenditure.
Section DA 1(1)(a) contains the general permission that permits a
deduction for an amount of expenditure or loss to the extent that it is
incurred by a person in deriving their assessable income. To qualify for a
deduction under the general permission, the expenditure needs to bear a
sufficient relationship and nexus to the deriving of assessable income. In
terms of section CW 17, the assessable income is the income derived
from the employee’s employment or service. If the required nexus with
income exists, general limitations in section DA 2 may apply to deny a
deduction for the expenditure. These general limitations include the
employment limitation, capital limitation, and private limitation.
Ordinarily, the employment limitation prohibits a deduction for expenditure
related to deriving income from employment. However section CW 17
specifically sets this general limitation aside. The private limitation
excludes from deductibility any expenditure to the extent that is “of a
private or domestic nature”. The capital limitation denies a deduction for
an amount of expenditure or loss to the extent it is of a capital nature.
There are other general limitations in section DA 2 but given the nature of
the payments under consideration, the private limitation and the capital
limitation are the most applicable. These general limitations affect the
deductibility of expenditure incurred by taxpayers deriving income from
their employment or service and must be considered in the context of the
exemption provided in section CW 17. It may be that the expenditure
under consideration would satisfy the general permission but would not
be deductible because either the private limitation or the capital limitation
would apply to deny the deduction.
It is also noted that section CW 17(4) provides that references to “expenditure”
in section CW 17 include an amount of depreciation loss. This means that
if a reimbursing allowance, a reimbursing payment, or an expenditure on
23
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
account payment included an amount representing depreciation, the
payment would not be denied the exemption because of the depreciation
element. This would be common with a mileage allowance that would
typically include an element for vehicle depreciation.
General approach to deductibility – nexus with income
The leading New Zealand authorities on the deductibility of expenditure are the
two Court of Appeal decisions CIR v Banks [1978] 2 NZLR 472 and
Buckley & Young Ltd v CIR [1978] 2 NZLR 485. These cases are
authority for the proposition that there must be a sufficient nexus
between the expenditure and the income-earning process in order for the
expenditure to be deductible.
Banks concerned a successful claim by an accountancy lecturer to deduct some
of the expenses relating to his home because part of his home was set
aside and used as an office from which he carried on income-producing
activities. Richardson J said (at page 476):
The deduction is available only where expenditure has the necessary relationship, both
with the taxpayer concerned and with the gaining or producing of his assessable
income…There must be the statutory nexus between the particular expenditure and
the assessable income of the taxpayer claiming the deduction.
[Emphasis added.]
In Buckley & Young, the Court of Appeal reiterated the requirements of the
general deductibility provision from Banks. Richardson J (for the court)
stated (at page 487):
There are two features of sec. 111 [now section DA 1 of the Income Tax Act 2007]
which are of particular importance in this case. The first is that a deduction is available
only where the expenditure has the necessary relationship both with the taxpayer
concerned and with the gaining or producing of his assessable income or with the
carrying on of a business for that purpose. The heart of the inquiry is the
identification of the relationship between the advantage gained or sought to
be gained by the expenditure and the income earning process. That in turn
requires determining the true character of the payment. It then becomes a matter of
degree and so a question of fact to determine whether there is a sufficient
relationship between the expenditure and what it provided or sought to
provide on the one hand, and the income earning process on the other, to fall
within the words of the section (C. of I.R. v Banks (1978) 3 NZTC 61,236, 61,242).
The second feature of sec. 111 is that the statutory language contained in the phrase
“to the extent to which” expressly contemplates apportionment.
[Emphasis added.]
In Cox v CIR (1992) 14 NZTC 9,164, Williams J summarised the principles
related to the nexus requirement (at page 9,168):
The decisions of the Court of Appeal in CIR v Banks (1978) 3 NZTC 61,236 at
p 61,240, and Buckley & Young Ltd v CIR (1978) 3 NZTC 61,271 at p 61,274 discuss
the general principles which are to govern an application under s 104. Three key
elements underlie the Court of Appeal's comments as to the relevant criteria.
1. A deduction is only available under [section BD 2(1)(b)(i) or section BD 2(1)(b)(ii)]
if a sufficient relationship exists between the expenditure and both the
taxpayer and the generation of his assessable income or with the carrying on of a
business for that purpose. This requires a focus on the relationship between
the advantage gained or sought to be gained by the expenditure and the
income-earning process, which in turn requires one to focus on the true
character of the payment made;
2. It is a matter of degree and a question of fact whether such a sufficient relationship
does exist;
3. The words “to the extent to which” contemplate that items of expenditure may be
apportioned in terms of their deductible and non-deductible components.
[Emphasis added.]
These cases indicate that the general deductibility permission in section DA
1(1)(a) requires there to be a sufficient relationship between the
24
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
expenditure and the income-earning process of the taxpayer claiming the
deduction. A deduction is available only where expenditure has the
necessary relationship, both with the taxpayer concerned and with the
gaining or producing of their assessable income. There must be a
statutory nexus between the particular expenditure and the assessable
income of the taxpayer claiming the deduction. In every case this will be
a question of fact. This means the expenditure needs to be related to the
employee’s employment income.
Case law – examples where a sufficient nexus was established
In Case F9 (1983) 6 NZTC 59,606, the court upheld the taxpayers’ claims for
deductions for drycleaning and clothing costs as they were sufficiently
related to their employment as hotel managers to allow the deduction for
the expenditure under section 105 of the Income Tax Act 1976.
In Case H37 (1986) 8 NZTC 327, the court partly upheld a claim by the taxpayer
for the cost of spectacles used only at work as an editor of a scientific
publication. The court considered there was a sufficient nexus between
50% of the expenditure and the taxpayer’s income from employment.
Case law – examples where a nexus was not established
In Case M96 (1990) 12 NZTC 2,594, the court considered that the cost of
airfares between a taxpayer’s overseas residence and place of
employment in New Zealand did not have a sufficient connection with the
taxpayer’s job as a university lecturer in New Zealand.
In Case H62 (1986) 8 NZTC 456, a taxpayer’s claim for the cost of erecting
security gates at his house was denied on the basis that there was not a
sufficient nexus between the expenditure and the taxpayer’s incomeearning process even though the need for the security gates arose
because of the taxpayer’s job as a police officer.
The four cases described above demonstrate that the required nexus with the
income-earning process can be difficult to establish when the expenditure
in question has a private or domestic element. It is this type of
expenditure that is often under consideration when the deductibility of
employment-related expenditure, in particular the deductibility
requirement in section CW 17, is being considered. Ordinarily, the type of
expenditure under consideration in four cases above would be prohibited
because of the employment limitation in section DA 2(4). However,
section CW 17 sets aside this limitation, so it is then necessary to
consider whether the private limitation would prohibit such a deduction.
Private limitation – private or domestic expenditure
What constitutes private or domestic expenditure in an income tax context has
been discussed by the courts in New Zealand and overseas on many
occasions. Inevitably, the conclusions reached by the courts have been
based on the particular facts of each case. Given that under section CW
17 the type of expenditure that would be under consideration will be
related to a person’s income from employment or service, it is
appropriate to consider cases where employment expenditure has been
considered.
In New Zealand, the Court of Appeal has dealt with three cases that considered
the deductibility of expenditure by employees where that expenditure was
considered by the Commissioner to be of a private or domestic nature:
25
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
CIR v Haenga (1985) 7 NZTC 5,198; CIR v Belcher (1988) 10 NZTC
5,164; Hunter v CIR (1990) 12 NZTC 7,169. These three cases were
considered under sections 104, 105, and 106 and the Fourth Schedule of
the Income Tax Act 1976, which contained a specific regime providing for
the deductibility of expenditure for salary and wage earners where the
expenditure was “for the purpose of” and “a condition of” employment.
However, this expenditure was still subject to the private and domestic
prohibition in section 106.
Section 104 of the Income Tax Act 1976 contained similar wording to section BD
2(1) of the Income Tax Act 1994, and section DA 1(1) of the Income Tax
