Employees to pay higher tax on salary for housing benefits

  • Port Moresby wharf

    Port Moresby wharf

    This isn’t the kind of news you’d expect to read as we head towards the festive season but unfortunately there is a more than likely chance that in the new year, employees will dig deeper into their pockets to pay more in tax if they receive some form of housing benefit from their employer.

    The Government on presenting the 2017 budget earlier this month announced this measure as part of its revenue raising strategy.  Accounting firm KPMG confirmed this move in their  budget review.

    As a brief background, employees who receive a housing benefit from their employer are taxed on a prescribed value.  The prescribed value depends on the level of benefit (by way of the amount of rental) and the area of the rented property.  The policy behind this as far as we can recall is to “assist” employees from being taxed at the full amount of the benefit received and avoiding paying a higher tax.

    Those who pay higher rental have a higher prescribed value than those who pay lower rentals.  Likewise, those who reside in more urban areas have a higher prescribed value from which they are taxed in comparison with those that live outside the prescribed urban areas.

    According to the KPMG report, the existing prescribed values have not been updated since 2011 and the Government has seen this as being “overly generous“.

    This is the current prescribed values:

    TYPE OF HOUSING AREA 1 AREA 2 AREA 3
    HIGH COST House or flat
    K 3,000 per week or more
    700 500 NIL
    MEDIUM COST House or flat
    between K 1,000 per week and less than
    K 3,000 per week
    400 300 NIL
    LOW COST House or flat
    K 1,000 per week or less
    160 150 NIL
    MESS OR BARRACK STYLE BASIC ACC. 60 50 NIL
    GOVERNMENT MESS OR BARACK STYLE 7 7 NIL
    EMPLOYEES INVOLVED IN A CITIZEN EMPLOYEE
    FIRST TIME HOME BUYER SCHEME NIL NIL NIL

    The Government has reformulated the rental levels applicable to various housing classifications and increased the range of urban centers. Here is the proposed figures for 2017.

    housing

    Source: KPMG Budget 2017 Review

    As you can see from the two tables above, there are two significant changes.

    The first change is the increase in level of rentals.  For example, low cost housing are classed at K1,000 per week or less.  The proposed changes mean that the rental level is now K300 or less per week to qualify.  Effectively, more on the low cost housing are now being pushed up to the next level and will obviously pay a higher rate of tax as per the relevant prescribed value.

    The same effect can be seen for the middle and high cost housing.

    The second major change is the addition of two new categories “Very High Cost” and “Up-market”.  These changes are obviously a reflection of the current housing market and the Government is seen to be aiming to tax more of the higher rental properties.  Most of the revenue generated through this measure is expected to come from these top two categories.

    The other change that may not be so obvious from the above tables is that, the reach and impact of this regime has also been extended geographically.  For example, other centres previously not included in Area 1 have been included. These centres include Kokopo, Alatou and Kimbe.  Previously, Area 1 only included Goroka, Lae, Madang, Mount Hagen and Port Moresby.

    KPMG reports that the Government intends to raise K6 million in 2017 which looks “very conservative in light of the extent of the prescribed value changes.”

     

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