Combining work and holiday on an overseas trip can have tax implications. Photo / Getty Images
Businesses could face having to pay hefty fringe benefit taxes if they allow workers to extend business trips with holiday time.
And sole-traders planning to tack a holiday on to their business trip are being urged to be careful about the proportion of expenses they can claim back.
After more than two years of very little business travel, the borders have reopened and many are travelling for work again.
But Robyn Walker, a tax partner with Deloitte, said there were tax implications for those who did so.
Last week, the Inland Revenue issued guidance to those looking to travel and make expenses claims.
Walker said the guidance was designed as a refresher for the rules as a lot of people might have forgotten what they are over the past few years.
"I think this is quite useful for just a reminder to stop and think around those boundary lines."
If an employee goes on an overseas trip for work, as long as they only go there for work it is straight-forward.
Income tax deductions can be claimed for overseas travel costs if they have a connection with the businesses income or carrying on a business, but no costs that are private or domestic in nature.
Walker said the complications came if an employee wanted to tack on an extra week for a holiday.
"That is when you might get into a situation where, if over 50 per cent of the time is on holiday, the employer won't pay for the accommodation or meals while the worker is on holiday but it might be a question of do you have to say that part of the flight was actually a private benefit that has FBT [fringe benefit tax] on it?"
Fringe benefit tax rose sharply after April 1 last year when the new 39 per cent top taxpayer rate was introduced for those who earn over $180,000.
Fringe benefits can be attributed to individual employees and taxed at a rate appropriate to the marginal tax rate of the employee, or else they can be paid at a flat rate to make it easier to calculate.
But the flat rate of FBT has increased from 49.25 per cent to 63.93 per cent from April 1, 2021 - a hefty rise for businesses.
Walker said common sense should also be taken into account.
If a person was going to Australia for meetings on a Monday but couldn't get a flight Monday morning and had to fly over the weekend then that shouldn't attract fringe benefit tax on an expenses claim.
"Even though they are not necessarily doing work, that is not a private benefit because it is due to the flight options."
For sole-traders, the purpose of a trip and how much time they spent on business was also key to what and how much they could claim.
In one example given by the IRD, a self-employed person who booked a flight with the purpose of going on holiday but then decided to sell their products or services while away would not be able to claim for the flight expense.
In another example, a person away in Europe for 42 days, of which 11 were spent on business-related activities, could only claim 11/42nd of all the costs as a business expense.
Walker warned it was particularly important for family businesses to be careful.
"You might have everybody working in the business but there is a degree of question in what capacity are you going on this business trip? Is it as an employee working with a legitimate reason or is it because you are a family member of the primary person?"
"That is where documentation and evidence will be key."
Walker said the onus was on businesses or self-employed people to keep documentation to support why the expenses were deductible.
"You would want to keep a copy of your diary or a schedule of what you actually did on each of those days you were there to be able to justify that it was a business expense."
She predicted those with higher travel expenses claims would attract more scrutiny from the Inland Revenue.
"If there is a huge travel expense, say five people travelling first class around the world for a month and clocking up a large amount of expenditure, then it would seem legitimate and correct for IRD to ask for support to justify what was the business purpose of the trip, who was on the trip and what were their roles?"
Walker said those who claimed too much might have to make a voluntary disclosure to correct their tax return.
"Or, depending on the dollar amount, you may be able to be correct it with your next tax return if it is a small amount, otherwise you will need to do a voluntary disclosure to IRD to correct it."
There were a range of penalties for those who got caught out claiming expenses they shouldn't have.
"Not taking reasonable care or gross carelessness are probably the types of penalties that could apply in this situation. If you are a business owner it might affect your personal tax situation."
For owner-shareholders, incorrect expense claims could have an impact on their personal tax situation.
A business might have a travel expense which could be denied as a deduction but deemed as dividend to the owner-shareholder because it was seen as a transfer of value.
That could mean the individual shareholder's income is higher and should be taxed at a higher rate.
"When you are a sole-trader it is that boundary line between what is a personal cost and what is a business cost."
Walker said claiming for meals was an area that was often confusing for self-employed people.
"If you are a self-employed person you can't claim a meal expense as a business expense; it is completely private in IRD's view."
Separate to the issue of work trips, Walker said employers might also be facing more pressure to let staff work from overseas for extended periods of time.
"We are definitely seeing a trend upwards in employees wanting to go on holiday and work remotely."
She said employers that thought about the tax implications often told staff they could only go to certain countries.
"Countries that New Zealand has a double tax agreement with. We have got an undertaking between New Zealand and Australia or the UK, US, Canada; there are 40 countries."
They were also likely to limit how long the worker could stay there. "Often it can trigger tax issues if you are somewhere for more than 92 days or 183 days - there are very specific rules."
Those who went to countries outside the tax treaty-covered areas could be liable to pay tax in both New Zealand and the country they were working in on the income earned while there.
Companies which allowed staff to work in another country for an extended period of time might also be required to register with the tax authority in that country.
"If a company has people working in the UK for them on holiday then that can trigger, if they are there for long enough, they have to register with HMRC [UK tax department] as an employer and do payroll taxes."
That is the same for a foreigner who works in New Zealand for a long period. Their company would also have to register to do PAYE with Inland Revenue.
"That is a real niggling hassle that people don't want."
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