Act 2007 has the same effect as section BD 2(1). Also, section 106 of the
of the Income Tax Act 1976 is similar to the private limitation in section
DA 2(2). Therefore, the principles in relation to whether expenditure is
private or domestic from these decisions are likely to be appropriate when
considering deductibility in terms of the private limitation in the current
Act.
The critical issue in the three cases was whether the expenditure came within
the “purpose of, and a condition of, employment” test of clause 8 of the
Fourth Schedule of the Income Tax Act 1976. If a sufficient nexus existed
between the expenditure and condition of employment, and that
expenditure was for the purpose of that employment, the expenditure
was deductible. In other words if the necessary nexus is established, the
expenditure is not of a private or domestic nature.
CIR v Haenga
In CIR v Haenga the taxpayer was an employee of the New Zealand Railways
Corporation. The taxpayer claimed a deduction against his employment
income for contributions he was required to make by statute to an
employee welfare scheme. The welfare scheme was designed to provide
certain benefits to employees and their families mainly in respect of
health care. Evidence was presented indicating that membership to the
welfare society “resulted in improved work performance and attendance”
due to the security and relief afforded to members. This latter aspect
appears to have been a significant factor in the court’s finding for the
taxpayer.
The Commissioner argued that the expenditure was of a private or domestic
nature, so not deductible under section 106(1)(j) of the Income Tax Act
1976. However, the court found that the expenditure had the necessary
nexus to the income-earning process (the welfare society contributions
were for the purpose, and a condition, of employment under the Fourth
Schedule of the Income Tax Act 1976), so were not of a private or
domestic nature. Richardson J said (at page 5,207):
An outgoing is of a private nature if it is exclusively referable to living as an individual
member of society and domestic expenses are those relating to the household or
family unit …
[I]t is overly simplistic to brand these contributions to this welfare society as inherently
of a private rather than an employment character. On the contrary, in the very unusual
circumstances of this case I have come to the conclusion, not without hesitation, that
the required nexus exists between the expenditure in question and the gaining of the
employment income.
In reaching his conclusion, Richardson J held that expenses properly
characterised as consumption (such as food, clothing, and shelter) are
not incidental and relevant to the derivation of income just because they
are required in order for a person to be able to earn income. The decision
in CIR v Haenga indicates that it is necessary to determine whether the
26
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
expenditure, in whole or in part, is related exclusively to things of a
private or domestic nature.
CIR v Belcher
In CIR v Belcher, the taxpayer was a senior university lecturer who applied for
and was granted sabbatical leave to be spent mainly in London. During
this leave, she undertook research work and claimed a deduction against
her employment income for travel to, from, and about London and
accommodation in London while conducting her research work. The
taxpayer was expected under her conditions of employment to “engage
actively in research and to assist in promoting research”. The court
considered that in these circumstances the taxpayer was contractually
required to undertake the research work. The court noted that the type
of research undertaken could be carried out only in the United Kingdom.
The Commissioner first raised the private and domestic argument in the Court of
Appeal. The court rejected this late argument on the basis that it had not
been raised in the lower court. Nevertheless, Richardson J went on to
consider the argument and indicated that in his view the expenditure was
not of a private or domestic nature. Richardson J considered that the
costs associated with the taxpayer’s overseas research had the necessary
nexus to the derivation of income from the university. Richardson J said
(at page 5,169):
An expenditure does not exist in a vacuum. It is necessary to consider to what activity
it relates. What is it for? If the taxpayer is performing a condition of employment, any
expenditure appropriately incurred in doing so must I think be characterised as an
expenditure incurred as a condition of employment. To put it another way, a condition
that the employee do research necessarily extends to outlays required for that
research. The first step is to determine whether the subject matter of the
expenditure is a condition of the employment and, if so, the second is to
determine whether there is a sufficient relationship between the expenditure
and the income earning activity in respect of which it is incurred to warrant
the conclusion that it was incurred as a condition of employment.
[Emphasis added.]
On this point, Richardson J went on to draw parallels with his decision in CIR v
Haenga (at page 5,171):
In any event there is no substance in the new point. As earlier noted the Authority held
that all the expenditure was incurred by the taxpayer in gaining or producing her
assessable income from the university within s 105(2)(b). That finding has not been
challenged. And the finding under cl 6 is that the travel costs were incurred in the
course of the taxpayer’s employment and under cl 8 it is that other research expenses
were incurred as a condition of and for the purposes of the employment. On that
analysis these were work related expenses. They were of an employment, not a private
and domestic character. As in (Haenga) the finding of deductibility under those
provisions involves a finding that deduction is not debarred under s 106(1)(j).
Reference was made in CIR v Belcher to an earlier High Court case (CIR v
Mathieson (1984) 6 NZTC 61,838) that had similar facts to Belcher. In
Mathieson, the taxpayer was also a university lecturer who travelled to
England to undertake research while employed by the university.
Similarly, the taxpayer claimed accommodation costs over and above the
reimbursement from the university, but the High Court agreed with the
Commissioner’s decision to disallow the claim. The distinguishing feature
between these two cases was that in Mathieson the High Court judge
determined that the research in England was not a “condition of his
employment” – the taxpayer could have done the research anywhere – it
was his personal choice to do the research in England. This being the
case, the cost of accommodation did not meet the requirements of
clause 8 of the Fourth Schedule of the Income Tax Act 1976, and the
expenditure was of a private or domestic nature.
27
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
Richardson J concluded in CIR v Belcher that the costs met the requirements of
clause 8 of the Fourth Schedule of the Income Tax Act 1976. This case
illustrates that when an expense has the necessary nexus to the
derivation of the employee’s income from employment, it is not of a
private or domestic nature.
Hunter v CIR
In Hunter v CIR, the taxpayer was a police officer who applied for and gained
promotion to a more senior position in another city. This promotion
required the taxpayer to transfer from one city to another. The taxpayer
incurred moving expenses over and above the amount reimbursed to him
by the New Zealand Police, and he sought to claim a deduction against his
employment income for legal fees, land agent's charges, and other costs
arising from the sale of his family home and the purchase of a
replacement property. A critical point in this case was the specific
transfer requirements included in the New Zealand Police’s General
Instructions on Transfer. These instructions laid down strict conditions as
to when an officer and the officer’s family could transfer; for example, it
was not possible for the officer to take up his new position until he had
established a home in the new city and moved his family with him. The
court viewed these requirements as distinguishing police officers from
other public sector employees who had more flexibility in relation to
transfers. However, the court found that the expenditure fell into the
category of “private and domestic”, on the natural and ordinary meaning
of those words. The court considered that the provision of housing or
shelter is a highly domestic and personal requirement, and that the
expenditure had no direct role in the income-producing activity of the
taxpayer, but rather the payment was more a prerequisite to earning
income.
As with CIR v Haenga, the Commissioner’s arguments were that the costs were
of a private or domestic nature, so were not deductible because of the
application of section 106(1)(j) of the Income Tax Act 1976.
Richardson J stated (at page 7,171):
To meet the deductibility requirements of [section 105(2)(b), cl 8 of the Fourth
Schedule and section 106(1)(j) of the Income Tax Act 1976] … four tests must be
satisfied: (1) the expenditure must have been incurred by the taxpayer in gaining or
producing assessable income (s 105(2)(b)); (2) the expenditure must have been
incurred for the purposes of the employment (Fourth Schedule cl 8); (3) the
expenditure must not have been of a private or domestic nature (Fourth Schedule cl 8
and s 106(1)(j)); and (4) the expenditure must have been a condition of the
employment (Fourth Schedule cl 8).
It was noted in Haenga (NZTC p 5,207; NZLR p 128 [TRNZ p 50]) that the exclusion of
expenditure made on private matters comes from the requirement of the first limb of
s 104 (and s 105(2)(b)) which limits deductions to expenditure incurred in gaining
assessable income, and the express inclusion in s 106(1)(j) may be regarded as having
