Tax implications of rewarding high performing employees

Jamie Tulloch is managing director of e3 Business Accountants in Christchurch based Chartered Accountants specialising in family owned and owner manager businesses throughout New Zealand. Visit e3accountants.co.nz or phone 03 3792343

By Jamie Tulloch

Hard working and committed employees always stand out. They are hard to find and when you do find them, you want to retain them by rewarding them with something meaningful and thoughtful – and something that will express your gratitude.

We often get asked what can be given to employees that are of the best tax benefit to the employer and of full value benefit to the employee.

You are probably aware that the IRD has received extra funding to track cash transactions in the building and construction industry. That means that it is almost inevitable that within say five years, every company in the sector will have had an IRD eye go over its records.

And to make it tougher to escape the IRD’s net, just one cash transaction that is uncovered will implicate every single business that has traded with that company.

So, when it comes to rewarding your employees, play by the rules. There are lots of ways to be kind, generous and helpful with your employees – which are always appreciated – but be aware that when certain thresholds are exceeded, the tax man may be lurking.

Here are some options to consider:

Cash as a bonus. How do you give your employees a lump sum? Fact is you can’t without it coming from a cash source and if it does, then you are going to struggle to account for it. If you take cash from your company bank account to pay your employee, what are you going to record it as? The correct way is to pass all cash bonuses through the pay roll system and deduct PAYE. The employee will be then taxed at their marginal tax rate. For example, a $100 cash bonus will be fully deductible to the company and the employee (if they are earning more than $70,000 per annum) will receive $67.00 in the hand. The company will add the $33.00 tax to their monthly PAYE return.

Goods, services or vouchers as bonuses.  Any bonuses that fall into this category fall under the Fringe Benefit Tax (FBT) rules. If you offer any employee this type of bonus with a value up to but not exceeding $300 per quarter, then there is no FBT to pay. The employee gets the benefit of the full value and the employer gets to claim the value as a deductible expense. However, if the value of any bonus exceeds $300 in any one quarter, then FBT is payable on the full amount. Quite an incentive to keep the value down under $300.

Some other points to note on the tax treatment of vouchers, for example MTA vouchers.

Your company can’t claim GST on the purchase of vouchers as they are not goods or services.

If you purchase a gift for an employee then you can claim GST on the purchase assuming you have a valid GST invoice.

Maximum Exemptions that apply to FBT

You can provide up to $300 of free, subsidised or discounted goods and services per employee per quarter without having to pay FBT.

As soon as the value of the benefits goes over $300 per employee per quarter, the full value of the benefit is subject to FBT. The $300 exemption isn’t deducted first.

If you file annual returns, you have a yearly exemption of $1,200 for each employee.

The maximum exemption you can claim is $22,500 per year.

If the value of the benefits you provide goes over $22,500, then you must pay FBT on the total value of the benefits for the year in the current quarter.

In summary, it’s great that you have high performing employees and want to reward them but be careful that you don’t over-extend your generosity to find that you have fallen foul of the tax rules. Invariably your employee might be exempt if you make errors, but you the employer won’t be.

And finally, do not collude with employees to defeat the tax rules. This has the potential to back fire should any employment issues arise..