A refresher on the tax deduction rules for working from home

  • A refresher on the tax deduction rules for working from home;
  • Inland Revenue guidance on the meaning of ‘minor’ for subdivisions; and
  • Are New Zealand’s tax policy settings correct?


The big news this week, obviously, is the reintroduction of the Level 3 lockdown restrictions in Auckland and Level 2 around the country in general. Under Level 3 the requirement is people must work from home where possible unless they’re an essential worker. So of course, this comes back to something we looked at in some detail several months ago, which is what is the position for employees claiming a deduction for home office expenditure?

Now, this turned out to be a matter of great interest to a lot of people, understandably. And Inland Revenue came to the party with the Determination EE002 Payments to employees for working from home costs during the Covid-19 pandemic.

Now, the Determination laid out the rules that apply where employers have either made or intend to make payments to employees to reimburse costs incurred by employees as a result of having to work from home during the pandemic.

And a reminder is that only the employer can claim a deduction for such expenditure, but they can reimburse employees for the costs and such payments would be exempt income for the employee. The Determination is not binding on employers who can work out their own allocations within the rules.

Now remember, the Determination also sets out the amount of allowances that Inland Revenue thought to be acceptable. Under the Determination an employer paying an allowance covering general expenditure to an employee working from home during the pandemic can treat up to $15 per week as exempt income.  This applies in a pro-rata basis:  $30 per fortnight or $65 per month. Anything above that threshold, the excess would be taxable income and subject to PAYE, unless the employer can show that the costs are higher.

Additional payments can be made for the cost of furniture and equipment. And these are to recognise the fact that an employee would have suffered a depreciation loss on furniture and equipment used in a home office. But because of the employee limitation rule they can’t claim a deduction.  Instead, there’s a safe harbour option where the employer can pay up to $400 dollars to the employee and it would be treated as exempt income. Alternatively, the employer can reimburse employees for the actual cost of furniture and equipment purchased for use in a home office.

This is all great stuff with generally simple rules. The one caveat is this Determination was initially a temporary response, and it applied to payments made for the period from 17th of March to 17th of September. Now, 17th of September isn’t that far off. So I would hope we’d soon see Inland Revenue issuing an extension to this Determination if the lockdown is extended.

Regardless of that, this Determination is a useful set of rules for future lockdowns, if any, to cover the position for working from home. But just note the Determination is temporary and expires in just over five weeks’ time.

“Minor” development work

Moving on, as is well known New Zealand does not have a general capital gains tax, but – and it’s a very big but – there are a number of transactions which would normally be treated as capital gains that are taxed. And there’s a whole series of transactions in particular which relate to the taxation of land.

One of these provisions is Section CB 12 of the Income Tax Act 2007.  Under that provision an amount a person receives from the disposal of land is taxable if the development or division work carried out as part of the sale is “not minor”.

This provision highlights one of the key problems of our current taxation of capital, which is that many of the provisions which would tax capital are very subjective in their approach.  For example, the general provision in section CB 6 taxes the sale of land where the land was acquired with a purpose or intent of sale.

During last year’s debate over taxing capital gains, I was always frustrated to hear when people said capital gains taxes were complicated. There are definitely complexities in it, but at least the imposition of a general capital gains tax clarifies the position. We’re not then relying on matters of subjectivity as to intent or in this particular section CB 12 what is the meaning of the word “minor”.

Now, in this context, Inland Revenue has just released an Interpretation Statement, IS 20/08, which sets out when development work or division work is “minor”. This Interpretation Statement is an update and replaces a previous Interpretation Guideline, IG0010 “Work of a minor nature” which was issued in February 2005.

The main conclusions in the 2020 Interpretation Statement are unchanged from that previous Interpretation Guideline. But some parts have been updated for clarity and, extremely importantly, also identified safe harbour figures for absolute cost and relative cost to assist with compliance.

And this is a big, big step forward because the previous Interpretation Guideline wasn’t very specific as to what would represent work of a minor nature.  Under that guideline, work of a minor nature was very relative and the cases, some of which went back to the 1970s before the massive inflation in property prices took off, involved what seem relatively small sums being deemed to be not of a minor nature.

