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Objectives of the review
The scope of this discussion document
Summary of proposals
Other key decisions
Submissions are invited

1.1     Introduced in 1985, fringe benefit tax (FBT) was a response to the growing trend in the 1980s to provide in-kind benefits in lieu of cash remuneration. Non-cash untaxed benefits became popular in the environment of high marginal tax rates that prevailed at that time. By taxing fringe benefits, FBT was intended to buttress the PAYE system so that all forms of remuneration were taxed equally. The initial focus of FBT was on the main fringe benefits at that time - cars, low interest-loans and free, subsidised or discounted goods and services.

1.2     Fringe benefits continue to be offered today, albeit perhaps representing a less significant part of packages, and the types of benefits provided by employers have widened,^[1] so that FBT continues to play an important role in maintaining the integrity of the tax base.

1.3     Although there have been specific changes to the rules to clarify particular areas, such as the use of a test period to establish private use of a motor vehicle, the FBT system has remained substantially unchanged. The most major change was the introduction of the multi-rate system in 2000, which was designed to remove the overtaxation of low and middle-income employees by attributing fringe benefits at the marginal tax rate of the employee.

Objectives of the review

1.4     A key step in the process for developing and assessing tax policy - the generic tax policy process - is the undertaking of a review of policy once it has been implemented to see if it is operating as intended and how it can be improved. Several of these reviews have been carried out in various areas of tax policy since the process was introduced in 1994 - for example, the GST review and the accrual rules review. The FBT review is another in this series.

1.5     FBT can be considered to have been a relatively effective tax, but questions have arisen over the almost 20 years since it was introduced as to whether its efficiency and equity could be improved. In October last year the government called for taxpayers to identify areas they wished to be addressed in the review. Seventy-eight submissions were received from a cross-section of the public.

1.6     The vast majority of submissions considered the fringe benefit tax system to be complex and costly and suggested ways to reduce the cost by simplifying both the process and the rules. There was general concern that some of the rules were unfair, particularly in relation to motor vehicles. Anomalies in a number of areas were also highlighted.

1.7     A number of submissions commented on the rationale and scope of the FBT rules - for example, should the FBT rules be limited to benefits that can be readily substituted for salary or key benefits that were offered in lieu of salary? Some submissions suggested employees rather than employers should pay the tax, as part of the PAYE system. Others cautioned against the potential compliance cost increases and wage pressures that this might bring. A range of other issues was also raised.

1.8     Inland Revenue surveyed 301 large employers throughout New Zealand on the subject of compliance costs, including those associated with FBT. When businesses and tax agents were asked to name the one thing that could be done to reduce tax-related compliance costs, FBT was rated as the second most important issue for large employers. It was also the second biggest issue for tax agents generally and their most significant technical tax issue. Tax agents identified a number of issues that were considered a waste of their time or added to their clients' fees, and FBT was one of three general categories of issues.

1.9     Several developments in case law and changes in interpretation over time have added to the complexity of the tax, as they have suggested that the policy intent of the legislation is not being achieved in some areas. The different treatment of leased versus licensed car parks and the interpretation of "work-related vehicle" are prime examples.

1.10     The purpose of the post-implementation review is, therefore, to assess the operation of FBT and address taxpayers' concerns about the way the tensions between simplicity, comprehensiveness, and cost and equity are balanced. There are good policy reasons for retaining FBT. The challenge of the review is, therefore, to reduce the difficulty and cost to employers of complying with the FBT rules while essentially maintaining the revenue collected from FBT.^[2]

The scope of this discussion document

1.11     This discussion document outlines a number of proposals on which the public is invited to comment. The aim is that any changes the government decides upon from this review would be included in amending tax legislation next year.

1.12     The focus of the document is on employment-related fringe benefits. The document, therefore, does not consider the interaction of FBT with other issues such as the deductibility of business entertainment expenditure, or the relative treatment of benefits under different entities such as partnerships.

1.13     Because the review has focussed on both the FBT framework and problems with specific benefits, the discussion document looks at, on the one hand, issues such as who should pay the tax and the basis for valuing benefits, and on the other, problems such as how best to value motor vehicles and the extent to which car parks are included as fringe benefits. A range of remedial issues also needs to be addressed.

1.14     Part two outlines the conceptual framework and practical issues that provide the foundations for New Zealand's FBT system.

1.15     Part three examines the application of the FBT rules in relation to motor vehicles, car parks, loans to employees, the multi-rate, charities, low-value benefits and business tools. These areas address both concerns expressed in submissions and some anomalies that are both conceptually problematic and that provide opportunities to erode the FBT revenue base.

