Crowe Horwarth: Free farm house accommodation not really free

Chris Guillemot

It is commonplace in rural New Zealand, more so than urban areas, to provide some workers with free or subsidised accommodation.

The problem with this is nothing in life is free, and employee accommodation is just another example.

By providing free or subsidised accommodation the employer creates a tax liability for themselves as the current tax law treats the value of the accommodation as a taxable allowance to the employee.

The fact that this is a taxable allowance can be missed when employment agreements are being negotiated and signed off. It will add an additional cash cost to the employer for the PAYE due on the allowance as well as potential employer Kiwisaver contributions.

It will also increase the employees' taxable income each pay period, which can influence KiwiSaver, Working for Families entitlements, Student Loan repayments and Child Support obligations.

'The fact that this is a taxable allowance can be missed when employment agreements are being negotiated and signed off.'

These can markedly change the employee's expected take-home pay.

The important thing to note is that you must use market value when assessing the benefit's value. This does not mean Auckland rental values nor does it mean the rental value of the town or city closest to the house being provided.

Often the properties are remote, it could be a condition of employment that the worker lives on site and the property may not have all the luxury of city living.

That being the case each property should have the value assessed in relation to each of those factors to ensure that a relative market value is assessed and the taxable allowance is neither too high nor too low.

You also need to consider what else in respect of the property is being paid for by the employer or being subsidised — phone, power, insurance — as each of these items if at no or lower than market cost to the employee will also become a taxable allowance and have the same effect on PAYE and other taxes as the accommodation allowance.

Supplying accommodation to workers is an area that has long attracted the Inland Revenue's attention as history has shown many employers have not been dealing with this correctly or simply ignoring it.

A knock on the door from the taxman can be unsettling at the best of times so ensuring that you are treating it correctly and can show them the same will make any review a bit less painful and stress free.