The treatment of employee accommodation (and taxable allowances) can be confusing. In 2015 the rules around employer provided accommodation were subject to a reform, with the changes intended to provide greater clarity and cohesion for employers to understand their tax obligation. Previously, a net benefit approach was acceptable, where accommodation provided to an employee was not taxable if the employee maintained a home in another locations. Following the reform, the starting point is that accommodation provided to employees is taxable unless one of the exemptions apply (e.g. temporary, out-of-town secondment, work-related conference). But how should it be taxed?
Firstly, PAYE typically applies to the provision of a cash allowance paid to an employee. While FBT usually applies to a non-cash benefit (such as the use of a car). However, the provision of accommodation comprises taxable income and is subject to PAYE, rather than FBT.
The amount of taxable income is the market rental value of the employee accommodation, less any contribution to the cost by the employee.
There are a number of Inland Revenue publications available to assist employers with determining the market rental value. The overarching theme of guidance is that employers have flexibility when determining the market rental value as long as a reasonable process is followed, and sufficient evidence is maintained to support the values used. For example, an independent valuation could be obtained by a registered valuer, or an analysis of comparable rental properties could be undertaken. Further, and employer is able to apply their own reduction percentages that they consider to be appropriate for any given accommodation type.