been inserted by way of precaution or emphasis. That links tests (1) and (3).
… And where that test is met the expenses are properly characterised as work related
expenses: they are of an employment not a private or domestic character and
deductibility in terms of s 105(2)(b) and the Fourth Schedule cl 8 involves a finding
that deduction is not barred under s 106(1)(j) (Belcher NZTC p 5,171 NZLR p 717
[TRNZ p 120]).
The court determined that when the necessary connection existed between the
expenditure and the income-earning process, the expenditure had the
“necessary nexus” to the income-earning process, so could not be
classified as being of a private or domestic nature. As in CIR v Belcher,
the court in Hunter v CIR concluded that the necessary nexus existed
between the expenditure and derivation of the taxpayer’s employment
income.
28
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
McGechan J in the earlier High Court decision (Hunter v CIR (1989) 11 NZTC 6,242)
summed up the contrast between expenditure of private or domestic
nature and expenditure that has the necessary nexus to the incomeearning process. He recognised that prima facie expenditure might be
seen as private and domestic, but “employment oriented aspects” might
take it out of this category (page 6,261):
In the end, I join with Cooke J in Haenga as best I can in standing back and looking at
the position overall. Questions of degree and judgment are involved. Does this factual
situation present as one in which, on an ordinary and natural meaning of the words,
expenditure is “of a private or domestic nature”, or primarily so? The margin is not
wide, but on balance I consider it does. The provision of shelter essentially is a highly
personal and domestic requirement. It is necessary for survival itself, as even those
unemployed know only too well. It is within the category at which the private/domestic
purposes limitation policy is aimed. Essential character is not in itself conclusive, as
Haenga illustrates. Other employment oriented aspects may turn the classification
around, and there are such employment oriented aspects in this case. There is an
employment condition that the appellant transfer the venue of employment and incur
whatever relocation expenses are involved without necessarily receiving complete
reimbursement. There is a degree of employer interest and regulation of relocation
activity. There is also a degree of statutory background to the events and expenditure
concerned. However, even in total, on my appraisal, these are not sufficient to take
an expenditure which in ordinary thinking would be private and domestic out
of that natural category. To borrow Cooke J's words it is not “sufficiently natural” to
describe the expenditure as “other than private or domestic”.
[Emphasis added.]
Summary of findings from CIR v Haenga, CIR v Belcher, and Hunter v CIR
In the three cases (CIR v Haenga, CIR v Belcher, and Hunter v CIR), the Court of
Appeal determined that if the expenditure was for the purpose and a
condition of the income-earning process, the “sufficient nexus” test would
be met. This meant the expenditure was tax deductible and not of a
private or domestic nature.
The Commissioner considers that the approach taken in CIR v Haenga, CIR v
Belcher, and Hunter v CIR is consistent with the general principles of
deductibility despite these cases being decided under the specific
employment deductibility regime provided in the Fourth Schedule of the
Income Tax Act 1976. Whilst there is no longer the requirement that the
expenditure is incurred “for the purposes of, and as a condition of …
employment”, there is still a requirement that the expenditure has the
required type of relationship with the operations and activities that
constitute the income-earning process. In terms of section CW 17, this
relationship is with the employee’s income from employment or service.
Therefore, the same interpretation can apply to the deductibility test in
section CW 17 when considering whether the expenditure is of a private
or domestic nature.
As mentioned, the general permission requires that for an amount of
expenditure to be deductible under section DA 1(1)(a), the expenditure,
or the advantage sought by it, must be linked to the actual incomeearning operations or activities. It is a matter of degree and so a
question of fact to determine whether there is sufficient nexus.
The first step is to ascertain whether the expenditure has the required type of
relationship to the operations and activities that constitute the incomeearning process; that is, what did the employee do to earn income from
employment?
The Commissioner considers that the case law discussed above gives useful
guidance as to determining whether the expenditure under consideration
in section CW 17 is of a private or domestic nature.
29
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
CIR v Haenga, CIR v Belcher, and Hunter v CIR are authority for the approach
that a deduction will be permitted where the expenditure is in discharge
of an obligation directly or indirectly imposed by the employment terms
or contract of service and where objectively that obligation serves the
purpose of the income-earning process. When these tests are met,
deductibility extends to expenditure that is necessary as a practical
requirement of the discharge of the obligation. In other words, to
establish the necessary nexus between the expenditure and the incomeearning process, it is necessary to consider the obligations that the
employee is fulfilling under their employment terms or contract of service
as part of their income-earning process. Consequently, the application of
the private limitation would not deny the employee the deduction for the
expenditure.
The Commissioner has formulated the following three requirements to assist in
determining whether the private limitation applies to the expenditure to
which the reimbursing allowance, reimbursing payment, or expenditure
on account payment relates:
(i)
The employee must be (or will be) performing an obligation under
the contract of employment or service at the time the expenditure is
(or is likely to be) incurred.
(ii)
The obligation must serve the purpose of the employee’s incomeearning process of deriving income from employment or service.
(iii)
The expenditure is necessary as a practical requirement of the
performance of the obligation.
(Note that requirement (i) is worded to take into account that the
expenditure for which a reimbursing allowance is paid is estimated based
on the expenditure likely to be incurred.)
If all three requirements are met, the Commissioner’s view is that the private
limitation will not apply and the payment will be exempt under
section CW 17 as long as the capital limitation does not apply to the
expenditure (the capital limitation is discussed in paragraphs 0–0).
The Commissioner acknowledges that the courts did not expressly formulate
these requirements, even in relation to the legislation that CIR v Haenga,
CIR v Belcher, and Hunter v CIR were decided under. However, the cases
are considered to be the leading decisions in the area of the tax
deductibility of employment-related expenditure, and from them the
Commissioner has formulated the requirements that he considers
compatible with the current legislation. This is because the type of
expenditure that section CW 17 payments relate to frequently raises the
issue as to whether the expenditure has a private or domestic element.
Capital limitation – capital expenditure
In addition to the above, an employee would be denied a deduction for the
expenditure that the reimbursing allowance, the reimbursing payment or
the expenditure on account payment relates to if the expenditure is
capital in nature. As mentioned above, section CW 17(4) provides that
expenditure in section CW 17 includes an amount of depreciation loss. In
practice, this issue might arise where an employee is reimbursed for
expenditure relating to the purchase of a capital item such as work tools
or where the expenditure relates to a capital item such as a
reimbursement of costs relating to the cost of converting a room into a
home office for an employee who works from home. It is useful to bear
in mind that often this type of expenditure will also have a private or
30
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
domestic element to it, so the above three requirements should be
applied in the context of the payment before whether the payment is
capital in nature is considered.
The courts have applied several tests to assist in determining whether
expenditure is capital or revenue in nature: BP Australia Ltd v FCT (1965)
14 ATD 1, followed in New Zealand in CIR v L D Nathan & Co Ltd [1972]
NZLR 209, Buckley & Young Ltd v CIR, CIR v McKenzies New Zealand Ltd
(1988) 10 NZTC 5,233, Christchurch Press Company Ltd v CIR (1993) 15
NZTC 10,206, and Birkdale Service Station Ltd v CIR (2000) 19 NZTC
15,981. Some of these tests are not relevant in the context of
considering the type of expenditure that a reimbursing allowance, a
reimbursing payment, or an expenditure on account payment would
relate to as some of the tests relate to the operation of a business or
carrying out of a trade. A reimbursing allowance, a reimbursing payment,
or an expenditure on account payment must have the necessary
connection with an employee’s employment or service, so is unlikely to be
expenditure of this type.
The Commissioner considers that the issue of whether the payment relates to
expenditure of a capital nature would arise in very limited circumstances,
so it is not necessary to provide an in-depth analysis on the various
capital–revenue tests. However, the following summary of four applicable
tests adapted to relate to the type of expenditure under consideration
when considering a reimbursing allowance, a reimbursing payment, or an
expenditure on account payment should assist in determining whether the
expenditure is of a capital nature.

