Reimbursing Allowances

On 3 April, Inland Revenue issued a draft ‘Questions we’ve been asked’ (QWBA) covering the tax treatment of allowances and benefits paid or provided to farm workers. A key principle covering such payments centres on the tax treatment of ‘reimbursing allowances’ – this is relevant not just to farm workers but all employees.

Reimbursing allowances are paid to employees for expenses incurred, or likely to be incurred, in connection with their employment, e.g., vehicle mileage and tools. Section CW 17 of the Income Tax Act contains the requirements that must be met for such payments to be received tax-free and one of then key tests is that the expense incurred must be a ‘necessary expense’ incurred in performing the employment duties.

Furthermore, if employees were allowed to deduct expenses incurred to derive salary or wages, the expense would need to qualify as tax-deductible. For example, if an employee was instead self-employed and the expense was tax-deductible because it was incurred to derive their self-employed income, the test would be met.