If an individual operates as a sole-trader, as opposed to trading through a company, it allows for a simplified structure with fewer formal set up tasks (and costs) and greater flexibility and control. However, differences can arise in how the income and expenditure of a sole trader is calculated, compared to a company.
Tax deductible meal allowances is one such difference, where these can be paid by an employer to an employee, while self-employed taxpayers may not be able to deduct meal expenses.
In July, Inland Revenue released a 37-page Interpretation Statement, IS 21/06, that discusses the income tax and GST treatment of meal expenses and draws out this distinction. It provides that the reason for this difference is because meal expenditure for a self-employed individual is of a private nature, and therefore non-deductible. This difference in tax treatment reflects the different legal arrangements between a company and a self-employed person.
Before presuming there is an advantage to be sought, consideration should also be given to whether the benefit to the employee could be captured as a taxable benefit and subject to PAYE or FBT.
If you have questions on matters raised in this article, please get in touch.