1.16     In discussing these issues and suggested solutions, a key point is the need to strike appropriate trade-offs between compliance costs and an accurate and comprehensive system. Often there will be a number of solutions, depending on where the trade-off is made. Accordingly, we are particularly interested in feedback on whether the suggested solutions achieve the best trade-offs.

1.17     Part four of the discussion document addresses other exemptions and issues raised by taxpayers or which are of concern to Inland Revenue.

Summary of proposals

1.18     The proposed changes are:

Motor vehicles

• Owners would have the choice of calculating the benefit based on the vehicle's book value (with a minimum value) or, as at present, based on its cost.

• The rate applying to either the cost price or book value would be reduced in recognition of lower real motoring costs since the rate was set in the early 1980s. This would reduce the rate from 24% to 20% of cost. (The equivalent rate under the proposed book value option would be 36%.)

• The incentive to use various vehicle leasing structures to reduce FBT liability would be removed by aligning the treatment of leased vehicles with that of owned vehicles. This means that the benefit in respect of a leased vehicle would be based on either cost or book value. Market value (at a rate of 27%) could, however, be used if information on the cost or book value could not be easily obtained.

• To remove the potential for private use within a 24-hour period being treated as two days' private use, each employer would have the option to elect the start time for a day which would be consistently applied in calculating the motor vehicle fringe benefit.

Car parks

• FBT would be applied to employer-provided car parks that are available for private use, irrespective of their legal form or whether they are on or off the premises, on the basis that any car park provided to an employee for private use is a benefit. Currently, because of the broad application of the "on-premises" exemption most car parks are not subject to FBT. Various valuation options are suggested, and a minimum value threshold is discussed.

Multi-rate calculation

• Employers who file their fringe benefit returns on-line with Inland Revenue would have access to an on-line electronic calculator that would undertake the end-of-year multi-rate calculation for them.

• Other simplification options are to replace the FBT multi-rate calculation with a simpler calculation that uses the top marginal tax rate on the employee's cash remuneration as a final tax, or to apply a single rate (54%) that produces the same overall revenue outcome.

• Employers who cease to employ staff and do not intend to replace them would have the option of applying the flat rate of 64% in their final return rather than doing the multi-rate calculation.

Low-interest loans

• Employers would have the option of valuing their loans to employees at a publicly available market rate as an alternative to the current prescribed rate of interest.

Minimum thresholds

• The minimum value thresholds that apply to unclassified fringe benefits would be increased. The employee de minimis would be increased from $75 to $200 per quarter and the employer de minimis increased from $450 to $2,000 per quarter. These increases are expected to remove the need for a number of employers to file FBT returns.

Business tools

• The private use of employer-owned work tools such as cell phones and laptops would be exempt from FBT when provided to employees primarily for business purposes.

Miscellaneous issues

• Payment of income protection insurance premiums by an employer on behalf of an employee would be exempt to the extent that the employee would have received a tax deduction if he or she had paid the premium directly and the income stream would have been taxable.

• Benefits relating to employer health and safety obligations would be exempt from FBT.

• The current law would be clarified to confirm that FBT should not apply to benefits that arise when an employer secures a bulk discount for employees, provided those discounts would be available to other groups on a basis unrelated to employment.

• For the purposes of the on-premises exemption, an employer's premises would include the premises of other companies in the consolidated group.

• The general anti-avoidance rule in section BG 1 would be applied to FBT.

• The legislation treating share options as monetary remuneration would be amended to make it clear that it covers options that are cancelled in exchange for cash.

• The legislation would be clarified so that an election to pay FBT on a quarterly basis is made at the time of filing.

• Employers would be given the option of making their election to pay FBT annually by telephone rather than in writing.

Other key decisions

Who pays the tax?

1.19     FBT would continue to be paid by employers.

Charities exemption

1.20     Following submissions from the review of charities, the current exemption that charities have from FBT would be retained. An anti-avoidance rule is proposed to close off possible opportunities for the exemption to be exploited by charities providing employees with credit cards as a significant proportion of their remuneration.

Submissions are invited

1.21     Submissions on any aspect of this paper are welcome. They can be mailed to:

Streamlining the taxation of fringe benefits
C/- the General Manager
Policy Advice Division
Inland Revenue Department
PO Box 2198
WELLINGTON

1.22     Alternatively, submissions may be made in electronic form to:

policy.webmaster@ird.govt.nz

Please put "Streamlining the taxation of fringe benefits" in the subject line for electronic submissions.

1.23     Submissions should be made by 27 February 2004 and should contain a brief summary of the main points and recommendations. Submissions received by the due date will be acknowledged.

1.24     Please note that submissions may be the subject of a request under the Official Information Act 1982. The withholding of particular submissions on the grounds of privacy, or for any other reason, will be determined in accordance with that Act. If you consider that there is any part of your submission that could be properly withheld under the Act, please indicate this clearly in your submission.

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