Motor Vehicle Allowance
We have a client who is going to pay an employee a car allowance, instead of providing them with a vehicle. How is this treated for PAYE/GST/FBT purposes?
Travel allowances are tax free to the employee, i.e. there is no PAYE payable. These reimbursements can be based on either:
actual costs incurred by the employee;
a reasonable estimate of the costs incurred by the employee;
published mileage rates (based on number of business kms travelled) such as AA rates;
IRD published mileage rates (< 5,000 km).
Note that travel allowances paid in excess of the actual business expenditure incurred will be employment income to the employee and subject to PAYE.
When the allowance is for a reimbursement of actual expenses incurred, the employer can claim GST. Note that GST invoices should be kept for amounts over $50.00.
As the vehicle is owned privately, there are no issues with fringe benefit tax.
When it comes to completing a Trust Minute for the end of year accounts and there has been various inputs and drawings from the trustees current account, is this classed as a capital distribution? Should it have it's own resolution?
Is the trustee also a beneficiary and or a settlor? Whether or not a minute is required is dependent on the nature of the transactions. If a capital distribution is made from trust equity or a taxable distribution is made from current year earnings, there would need to be a resolution reflecting the distribution. If the transactions are between the settlor and the trust, there would need to be a Deed of Acknowledgement of Debt and there would possibly be a gifting programme in place.
Living in a property owned by a LTC
Our clients have a property owned by a LTC (which transitioned 1 April from an LAQC). For genuine reasons (transfer back to Auckland) the clients will be moving into the company's property.
They understand there will be tax implications.
- We assume the clients should pay market rental for the property?
- As the property is loss-making, payment of market rental would result in a tax loss, which is then passed on to the shareholders. Will IRD limit the loss claim? Or will the payment of market rental mean that IRD will treat the loss in the same way as if for any other tenant renting the property? No additional deductions will be claimed e.g. there is no intention to pay shareholder salaries etc.
We understand that the IRD will view this structure as tax avoidance. They will not accept a taxpayer living in a house owned by a LTC which is operating at a loss with the loss being passed out to the shareholder, even temporarily. If this is going to be long term we would suggest a change of structure. If this is a short term measure we would suggest charging market value rent but limiting the deductions to the amount of the rent charged (meaning if the rent does not cover the expenses, the company will have a break even position for tax purposes). Please refer to the link below for the IRD's position:
Posted on Fri, 1 June 2012
by Shawn O'Grady