Tax relief for employers' welfare contributions to employees

Sections CZ 23, CZ 24 and YA 1 of the Income Tax Act 2007

Changes included in the Taxation (Canterbury Earthquake Measures) Act 2011 provide an exemption for certain welfare contributions made by an employer to employees as a result of the two major Canterbury earthquakes. The exemption may be applied to:

• accommodation;
• "sundry" fringe benefits when the employer cannot reasonably estimate which employees received which benefits; and
• the first $3,200 per earthquake of monetary remuneration and fringe benefits of the kind where the employer can reasonably be expected to know which employees received which benefits.

Background

Under existing tax law (with a few limited exclusions), payments made from an employer to an employee and fringe benefits provided to an employee are taxable, either as monetary remuneration or by way of fringe benefit tax (FBT).

Following the major Christchurch earthquakes of 4 September 2010 and 22 February 2011, a number of employers made ex gratia welfare contributions of cash or benefits to their earthquake-affected employees. Several requests were made asking that these contributions not be subject to taxation.

On 28 March 2011, the Minister of Finance and the Minister of Revenue released details of changes to tax legislation agreed to by Cabinet, including three inter-linked tax exemptions for employers and their employees for earthquake-related employer welfare contributions.

Key features

Income tax exemption

New section CZ 23 of the Income Tax Act 2007 provides that income (which could include accommodation benefits) derived by an employee from an employer is exempt income if:

• it was provided by the employer for the purpose of relief of employees from the adverse effects of the Canterbury earthquakes of 4 September 2010 or 22 February 2011, as defined in section 4 of the Canterbury Earthquake Recovery Act 2011;
• it would otherwise have been taxable income;
• it was derived in the eight weeks after each of these earthquakes;
• it was not paid as a substitute for wages or salary;
• the amount provided does not depend on the seniority of the employee;
• the employee is associated with the employer, it was also available to an unrelated full-time employee; and
• the employer elects to treat the income as being exempt income of the employee.

Extent of the exemption

All accommodation benefits defined in section CE 1(2) (Amounts derived in connection with employment) are exempt.

In relation to each of the two major earthquakes, the first $3,200 paid to each employee, other than accommodation benefits, is also exempt.

Fringe benefit tax exemption

New section CZ 24 of the Income Tax Act 2007 provides that benefits received by an employee from an employer are exempt from FBT if:

• it was provided by the employer to employees for the purpose of relief of employees from the adverse effects of the Canterbury earthquakes of 4 September 2010 or 22 February 2011, as defined in section 4 of the Canterbury Earthquake Recovery Act 2011;
• it would otherwise have been a fringe benefit;
• it was received by the employee in the eight weeks after each of these earthquakes;
• it was not provided in substitution for wages and salary;
• its provision and amount does not depend on the seniority of the employee;
• the employee is associated with the employer, it was also available to an unrelated full-time employee; and
• the employer elects to treat the benefit as not being a taxable benefit.

Extent of the exemption

All "sundry benefits" are exempt, for example, benefits that were provided at a drop-in centre. Often, if not always in this case, an employer would have no idea which employee had received what benefits. Accordingly, if the employer cannot estimate the value of these benefits provided to each employee, they are treated as exempt.

If the employer can estimate the value of a benefit that an employee has received in relation to one of the two earthquakes, it will be exempt FBT to the extent that the $3,200 employee exemption for that earthquake has not been used to exempt employee income.

The election

The employer makes the elections by taking or amending a filing position.

Application date

These amendments are treated as coming into force on 4 September 2010.