So to just quickly recap the provision here. Section CB 12 deems an amount from the disposal of land to be income when the person carries on an undertaking or scheme (that doesn’t necessarily mean in the nature of a business), and this undertaking or scheme involves the development of the land or the division of the land into lots; the development of division work is carried on by the person or another person for them, this work is not minor, and the undertaking or scheme was begun within 10 years of the date on which the person acquired the land.

So the 10 year time limit is the often critical part of this provision.  People are probably well aware of the bright-line test, which now applies for five years from the date of acquisition. However, people are less aware that these set of rules in section CB 12 have a ten-year clock on them. And by the way, just a reminder that the bright-line test in section CB 6A only applies if any other taxing provision doesn’t apply. Remember it’s a fallback provision.

So as I said, these these rules are complex. They provide plenty of work for tax advisors let’s put it like that. And the key takeaway I want to bring out today is about the safe harbour figures that have been introduced into this Interpretation Statement.

Now, under the case law relating to this provision, and there’s plenty of it, there are four factors that have to be considered when you’re trying to assess whether work is minor. Firstly, what is the total cost of the work done in both absolute and relative terms? What are the natures of the professional services used, the extent of the physical work undertaken and the significance of the changes to the physical nature and character of the land and so forth.

So these are now the safe harbours. They would be considered in conjunction with the other three factors I mentioned: the nature of services used, the nature of the extent physical work required, and the significance of the changes to the physical character and nature of the land. But right now, the good thing about this Interpretation Statement is we have some form of baseline. And that actually would clear up quite a lot of these issues I encounter straight away. People know above those thresholds they’ve got to think very hard that they’re looking at a potential tax bill, and they have to consider the tax consequences.

So this is a good move by Inland Revenue. It clarifies the position and sorts out quite a bit of the wheat from the chaff on this matter. Also it gives a realistic number to people who think that subdivision work is pretty easy, just take a slice off the excess land at the back of a house and there you go. It’s not as simple as that. And the fact that Inland Revenue considers $50,000 of costs to be relatively low in absolute terms should make people thinking of subdivisions as simple, quick and easy projects pause for thought.

But no doubt, as always, people will charge ahead and then they’ll come to advisors like myself looking to see, well, “where we go with this and what are the tax consequences?” I’m sure other advisors will say the same – that it’s remarkable the number of times people go a long way down a project before they start thinking about the tax implications of it. By which time, more often than not, it’s too late.

What’s the rush?

Moving on, as you might expect I was very interested to read John Cantin of KPMG’s piece asking whether or not we have our tax settings right.

There was a lot of good stuff to consider in John’s article, which I thoroughly recommend.

In particular I think the two considerations around which he framed his discussion were very important.  Firstly, we have time. That is, we are likely to be cushioning the economic impact of Covid-19 for some time. And his second point was and Covid-19 relies on availability and how that might apply to tax policy. I thought those were two really salient points, which you have to keep in mind.

Clearly, we are going to be stuck with the consequences of this virus for quite some time. So rushing ahead into tax changes and other changes is not necessarily what we need to do at this stage. It’s perhaps a softly, softly approach as we work out where the changes can be made without damaging a recovery, and also what fits with the longer-term shape of the economy post the pandemic.

So his first conclusion is we don’t really need to charge in and make changes right away now. But you can expect that sooner or later the question of how we’re going to pay for all this debt the government has incurred will arise. And you can imagine how much more difficult those conversations are going to be in other countries which do not have the margin for lending that New Zealand currently does.

John’s commentary around tax policy was quite interesting as he noted tax policy has tended to be done on a “in time basis”. That is when a decision is made to proceed on topic that’s when the thinking about what is required is done.  His view here is that we should think about investing in tax policy so we can consider different options sooner. That does increase the cost of running the tax system but means we’re better able to respond.