The need or occasion that calls for the expenditure.
This test focuses on the reason or need for incurring the expenditure.
In the context of this test, the object of the expenditure is
ascertained by looking not at the actual thing achieved, but the
reason or need for making the expenditure. Clear and accurate
application of this test is important, as it will often form the basis for
applying the other capital–revenue tests accurately. In terms of
section CW 17, the reason for the expenditure must be related to the
employee’s employment or service. Additionally, the circumstances
that give rise to either the employee incurring (or being likely to
incur) the expenditure or the employer paying for the expenditure on
the employee’s behalf must be considered.

Whether the expenditure is recurrent in nature.
This test involves considering whether the expenditure is recurrent or
a once and for all payment (that is, whether the expenditure related
to a one-off reimbursing payment or expenditure on account payment
or is related to a recurring reimbursing allowance). If the
expenditure is recurrent and made to meet a continuous demand,
this suggests that the payment is part of the cost of ordinary
operations and will be a revenue outlay. Capital expenditure is going
to be spent once and for all.

Whether the expenditure creates an identifiable asset.
This test indicates that expenditure will be on capital account where
an asset of a capital nature has been acquired by the expenditure,
and where money is spent on improving the asset or making it more
advantageous. This is likely to be the most applicable test in terms of
determining whether the expenditure to which the reimbursing
allowance, reimbursing payment, or expenditure on account payment
relates is capital in nature. The question then becomes whether the
payment by the employer results in the employee acquiring a capital
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EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
asset or improving an existing capital asset belonging to the
employee. In these cases, it is likely that the capital limitation will
apply subject to whether the expenditure represents an amount of
depreciation loss.

