Here’s a little history

My first tax job was at Inland Revenue where I assessed paper tax returns for salary and wage earners (an IR 5 tax return). Assessing a return meant reading the tax return and accompanying documents.

An IR 5 included employment income and came with receipts for deductible expenses.  That’s right, the fourth schedule to the 1976 Act allowed certain work-related expenses to be claimed (see the summary at the end). Instead of actual expenses, employees could claim a standard deduction of the lesser of $52 or 2% of income. ($52 was the maximum if your employment income was more than $2,600).

Both the fourth schedule and the standard deduction were repealed for the 1989 tax year. 

This resulted in Inland Revenue having the biggest saving. The tax return assessment process was much simplified and those that prepared tax returns for employees largely had their business terminated overnight.

Employees’ compensation for the denial of deductions was:

  • a reduced tax rate which was introduced at the same time; and
  • less compliance costs as there was no need to prove deductions, meaning record keeping was unnecessary.

What does that mean today?

  • The benefits from the lower 1989 tax rates are long gone.
  • There is no tax saving for employment expenses.
  • There is an incentive, if the work you do requires you to spend money to earn the income, to be a contractor. But, if that is not an option, a tax-free reimbursement or allowance from the employer is required to compensate the employee.

The Commissioner’s working from home tax-free allowances position is important during a Level 4 or 3 lockdown. It provides employers with certainty that they can make a payment without a tax cost and also without having to prove each employee’s actual working from home costs.

For employees though, compensation for their expenses remains in the hands of the employer. An allowance or payment may not be a viable option for many employers who are affected by the lockdown.

Back to the future?

Fairness should mean that tax is paid on net income. Deductions should be allowed to determine what that net income is. For those who do not receive tax-free allowances to cover their costs (at least partially), more tax is paid than is actually fair.

This ideal is of course not always achieved. Tax simplification and ease of administration were drivers of the 1988 decision and were thought at the time to be a good reason to deny deductions despite the lack of fairness.

However, Inland Revenue’s recent Business Transformation and changes to the nature of work and employment since then, not to mention the ongoing disruption from COVID-19, means that it is timely to revisit the current tax settings. The starting point should be that employees are entitled to deduct their expenses.

1976 Act fourth schedule allowable expenses

  1. Professional and trade associations subscriptions
  2. Books and journals
  3. Protective clothing or uniforms
  4. Hand tools, equipment, or technical aids
  5. Education for which there is an entitlement to an income increase, refresher courses and research
  6. Work related travel (but not home to work)
  7. Home office expenses (repairs, electricity, gas, insurance)
  8. Other expenses incurred as a condition of employment.


John Cantin retired as a Senior Tax Partner of KPMG at the end of 2021. His main focus was on corporate tax in both domestic and international sectors. He had clients in the broader financial services sector and had a particular interest in GST, and tax policy. He also served as a member of the Institute of Chartered Accountants' National Tax Advisory Group and was heavily involved in submissions on proposed changes to New Zealand’s tax system. In 2019 John was awarded the Meritorious Service Award by Chartered Accountants Australia and New Zealand for his services to the tax profession.