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Background
Policy arguments
Other issues
Leading conclusion from review
Possible anti-avoidance rule
Tertiary institutions and FBT
| Proposed changes
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Background
10.1 Benefits provided to employees of charitable organisations are exempt from FBT, other than when they are employed in businesses carried on by charities. This exemption has been in the FBT rules since 1985, although it was removed for a brief period in 1990.
10.2 The government discussion document Tax and Charities, issued in June 2001, proposed that the FBT exemption for charities be removed on the basis that, in principle, employees of charities should be treated in the same way as other employees. A similar recommendation had been made by the Committee of Experts on Tax Compliance in its December 1998 report. Most of the submissions received in response to the discussion document, many of which were from charities, opposed the abolition of the exemption on various grounds, including compliance costs. As a result, the issue, including whether it would be feasible to limit the exemption, was referred for consideration in the wider context of this review.
10.3 There was a divided response from those who provided comments for the purposes of this review as to whether the exemption should be retained. Some commented that the FBT review needed to reconsider the application of the exemption as they considered that it applied inequitably - universities, for example, must pay FBT, while polytechnics and other tertiary institutions may be exempt. Some also considered that it was unfair to exempt charities but not other local or public bodies that performed a similar function. Charities reiterated their earlier arguments against removing the exemption, that:
- having to pay FBT would reduce the amount of funds they have available for charitable purposes;
- employees of charities are paid less than market salaries, and fringe benefits partly redress this;
- the compliance costs would be particularly severe on small charities, which do not have the resources to pay a tax accountant to calculate any FBT liability; and
- bigger charities may undertake less efficient practices in order to reduce their FBT liability.
10.4 It would appear that while, like other employers, charities may offer their staff a wide range of fringe benefits, the main form of fringe benefit is motor vehicles.
Policy arguments
10.5 FBT relates to income earned by the employee rather than the income of the employer, even though the tax is paid by the employer. The current FBT exemption for charities, therefore, advantages employees of charities because they pay less tax than other employees on the same total remuneration.
10.6 There is no tax policy reason why one set of employees should be treated differently from any other purely because of who they work for or because the remuneration is paid in kind. Given that the true value of the benefit normally accrues to the employee rather than the employer, the fact that the employer is exempt from income tax is not a relevant consideration. The contrast is more obvious when it is considered that employees of charities are taxed on their cash remuneration through the PAYE system in the same way as other employees.
10.7 Apart from equity issues, the main concern with any FBT exemption is the flow-on distortions that are created from having some form of remuneration that is not taxable. For example, the exemption provides an incentive for further fringe benefits to be substituted for cash remuneration, increasing the relative tax advantage.
Compliance costs
10.8 Although removing the exemption for charities would remove any distortions that the exemption creates, it would increase compliance costs for charities. Charities would have to pay tax on benefits, which could mean higher costs or lower cash payments to employees. Alternatively, charities might decide to alter the relative value of fringe benefits and instead pay more cash, to reduce compliance costs.
Possible limitations
10.9 Consideration was given to various options for limiting the exemption, some of which are outlined below. The government's conclusion was that the limitations in these options would be either too narrow or too wide to be meaningful or effective. Furthermore, any limitation, such as apportionment between charitable and private use, would likely result in more compliance costs than if the exemption was either retained or removed in full.
| Examples of possible limitations and their problems
Example 1 One option would be to limit the exemption to vehicle-related benefits provided the vehicles are available for charitable purposes at all times. This would remove any small private benefits that might arise when a vehicle is provided to carry out charitable purposes. It would go beyond the current exemptions for incidental benefits, emergency calls, or work-related vehicles. But, in fact, it would not preclude wide private use because a vehicle could still be concurrently available for charitable purposes, and the exemption would, therefore, be very broad in its application. Example 2 A limit could be related directly to the employee's circumstances. An exemption may be more justified, for example, when the person's only remuneration is to cover necessities, such remuneration being exempt from income tax. Arguably, the provision of a fringe benefit is neither a deciding factor in determining employment decisions nor a substitute for cash remuneration in such cases. An example would be those who join certain religious orders. But such an exemption would be extremely narrow. Example 3 Options that would allow more private use of motor vehicles would likely focus on maintaining records of actual use. To avoid the significant compliance costs arising from having to keeping logbooks, or otherwise having to apportion business and private use, the fringe benefit could be a set percentage - say, 50 percent - of the usual value. But there would be no sound basis on which to base any such percentage. |
Other issues
10.10 A number of other issues were also considered in determining the FBT treatment of charities:
- Many charities do not provide fringe benefits and would, therefore, not be affected by whether the exemption was removed or retained.[27]
- Even without the exemption, many of the fringe benefits provided by charities might not be subject to FBT. Charities would need to be sufficiently large to have employees (rather than volunteers) and have systems that are capable of making source deduction payments. They would not have to pay FBT on incidental private benefits on vehicles available for emergency calls, or on work-related vehicles. The government's proposed changes, particularly those in relation to the valuation of motor vehicles, low-interest loans and increasing the minimum thresholds would, in many instances, further reduce any FBT liability.
- More importantly, at present, little information is available on the value of current benefits, so that neither the impact on the sector of removing the exemption nor how it fits within the government's assistance to the sector can be determined.[28]
Leading conclusion from review
10.11 The government's view, after weighing up the various factors, is that the exemption for employees of charitable organisations should be retained. But given the policy reasons that militate against the exemption, the government is not in favour of extending it to other groups that may be similar but who are not charities. Although this may give rise to distortions, any extension would likely lead to greater distortions, as well as erode the tax base.
Possible anti-avoidance rule
10.12 Although the government has decided to retain the exemption, it is concerned to minimise the potential for the exemption to be exploited by providing a significant proportion of employees' remuneration in the form of fringe benefits. This is more likely the more readily substitutable a benefit is for cash. Credit cards are perhaps the closest cash substitute as a wide range of goods and services can be purchased with them.
10.13 There has been some suggestion that credit cards are being used to provide significant untaxed fringe benefits to some employees of charities. The government considers this to be inconsistent with its policy objectives and wishes to close off such opportunities. This will be achieved either through including a specific anti-avoidance rule targeted at credit cards and other short-term credit facilities or by specifically excluding such activities from the exemption.
Tertiary institutions and FBT
10.14 Some submissions were concerned that universities are subject to FBT, on the basis that they are specifically excluded from the definition of "charitable organisation", while other tertiary institutions may not be. The government has set out its reasons for not altering the current exemption but it is worth noting that there is some debate over whether polytechnics, colleges of education and wananga are subject to FBT. Public authorities are subject to FBT and one argument is that at least some of these tertiary institutions are public authorities.
[27] In a survey conducted by Watson Wyatt, Remuneration Report for the Voluntary Welfare Sector (April 2001), more than half the participants did not provide fringe benefits to employees.
[28] One of the benefits from the proposed registration and reporting system for charities should be a better indication of the aggregate value of the government's various forms of assistance to the sector.