Whether the expenditure is a once and for all payment producing
assets or advantages that are of an enduring benefit.
Under this test, expenditure will be regarded as capital where it
brings into existence an asset or advantage for the enduring benefit
of the employee. This test includes consideration of recurrence and
the concept of enduring benefit. This test is one of the more relevant
and persuasive tests for deciding whether expenditure is on capital or
revenue account. This test could be applicable to reimbursing
payments or expenditure on account payments as these payments
are more likely to be related to expenditure of a once and for all
nature.
The type of expenditure that a reimbursing allowance, a reimbursing payment,
or an expenditure on account payment relates to is more likely to raise
issues of a private or domestic nature rather than a capital nature.
However, the four tests above should be considered if the three
requirements to determine whether the expenditure is private or domestic
expenditure are met (that is, the private limitation does not apply). In
practical terms this means a fourth requirement can be added to the list
of requirements.
(iv)
The expenditure incurred must not be capital in nature.
Having dealt with the deductibility requirement in order that a reimbursing
allowance, a reimbursing payment, or an expenditure on account
payment is exempt under section CW 17, the other requirements of
section CW 17(1)–(3) can now be considered.
Expenditure on account payments – section CW 17(1)
This section looks at what is needed to make an expenditure on account
payment exempt from tax.
Section CW 17(1) states:
Exempt income: expenditure on account
(1)
Expenditure on account of an employee incurred by an employer in connection
with the employee’s employment or service is exempt income of the employee
to the extent to which the expenditure is expenditure for which the employee
would be allowed a deduction if they incurred the expenditure and if the
employment limitation did not exist.
“Expenditure on account of an employee” is defined in section CE 5 as a
“payment made by an employer relating to expenditure incurred by an
employee” but does not include “expenditure for the benefit of an
employee, … under section CW 17”. This means an expenditure on
account payment that prima facie would be subject to tax under
section CE 5(1) can be exempt from tax if section CW 17(1) applies.
It could be said that the common use of the term “expenditure on a account of
an employee” in both sections CE 5(1) and CW 17(1) creates ambiguity
insofar as who has incurred the expenditure. However, it is the
Commissioner’s view that each section serves a different purpose and the
order of how things have occurred needs to be understood. The use of
the phrase “incurred by an employer” in section CW 17(1) indicates that
the expenditure that was initially incurred by the employee, has been paid
or the liability to pay has been assumed by the employer. This view is
32
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
supported by the sections that preceded section CW 17(1) that referred
to amounts made or paid by an employer (section 73A of the Income Tax
Act 1976 and section CB 12 of the Income Tax Act 1994). This view is
also supported by the inclusion of the words “expenditure for the benefit
of an employee” in section CE 5(3)(a) when referring to
section CW 17(1). Section CE 5(1), on the other hand, deals with
expenditure that remains incurred by the employee.
Therefore, an expenditure on account payment that section CW 17(1) applies to
can be broken down into the following parts in the order that they need to
occur:

The employee incurs some expenditure.

The employer pays (or assumes the liability to pay) for that
expenditure.

The expenditure is in connection with the employee’s employment or
service.

The employee would be entitled to a deduction for the expenditure
(or a portion of it) if the employment limitation did not exist. The
following requirements must be met for a deduction:
(i) The employee must be performing an obligation under the
contract of employment or service at the time the expenditure is
incurred.
(ii) The obligation must serve the purpose of the employee’s incomeearning process of deriving income from employment.
(iii) The expenditure is necessary as a practical requirement of the
performance of the obligation.
(iv) The expenditure must not be capital in nature
If the above requirements are met, the expenditure (or a portion of the
expenditure) to which the payment relates is deductible and
section CW 17(1) will apply to exempt the expenditure on account
payment.
Example 4 – expenditure on account payment
An employee is required by his employer to register for and attend an industry
conference. The employee registers for the conference and receives an
invoice for the conference fee. His employer pays the invoice on behalf of
their employee. The payment is an expenditure on account payment and
is not subject to tax as it is exempt under section CW 17(1) because:

the employee incurred the conference fee expenditure.

the employer paid for the conference fee expenditure on behalf of the
employee;

the conference fee expenditure is in connection with the employee’s
employment;

the employee would be entitled to a deduction for the conference fee
expenditure if the employment limitation did not exist because the
following requirements are met:
(i) the employee was performing an obligation under his
employment contract because he was carrying out his duties as
required by his employer in registering for the conference;
(ii) the obligation of attending the conference was considered to be
part of his job and therefore served the purpose of the incomeearning process of deriving income from employment;
33
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
(iii) the conference fee expenditure was necessarily incurred as a
practical requirement of performing the obligation of attending
the conference; and
(iv) the expenditure was not capital in nature.
Reimbursing allowances and reimbursing payments – section CW 17(2)
and (3)
This section looks at what is needed to make a reimbursing allowance and a
reimbursing payment exempt from tax.
Section CW 17(2) and (3) states:
Exempt income: reimbursement
(2)
An amount that an employer pays to an employee in connection with the
employee’s employment or service is exempt income of the employee to the
extent to which it reimburses the employee for expenditure for which the
employee would be allowed a deduction if the employment limitation did not
exist.
Estimated expenditure of employees
(3)
For the purposes of subsection (2),—
(a)
the employer may make, for a relevant period, a reasonable estimate
of the amount of expenditure likely to be incurred by the employee or a
group of employees for which reimbursement is payable; and
(b)
the amount estimated is treated as if it were the amount incurred
during the period to which the estimate relates.
Reimbursing payments
A reimbursing payment that section CW 17(2) applies to can be broken down
into the following parts in the order that they need to occur:

The employee has incurred some expenditure.

The employer has reimbursed the employee for the expenditure
incurred.

The payment is in connection with the employee’s employment or
service.

The employee would be entitled to a deduction for the expenditure
(or a portion of it) if the employment limitation did not exist. The
following requirements must be met for a deduction:
(i) The employee must be performing an obligation under the
contract of employment or service at the time the expenditure is
incurred.
(ii) The obligation must serve the purpose of the employee’s incomeearning process of deriving income from employment.
(iii) The expenditure is necessary as a practical requirement of the
performance of the obligation.
(iv) The expenditure must not be capital in nature.
Example 5 – reimbursing payment
An employee is employed as a desktop publisher and works from home. Her
employer provides the employee with a laptop and printer and the
employee claims a reimbursing payment for the monthly fixed internet
connection cost. The employee is required to have access to the internet
34
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
to carry out the functions of her job. These arrangements are
documented in the employee’s conditions of employment. The employee
uses the internet connection exclusively for work purposes. The
reimbursing payment to the employee is exempt under section CW 17(2),
so is not subject to tax because:

the employee has incurred some expenditure (the monthly fixed
internet connection cost);

the employer has paid the employee a reimbursing payment for the
monthly internet connection cost;

the reimbursing payment is connected to the employee’s
employment; and

the employee would be entitled to a deduction for the monthly
internet connection cost if the employment limitation did not exist
because:
(i) the employee is performing an obligation under her employment
contract when the expenditure is incurred because the
employee’s job requires her to have access to the internet;
(ii) the requirement for the employee to have access to the internet
serves the purpose of the employee carrying out their job as a
desktop publisher;
(iii) the expenditure is necessary so the employee can carry out her
job; and
(iv) the monthly fixed internet cost is not capital in nature.
Reimbursing allowances
A reimbursing allowance that section CW 17(2) and (3) applies to can be broken
down into the following parts in the order that they need to occur:

The employee is likely to incur some expenditure.

The employer has paid an allowance to the employee for the
expenditure likely to be incurred.

The payment is in connection with the employee’s employment or
service.