That said, and it needs repeating, Inland Revenue has responded extremely quickly to the demands of this pandemic. It would be very churlish to be critical of its response.  But its responses have highlighted a thought I’ve had for some time – that we need to beef up the tax policy staffing and resources because we are going to have ongoing issues with this pandemic and we have to really think about them.

In addition and I raised it at the beginning of April, at some stage we are going to have to pay for this. So how is the tax system going to need to adapt to meet those demands? John’s article is really worthwhile with a lot of very interesting commentary in it. Well worth a read.


Finally, talking about having to pay for the bill, just a quick reminder that the first instalment of Provisional tax for the year ended 31st March 2021 is due in two weeks time on 28th August. I imagine clients will be starting to get letters and reminders about this from their accountants.

Remember, one of the options we’ve talked about before is tax pooling. If you think you may be struggling to make those payments,get in front of your advisor and Inland Revenue straight away. Don’t leave it to the last minute because although Inland Revenue has a lot of discretion, one senses that sooner or later its patience may run out.

Well, that’s it for this week. I’m Terry Baucher and you can find this podcast on my www.baucher.tax or wherever you get your podcasts. Thank you for listening. Please send me your feedback and remember to tell your friends and clients. Until next week. Ka kite āno.

The Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill introduced covering purchase price allocation, taxation of land, feasibility expenditure and trusts

  • The Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill introduced covering purchase price allocation, taxation of land, feasibility expenditure and trusts
  • Inland Revenue phone issues
  • Last week for applications for the small business cashflow scheme


After a frenetic period of activity with COVID-19 related measures coming out almost daily, it’s reassuring to see a normal tax bill turn up with the introduction into Parliament of The Taxation (Annual Rates for 2020-21, Feasibility Expenditure and Remedial Matters) Bill.

Now, this is a sort of standard type of tax bill we see twice a year. There’s usually one introduced in May and another in November. And typically, these bills will deal with some policy matters that have been on the table for some time, plus tidy up remedial issues. So, this Bill is a sign of nature healing and a return to normal.

This Bill has a number of measures which will be both welcomed and not welcomed across the board. Firstly, there’s a measure up to encourage investment by allowing businesses to take a deduction for feasibility expenditure incurred in investigating or developing a new asset, or process, even if that process is actually abandoned and never implemented. Until this bill there was some doubt that any of this expenditure would be deductible.

And there are two parts to this measure which are welcome. Firstly, for small and medium businesses, qualifying expenditure on feasibility expenditure, which is less than $10,000 a year, will be immediately deductible in the year of expenditure.

Where the expenditure is above that $10,000 threshold, then a business would be able to claim a deduction spread over five years for the expenditure it incurred on investigating this new asset, process or business model. And this deduction will be available even if the planned project is abandoned.

There are several other measures in the Bill. One which won’t be welcomed is in relation to what we call purchase price allocation. And this happens when parties to the sale and purchase of assets with differing tax treatments for the purchaser and vendor allocate the sale prices between assets to maximise the tax advantage.

This has been a running sore point for Inland Revenue because you could actually find that for the same asset, the purchaser and the vendor have adopted completely different tax treatments. This bill is designed to ensure the treatment for the asset is consistent across the board and it’s expected to raise $154 million dollars over four years.

There are more rules relating to the taxation of land, particularly in relation to investment property and speculators. What is particularly targeted here are attempts to get round the provisions which apply where someone has a “regular pattern of buying and selling of land”.  In these circumstances the transactions are deemed to be taxable.

The Bill proposes to extend the regular pattern restrictions which apply for the main home, residential and business premises, to a group of persons undertaking, buying and selling activities together, rather than looking at the regular pattern of a single person.

So that will introduce more complexity into an area which is already very complex, because a lot of the matters relating to the taxation of land involve defining rather subjective terms such as “work of a minor nature” or “a regular pattern”. What is a “regular pattern”? What is “work of a minor nature”? These are issues that have dogged the taxation of land for some time. And dare I say it, a simpler answer would have been a comprehensive capital gains tax. Then everyone’s on the same treatment. But I guess it’s probably too soon to talk about that.

