Employees Additional Transport Costs Tax Free

Inland Revenue (IR) has issued a draft operational statement for comment titled ‘When employee allowances for additional transport costs are exempt from tax’. The OS has the reference ED0243, and is a 17 page document issued to provide guidance on the potential application of section CW 18 of the ITA07, which can exempt from tax an allowance paid to an employee for additional transport costs.

The general rule is that home to work travel by an employee is private expenditure of the employee, primarily because:employee’s private choices (about where to live and how to get to work) are the key factor in determining the cost of home-to-work travel; and,

an expense of starting work is distinguished from expenses while ‘on work’, and employees are expected to bear the cost of starting work.Consequently, the starting position is that any allowance paid to the employee for their home to work travel will be a taxable allowance subject to PAYE deductions. However, where the allowance is paid to the employee to reimburse them for ‘additional’ transport costs incurred in getting from home to work, then section CW 18 may apply to exempt the allowance from taxation where the following three tests can be satisfied:Step One – one or more of the factors contained with section CW 18(3) is present – if none of these factors is present, then the additional transport costs exemption cannot apply.

Step Two – did the employee incur the additional transport costs in connection with their employment and for the employer’s benefit or convenience? The example given in the OS is in relation to a temporary change in workplace for the employee. If it was at the employers request, then step two would be satisfied, however if the employee instead requested the change due to their own personal circumstances, then the allowance paid is likely to remain taxable.

Step Three – How much of a travel allowance is exempt under the additional transport costs exemption? Calculate the additional transport costs and compare them with the allowance paid. So note here that it is only the additional quantum of the travel costs that is tax free, which may not necessary equate to the full amount being paid therefore. Also, there is a cap of 70km’s per day, so if the employee’s round trip exceeds this threshold, any costs in relation to the excess distance travelled must be ignored for the purpose of the calculation.The factors contained within section CW 18(3) are:

a)   the day or time of day when the work duties are performed:

b)   the need to transport any goods or material for use or disposal in the course of the employee’s work:

c)   the requirement to fulfil a statutory obligation:

d)   a temporary change in the employee’s place of work while in the same employment:

e)    any other condition of the employee’s work:

f)     the absence of an adequate public passenger transport service that operates fixed routes and a regular timetable for  the employee’s place of work.

The OS provides commentary on each of the six factors, so I would recommend reading them as some of the factors are possibly not as accommodating as you may think at first glance.

If you would like to make a submission on the draft OS, the deadline is 22nd July.

Contributing Advisors