The employee would be entitled to a deduction for the expenditure if
the employment limitation did not exist. The following requirements
must be met for a deduction:
(i) The employee will be performing an obligation under the contract
of employment or service at the time the expenditure is likely to
be incurred.
(ii) The obligation must serve the purpose of the employee’s incomeearning process of deriving income from employment or service.
(iii) The expenditure is necessary as a practical requirement of the
performance of the obligation.
(iv) The expenditure must not be capital in nature.
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EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
In terms of, a reimbursing allowance, section CW 17(3) provides that the
employer may make a “reasonable estimate” of the amount of
expenditure likely to be incurred by an employee or a group of employees
for which a reimbursement is made. For groups of employees, the
Commissioner will accept a reasonable estimate for each group or part of
a group depending on the particulars of each case.
To arrive at a reasonable estimate, the Commissioner would expect the
employer to survey the employees in a group to determine the average
amount each employee incurs (or is likely to incur). Such an estimation
is treated as though it is the amount incurred during the period that the
estimation relates to. An example of such an estimation is when an
employer uses the New Zealand Automobile Association Inc published
mileage rates to reimburse employees who use their own vehicles for
work purposes. The mileage rates represent a reasonable estimate of
expenditure incurred or likely to be incurred by employees.
Example 6 – motor vehicle reimbursing allowance
An employee is employed as a travelling salesperson and is required to use his
own motor vehicle to visit prospective and existing customers. These
requirements are set out in the employee’s employment contract and job
description. It is estimated that this business travel would not exceed
5,000 kilometres in an income year. The employee is required to keep
details of business use including distance travelled in a logbook. The
employee is paid a reimbursing allowance by his employer on a monthly
basis based on the mileage rate method provided for in section DE 12.
The reimbursing allowance is exempt income under section CW 17(2), so
is not subject to tax because:

the employee is likely to incur some expenditure related to the use of
his own vehicle in visiting prospective and existing customers;

the employer has paid the employee a reimbursing allowance for this
expenditure;

the payment of the allowance is in connection with the employee
carrying out his job as a travelling salesperson;

the employee would be entitled to a deduction for the motor vehicle
expenditure if the employment limitation did not exist because:
(i) the employee will be performing an obligation under his
employment contract when the expenditure to which the
reimbursing allowance relates will be incurred because part of
the employee’s job requires him to use his own vehicle to visit
existing and prospective clients;
(ii) the requirement for the employee to use his own vehicle to visit
existing and prospective clients serves the purpose of the
employee carrying out his job;
(iii) the motor vehicle expenditure likely to be incurred is necessary
for the employee to visit prospective and existing customers.
(iv) the expenditure is not capital in nature even though the motor
vehicle allowance includes an element for depreciation of the
motor vehicle.
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EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
Comparison of reimbursing payments and employer expense payments
There are similarities between section CW 17(2) that exempts reimbursing
payments and section CE 5(3)(c) that excludes employer expense
payments from being “expenditure on account of an employee”. Both
sections deal with payments that represent a reimbursement from an
employer to an employee. However, the distinguishing characteristic is
that, for section CE 5(3)(c) to apply, the employer expense payment to
the employee needs to have come about because the expense was the
liability of the employer and the employee is paying the expense on
behalf of the employer. Therefore, employer expense payments are likely
to be expenses of the employer’s business. Section CW 17(2) payments
on the other hand need to have a connection to the derivation of the
employee’s income, such as the payment of a mileage allowance to a
travelling salesperson who uses their own car for visiting customers. In
other words, a section CW 17(2) reimbursing payment has come about
because the employee has incurred some expenditure required by or
related to their employment or service.
Another distinguishing characteristic between sections CE 5(3)(c) and CW 17(2)
is that section CE 5(3)(c) does not apply the deductibility tests.
Therefore, under section CE 5(3)(c) the employer expense payment may
be for capital or private expenses that would otherwise not be exempt
under section CW 17(2). However, the Commissioner considers that FBT
may apply to a section CE 5(3)(c) reimbursement because in some
situations the employee may be receiving a fringe benefit.
Irrespective of this distinction, the Commissioner acknowledges that there may
be some overlap between employer expense payments and reimbursing
payments. This overlap occurs when a payment prima facie falls within
both sections CE 5(3)(c) and CW 17(2) because both sections deal with
payments by the employee to a third party that are then reimbursed by
the employer. In this case, the critical issue is to determine who has the
ultimate liability for the expenditure.
37
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
The following table summarises the requirements in the order that they need to
occur for the employee-related payment to be either exempt or excluded
from income.
Employer
expense
payment –
section CE 5(3)(c)
exclusion*
Employer liable for
underlying
expenditure
Expenditure on
account
payment –
section CW17(1)
exemption**


Payment (or
assumed liability to
pay) by employer to
third party for
benefit of employee
Reimbursement by
employer to
employee
Reimbursing
allowances –
section CW 17(2)
exemption**

Expenditure incurred
(or likely to be
incurred) by an
employee
Payment (or likely
payment) by
employee to third
party for
expenditure incurred
Reimbursing
payment –
section CW 17(2)
exemption**








Notes
*
Even if the exclusion in section CE 5(3)(c) applies to an employer expense
payment, the employer may need to determine whether the expenditure results in a
fringe benefit being provided to the employee.
**
In addition to these events occurring, the employee must be able to claim a
deduction for the expenditure that the payment relates to if the employment
limitation did not exist.
Example 7 – employee-related payments
The following examples illustrate how sections CE 5(3)(c), CW 17(1) and CW
17(2) operate:

An employee is asked by her manager to organise morning tea at
work for her team. The employee orders and pays for the morning
tea. The employee receives an employer expense payment after
submitting a business expense reimbursement form for the cost of
the morning tea. The employer expense amount of the
reimbursement is not income to the employee under section CE
5(3)(c) because the employee paid for the morning tea at her
employer’s request on the understanding that she would receive an
employer expense payment for the amount she spent. In other
words, the cost of the morning tea was the liability of the employer
and the employee paid this expense on behalf of her employer. (Note
that FBT does not apply to this situation because the “on [business]
premises” exemption provided for in section CX23 applies.)

For an employee to carry out her job as a solicitor she is required to
have a current practising certificate. This requirement is specified in
the employee’s employment contract. Practising certificates are
38
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
issued annually. The employee completes the application for the
practising certificate and is sent an invoice for the practising fee. The
employee pays the invoice and claims a reimbursing payment from
her employer. The amount of the reimbursing payment paid to the
employee is exempt income under section CW 17(2). Therefore, the
reimbursing payment is not subject to tax because the employee
would be entitled to a deduction for the practising fee if the
employment limitation did not exist on the basis that the fee for the
practising certificate was incurred because the employee was fulfilling
an obligation under her employment contract and the certificate is
required for the employee to carry out her job as a solicitor. The
practising certificate is not capital in nature.

