Plain-clothes police officers will have their clothing allowance slashed under a plan to save money.
But the new rule could prompt a legal stoush after the Police Association called in tax experts to fight the Inland Revenue Department decision.
The decision is expected to reduce the annual $2.3 million clothing allowance of 2100 plain clothes police officers by $759,000.
The association, the police and tax company BDO Wellington have lodged an appeal against the rule which takes effect from Monday.
Plain clothes officers - mostly detectives in criminal investigation bureaus around the country, receive a $1305 annual clothing allowance about $50 a fortnight.
But after an audit the IRD determined the allowance should be a taxable benefit, reducing the $50 per fortnight to $34, a loss of $400 a year on a 33 per cent tax rate.
The rule is to be applied retrospectively meaning payment of the tax must be backdated to April 1, this year.
In an email to affected officers, leaked to the Herald, police industrial relations principal adviser Peter Harvey said the police would cover the retrospective payment of $189,000.
But he warned officers to set aside money in case any backpayment was required from them.
Association president Greg O'Connor said the association believed the decision was unfair, as was another one which removed the tax exemption on rural police house rents.
Mr O'Connor said police wore a uniform, but there were some such as detectives who were required to be out of uniform for various reasons, and they had to buy their own clothes.
Industrial advocate Greg Fleming said the association had called in tax specialists BDO to challenge the decision.
"Should IRD not change their decision, we will then assess our options which may include taking a test case under the tax dispute regime or seeking a declaratory judgment ..."
The other option was to seek an allowance increase "to neutralise the impact".
In a letter to the IRD, BDO said a tax-exempt clothing allowance was necessary for CIB officers because they operated in conditions that were "exceptionally hard on their clothing".
Some Wellington CIB members had ruined their clothing by chasing a drug offender into the water, tackling a man who breached bail, and jumping through a window to enter a house.
An IRD spokeswoman said there had not been a change in tax law, but the position on allowances, including clothing allowances paid to employees, was "complex".