Flooding events and tax concessions

In response to the adverse weather events that hit in January and February this year, a number of tax concessions were released on 14 March 2023 in an attempt to provide some relief to those who were impacted.

The events have been collectively given the legislated name “North Island flooding events”, which has been defined as including the following events, dates and Districs/Regions.

• Cyclone Hale: 8/01/23 – 12/01/23, Coromandel, Gisborne, Northland, Wairarapa, Wairoa.
• Heavy rainfall: 26/01/23 – 3/02/23, Auckland, Bay of Plenty, Northland, Waikato.
• Cyclone Gabrielle: 12/02/23 – 16/02/23, Auckland, Bay of Plenty, Gisborne, Hawke’s Bay, Northland, Tararua, Waikato.

Included in the March 2023 tax concessions are:

• Where employees are required to relocate to work on a project of limited duration relating to the rebuild or recovery of an area impacted by a North Island flooding event, an employer can provide the employee with tax-free accommodation or an accommodation allowance, for up to five years provided the employee starts the project within six months of the flooding event. Normally this tax-free accommodation period for out-of-town projects is three years.
• An exemption from PAYE and FBT for ex-gratia payments or benefits from an employer to an employee impacted by a North Island flooding event of up to $5,000, provided the payment or provision of the benefit is within eight weeks of the first date of the relevant event. Where the payment or benefit comprises accommodation, there is no $5,000 cap, however the eight-week time frame still applies.

Another response to the North Island flooding events was the extension of the temporary tax concessions relating to donated trading stock that were first introduced in response to Covid-19. They were due to expire on 31 March 2023, but will be extended to 31 March 2024.

For context, prior to March 2020, where a business disposed of its trading stock for less than market value, the business was treated as disposing of it for market value. As a result, a deemed taxable profit margin arose, creating a tax disincentive for businesses to donate their trading stock

As part of the COVID-19 related tax concessions, temporary amendments were made to this provision in March 2020 to allow businesses to make trading stock donations; for example, to hospitals or food banks, without incurring a tax liability on the donation.

There are two different treatments that apply:

1. Where donations of trading stock are made to a donee organisation (e.g. a registered charity) or a public authority, the deemed market value provision does not apply. As a result, in this scenario, a business would be allowed a deduction for the cost of the trading stock, with no deemed gross income arising.
2. Where donations of trading stock are made to non-associates that are neither a donee organisation or public authority, the business is treated as deriving an amount of income equal to the cost of the trading stock. As a result, in this scenario, the impact on the business’ taxable income is nil.

The deemed market value provision was originally introduced in the 90s as a tax avoidance measure, to address situations where sole traders were using their trading stock for private purposes. However, the disincentive for businesses who are genuinely trying to help their community does raise the question, whether the provision was too harsh – an obvious and easy solution would be to make these temporary amendments permanent.