Instead of the employee paying for the practising certificate herself,
her employer pays the invoice for the practising certificate. The
amount that the employer pays is exempt income under section CW
17(1). Therefore, the amount is not subject to tax because the
employer has paid the fee for the practising certificate for the benefit
of the employee and if the employee had paid, she would be entitled
to a deduction for the practising certificate fee if the employment
limitation did not exist on the same basis as the above example.
Meaning of “to the extent”
Sections CE 5(3)(c) and CW 17(1) and (2) contain the words “to the extent”.
The Commissioner considers these words contemplate apportionment in
relation to the expenditure under consideration. In other words, it may
be that only a portion of the expenditure meets the particular
requirements of the provision. In the case of section CE 5(3)(c), the
apportionment relates to the amount of the expenditure that is the
employer’s liability. In section CW 17 the apportionment relates to the
deductibility of the expenditure by the employee if the employment
limitation did not exist. This means an apportionment may have to be
made between the deductible and non-deductible elements of the
expenditure. This apportionment is a question of fact as to how much is
correctly apportioned to the amount of expenditure that would be allowed
as a deduction if the employment limitation did not exist.
Additional exemptions – relocation payments, overtime meal payments,
and sustenance allowances
This section provides an overview of the additional exemptions for relocation
payments, overtime meal payments, and sustenance allowances that
were introduced as part of the Taxation (International Taxation, Life
Insurance, and Remedial Matters) Act 2009. These exemptions are
additional to the section CW 17 exemptions that have been discussed. A
detailed analysis of these exemptions is outside the scope of this
interpretation guideline.
Relocation payments
Section CW 17B provides an exemption for a reimbursing payment or an
expenditure on account payment that is in connection with an employee’s
expenses arising from a work-related relocation. A work-related
relocation arises as a result of an employee:

taking up new employment with a new employer;

taking up new duties at a new location with the existing employer; or
39
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY

continuing in their current employment, but at a new location and the
employee’s existing residence is not within reasonable daily travelling
distance of the new workplace.
The relocation must relate to the person moving their place of residence
as a result of this change in employment circumstances. Where
accommodation forms an integral part of an employee’s work, the
requirement that the employee’s new workplace is more than a
reasonable daily travelling distance from their current residence does not
apply.
The employee must incur some expenditure for a reimbursing payment to be
exempt under section CW 17B. The employer must incur some
expenditure on behalf the employee in order for an expenditure on
account payment to be exempt under section CW 17B. Therefore, at the
time the expenditure is incurred, the person needs to be an employee.
The amount of the reimbursing payment or the expenditure on account
payment must not be more than the amount of expenditure incurred for
the eligible relocation expense.
The Commissioner has published a determination under section 91AAR of the
Tax Administration Act 1994 listing eligible relocation expenses. Where
there has been a work-related relocation and an employee has received a
reimbursing payment or an employer has paid an expenditure on account
payment for eligible relocation expenses, these amounts will be exempt
under section CW 17B, so are not subject to tax.
Therefore, when considering a reimbursing payment or an expenditure on
account payment that relates to the relocation costs of an employee, the
exemption in section CW 17B should be considered first to determine
whether the amount is exempt income under that section before
considering whether the payments are exempt under section CW 17.
Overtime meals and sustenance allowances
In addition to the above exemption, two other exemptions might apply to certain
employee-related payments. Section CW 17C provides an exemption for
a reimbursing payment, a reimbursing allowance, or an expenditure on
account payment that is for an overtime meal. The employee must have
worked overtime for the payment to be exempt. Also, the employee’s
employment agreement must provide for the payment of overtime
worked or the employer must have an established policy or practice of
paying for overtime meals. Overtime is defined to mean “time worked in
a day beyond the employee’s ordinary hours of work as set out in their
employment agreement”. The employee must have worked at least two
hours of overtime for the payment to be exempt.
Documentation such as a restaurant receipt for a reimbursing payment for an
overtime meal where the meal costs more than $20 is required or the
employer can pay a reimbursing allowance based on the reasonable
estimate of expenditure likely to be incurred by an employee or a group
of employees.
The other exemption provided in section CW 17C is for a reimbursing allowance
that is a sustenance allowance. For a sustenance allowance to be
exempt, the following requirements must be met:

The employee must work a minimum of seven hours each day.

The employee must work outdoors and away from their employment
base for most of the day.
40
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY

The employee must undertake a long period of physical activity in
travelling through a neighbourhood or a district on bicycle or foot.

It must be impracticable for the employer to provide sufficient
sustenance to the employer working outside.

The allowance recognises the arduous nature of the employee’s
outside work.

