Claas harvester in field: how to distinguish allowances and benefits to farm workers

Farm employees are often paid allowances or receive benefits from their employer as part of their employment agreement.

Some of these allowances will be tax-free in the hands of the employee. Others will need to be taken into account when calculating their wages and corresponding PAYE deductions, as the value of the benefit is deemed to be part of their gross income. Others may be caught under the Fringe Benefit rules.

It is important to be able to distinguish the different types of allowances and benefits so that the correct accounting and tax treatment is made.

Inland Revenue recently issued a "Questions We Have Been Asked" article on this topic. In the article they note that a farm worker definition includes farm employees and some contract workers. If you have contract workers engaged in completing farm-related work on your farm and want to know more, contact us to discuss this further.

There are two main types of allowances: reimbursing allowances, and benefit allowances.

Reimbursing allowances

Reimbursing allowances are those that reimburse a farm worker for expenses they will, or are likely to, incur in carrying out their work on the farm. If the employee was in business themselves they would be able to claim these costs as a deductible expense. Common types of reimbursing allowances are for wet weather gear, working dog expenses, quad bike running costs, protective clothing, and shearing equipment.

Reimbursement allowances are tax-free to the employee and tax-deductible to the employer.

Benefit allowances

Benefit allowances are split into two categories: those that are paid in cash, and non-cash benefits.

Cash benefits

Cash benefits are those that are paid to the farm worker to compensate them for the conditions of their service, such as working in a remote location, working in a dangerous or dirty environment, a cash allowance in lieu of providing stores and rations, or an allowance to assist with boarding school fees for their children.

These allowances provide a financial benefit to the farm worker rather than reimbursing them for costs incurred in carrying out their work. They are therefore taxable in the hands of the farm worker and subject to the PAYE rules. The employer is entitled to a tax deduction on the payment of these allowances.

Non-cash benefits

Non-cash benefits such as the provision of food, like meat, eggs, fruit and vegetables provided to the employee provides an economic advantage to the employee. It is therefore likely to attract Fringe Benefit Tax. The FBT rules are quite complex and include a number of thresholds before FBT is payable. If you are providing non-cash benefits to your farm workers we strongly suggest you discuss this with us, to ensure you are treating this correctly for tax purposes.

Non-cash benefits are generally not taxable to the employee but are deductible by the employer, although the employer may be liable for FBT.

We would be happy to assist if you are unsure how to treat the allowances or benefits you are providing to your workers. E-mail us or request an appointment to get in touch with one of our friendly advisers.