There is a measure to help dairy and beef cattle farmers who because they’re taxed under the rules for the herd scheme have unexpected taxable income because their herds have been culled as part of the attempt to eradicate Mycoplasma bovis over the past few years.

Now, what will happen instead is that income, which would normally be taxed in a single year, will now be able to be spread forward over six years. Farmers who have been affected by Mycoplasma bovis will be relieved that this measure will take some of the pressure off them.

Some of the Bill’s measures had already been in the public domain for consultation for some time, but others have not. There is some interesting legislation in relation to the taxation of trusts, which I had not expected to see. One of these to watch out for is if a beneficiary is owed more than $25,000 at the end of a tax year, then he or she will be deemed to be a settlor of the trust. And that has quite significant tax ramifications.

So there’s a lot in this bill, and over the coming weeks I’ll pick out particular aspects and discuss in a little bit more length.

Worsening client service

Moving on and another sign that we’re returning to normality, complaints about Inland Revenue not answering the phones are back in the press.

In part, Inland Revenue’s business model actually does not want to encourage phone calls. It rather would deal online with people. And in fact, to be fair to it, matters are being responded to very quickly through the Inland Revenue myIR online portal.

The call centres are under pressure as they always come under pressure this at time of year. But the pressure has been exacerbated by the fact that Inland Revenue have got to try and maintain social distancing and have a lot of staff working from home.

Unfortunately, it’s a fact of life that at this present time, Inland Revenue isn’t really in a position to answer phones as promptly as possible. It’s partly, as I said, the result of COVID-19 requiring some physical restrictions which has made it difficult for Inland Revenue to actually have everyone where they want them.

In addition, Inland Revenue has prioritised responding to matters COVID-19 related, that is, applications for debt remission, wage subsidy enquiries and the Small Business Cashflow Scheme. The pressure is such that Inland Revenue has basically turned off answering the phones on the dedicated tax agent line. We have a habit of ringing up and then asking about several clients at one time because it takes tax agents some time to get through even on a dedicated line. And that doesn’t really fit well with how Inland Revenue is operating at the moment.

The delays are frustrating, but it’s a fact of life. And I would expect this to be continuing for at least another six weeks or so, possibly longer.

Inland Revenue the banker

And finally, one of the additional things that Inland Revenue is currently dealing with is the Small Business Cashflow Scheme. This is where businesses can borrow up to $10,000 plus $1,800 per full time employee from the Government at 3% but if the loan is repaid within a year, it would be interest free.So far, more than 69,000 small businesses have applied for almost $1.2 billion in lending under the scheme but note applications close next Friday. So, if you qualified for the wage subsidy and you believe your business is sustainable, you might want to check this out separately. It’s possible it could be extended. Update: After this was recorded on Friday morning the Finance Minister announced an extension of the scheme until 24th July.My view is the Government should look at introducing some form of permanent variation of the scheme when everything settles down.  Research that we on the Small Business Council received last year, indicated that access to finance for businesses with five or fewer employees was difficult.  About 45% or about 31,000, of the 69,000 applications under the scheme have been made by businesses with five or fewer employees.It seems to me that the response to the Small Business Cashflow Scheme indicates that it is meeting an unfulfilled need. You may recall the Government agreed to underwrite 80% of the lending under the Business Finance Guarantee Scheme administered by the banks. But the take up on that has been disappointing.

There’s a number of factors going on there. But it does seem that the banks were quite happy to socialise the risk and privatise the profit. And certainly, reports I’ve heard are that the application processes were very cumbersome and off-putting for small businesses. For example, I had one tax agent advise me that a bank had requested projected cashflow statements for two years going forward. Well, in this climate, three months is a long way off.

Anyway, a variation of the Small Business Cashflow Scheme is something that I think the Government should investigate. In the United States the Small Business Administration runs a variation of this scheme which could be of interest.

Well, that’s it for this week. I’m Terry Baucher, and you can find this podcast on my www.baucher.tax  or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. Thanks for listening. And until next time, Kia Kaha stay strong.