The employer usually provides tea, coffee, water, or similar
refreshments to their employees at the employment base, and the
employer must have an established practice of paying a sustenance
allowance.
Therefore, when considering a reimbursement payment, a reimbursement
allowance, or an expenditure on account payment that relates to an
overtime meal or a sustenance allowance, the exemptions in
section CW 17C should be considered first to determine whether the
amount is exempt income under that section before considering whether
the payments are exempt under section CW 17.
Relationship of section CW 17 with other sections
This section lists other provisions that may be affected if payments are
exempted under section CW 17.
The additional exemptions above illustrate that the determination of whether a
payment is exempt under section CW 17 has wider application beyond
section CW 17. Section CX 5 provides that a benefit is not a fringe
benefit to the extent that it is exempt income. Therefore, a reimbursing
payment, a reimbursing allowance, or an expenditure on account
payment that is exempt under section CW 17 is not a fringe benefit.
However, this does not apply if a reimbursing allowance that is exempt
under section CW 17 enables an employee to provide a benefit to another
person. Therefore, a reimbursing allowance exempt under section CW 17
may still be subject to FBT if the allowance results in the employee being
able to provide a benefit to another person.
Additionally, section CX 19 provides that a benefit provided to an employee in
connection with their employment is not a fringe benefit if the benefit is
provided instead of a reimbursing allowance in certain circumstances.
The benefit is not a fringe benefit to the extent to which it removes the
need for the employer to pay a reimbursing allowance to the employee
where if a reimbursing allowance had been paid it would have been
exempt income under section CW 17 provided it was being paid for
reasons other than to enable the employee to provide a benefit to another
person. This means that when determining whether section CX 19
applies, it is necessary to consider what the treatment of a reimbursing
allowance would be if it had been paid instead of the benefit being
provided. The approach set out in this interpretation guideline in relation
to the requirements for a reimbursing allowance to be exempt under
section CW 17 should be considered when determining whether section
CX 19 applies.
Additional examples – section CW 17(2) and (3)
This section sets out additional examples illustrating the application of
section CW 17. These examples are considered to be common examples
of reimbursing payments and reimbursing allowances that may be exempt
under section CW 17(2).
41
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
Example 8 – reimbursing payment
An employer has a standard company policy of providing all employees with cell
phones and paying the monthly operating charges associated with these
cell phones. This is done by way of a reimbursing payment to employees
after they submit a reimbursement form. Some employees’ jobs do not
require the use of or access to a cell phone but in accordance with the
company policy, the employer provides these employees with a cell
phone. These employees are paid a reimbursing payment for the monthly
operating cost of the use of the cellphone that includes private calls. The
reimbursing payment to these employees is not exempt under section CW
17(2). Therefore, the reimbursing payment is subject to tax because
these employees would not be entitled to a deduction for the expenditure
if the employment limitation did not exist. They would not be entitled to
a deduction because the following requirement is not met:
(i) The employee must be performing an obligation under the
contract of employment or service at the time the expenditure is
incurred.
These employees do not require the use of the company-provided cell phone to
carry out their job. Therefore, the employees are not performing an
obligation under their contract of employment at the time the expenditure
(that is, the monthly cost of the cellphone) is incurred. Therefore, the
expenditure is of a private or domestic nature and the reimbursing
payment is subject to tax. (Note: The employer will also have a FBT
liability for the provision of the cell phones to these employees.)
Example 9 – clothing allowance
An employee is employed as a policy analyst by a government department. Part
of this role requires him to meet with the relevant Minister of the Crown
to discuss policy matters. A requirement of his employment conditions is
that he must wear a suit to work and when meeting with the minister.
The employee is paid an annual reimbursing allowance for clothing by his
employer. The amount of the reimbursing allowance is $1,500.
The reimbursing allowance is not exempt under section CW 17(2). Therefore,
the reimbursing allowance is subject to tax because the employee would
not be entitled to a deduction for the expenditure to which the
reimbursing allowances relates if the employment limitation did not exist.
The employee would not be entitled to a deduction because the following
requirements are not met:
(i) The employee will be performing an obligation under the contract
of employment or service at the time the expenditure is likely to
be incurred.
(ii) The obligation must serve the purpose of the employee’s incomeearning process of deriving income from employment or service.
(iii) The expenditure is necessary as a practical requirement of the
performance of the obligation.
Even though the employee is required under his employment conditions to wear
a suit to work, this requirement does not affect his ability to do his job as
a policy analyst. The cost associated with wearing a suit to work is not
necessary as a practical requirement in deriving assessable income as the
employment need does not go beyond reasonable normal work clothing
requirements. Several cases have considered the deductibility of clothing
42
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
costs as employment-related expenditure: Hillyer v Leeke (HM Inspector
of Taxes) (1973–1978) 51 TC 90; Case F46 (1983) 6 NZTC 59,792; Case
A45 69 ATC 270 ; Beckett v CIR (1981) 5 NZTC 61,078.
Reimbursing payments and allowances for clothing
In Hillyer v Leeke (HM Inspector of Taxes), the court found against the taxpayer
who was required by his employer to wear a suit when visiting the
employer’s clients. The court determined that the cost of a suit or suits
was not “ wholly and exclusively laid out for the purpose of trade,
profession or vocation” (the wording of the United Kingdom legislation).
In New Zealand, Barber DJ set out the tests for determining deductibility of
conventional clothing expenditure in Case F46. This case allowed a band
member’s claim for the cost of clothing he purchased specifically to wear
when performing with the band. The Taxation Review Authority noted
that the clothing was conventional “female clothing” that the male band
member wore only on stage. Barber DJ stated (at page 59,797):
The expenditure in question must have the required statutory connection with the
income earning activity and yet not be of a private nature — refer Case K2 78 ATC 13.
Accordingly counsel for R submitted, whether those hurdles can be successfully
negotiated by O depends upon whether his particular circumstances fall within either of
the two recognised tests which have evolved from the Australian cases. In this latter
respect counsel for R referred me to Case A45 69 ATC 270 which, as he so rightly said,
is worth reading to refresh one’s memory on the law relative to this issue.
The first test is the “necessary and peculiar” principle where expenditure is on
clothing necessary and peculiar to an occupation. The second test is where the
taxpayer, by virtue of his occupation, has been required to incur “abnormal
expenditure on conventional clothing”.
[Emphasis added.]
In Case A45 69 ATC 270 (referred to in the above quote), the second test was
described in more detail as:
a deduction may be allowable in respect of expenditure on clothing where in his
occupation a taxpayer is under a recognised obligation to provide himself with a
wardrobe of conventional clothing which is quantitatively in excess of what might
be regarded as normal everyday requirements, or where the exigencies of the
particular occupation require replacement of conventional clothing more frequently
than would be regarded as normal. This test may be shortly described as “the
abnormal expenditure on conventional clothing” test.
[Emphasis added.]
It is clear in example 9, the employee is not required to provide himself with
clothing (and therefore incur expenditure) that is “quantitatively in
excess” of what is generally accepted as being the normal attire for a
person working in the same or similar conditions. This situation is
distinguishable from the decision in Beckett v CIR where a uniformed
police officer was working in an investigative plain-clothes role based on
the waterfront. This role required the otherwise uniformed officer to wear
plain clothes and work in dirty and hazardous conditions that subjected
his clothing to a higher degree of wear and tear than was usual. The
police officer was paid a plain-clothes allowance and claimed a deduction
for the allowance. The court allowed the deduction because the cost
incurred by the taxpayer was exclusively incurred in the course of his job
43
EXPOSURE DRAFT—FOR COMMENT AND DISCUSSION ONLY
as a plain-clothes police officer and the police officer would not have incurred the
expenditure had he been working in his normal uniformed role.
In terms of meeting the deductibility requirement in section CW 17 for
expenditure related to the cost of clothing for employees, the
Commissioner considers that the following would qualify for exemption
under section CW 17 (1) and (2):

Expenditure in respect of protective clothing or footwear.

Expenditure in respect of a uniform or similar distinctive work
clothing.

Expenditure that is abnormal expenditure on conventional clothing
due to excessive wear and tear or the need for a greater quantity of
conventional clothing.
44
Draft items produced by the Office of the Chief Tax Counsel represent the
preliminary, though considered, views of the Commissioner of Inland Revenue.
In draft form these items may not be relied on by taxation officers, taxpayers,
and practitioners. Only finalised items represent authoritative statements by
Inland Revenue of its stance on the particular issues covered.