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Reason for catch-all provision
Specific exemption of employer health and safety-related benefits
Policy rationale
Proposal
Minor unspecified benefits
Proposal
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12.1 The catch-all provision in section CI 1 (h) applies FBT to all unspecified private benefits derived by an employee from his or her employment, subject to a few exceptions. The main general exceptions relevant to unclassified benefits are:
- benefits provided on the employer's premises;
- benefits that remove the need for the payment of an allowance if that allowance would have been exempt income under section CB 12 of the Income Tax Act 1994 (reimbursement of expenditure on account of an employee); and
- minor unclassified benefits totalling $75 or less, per quarter, per employee, provided all such benefits provided by an employer to all employees does not exceed $450 per quarter. (Annual and Income year filers have corresponding thresholds.)
Reason for catch-all provision
12.2 Some submissions have argued that this catch-all approach has extended the FBT rules beyond the scope of remuneration by including all private benefits arising from employment.
12.3 Generally, a taxable fringe benefit arises when there is a clear nexus between the provision of labour by the employee and a benefit provided as compensation. This may come in the form of an employee accepting a lower salary on the condition that a car, for example, is made available to the employee for private use. A taxable fringe benefit also arises when an employee's salary is supplemented, such as when an employee receives vouchers.
12.4 The FBT rules should cover both these circumstances. However, the rules arguably extend beyond these to tax any private benefit arising from employment, regardless of whether it is in the nature of remuneration. The example of flowers given to an employee upon the death of a relative has been cited as a common instance when a private benefit may arise from employment but does not have the nature of remuneration.
12.5 In addition, the catch-all provision imposes significant compliance cost on employers as it requires the recording and monitoring of all benefits.
Specific exemption of employer health and safety-related benefits
12.6 Benefits that might arise as a result of an employer meeting health and safety obligations can fall within the scope of FBT. Such benefits include free vaccinations, subsidised health checks and counselling services. The FBT treatment of these benefits depends on the location of their provision. If this occurs on the premises of the employer, the benefit will be exempt. This treatment is appropriate since the on-premises exemption was introduced to reduce compliance costs stemming from valuing a myriad of small benefits which are available to employees on their employer's premises.
12.7 If, however, the vaccination, counselling or health check is performed away from the employer's premises, FBT applies.
Policy rationale
12.8 There seems to be no good policy rationale for exempting these activities on the basis of location, given that any benefit that arises would be the same whether performed at the employer's premises or at the doctor's surgery, or elsewhere. In this instance the exemption only creates an arbitrary division between taxable and non-taxable fringe benefits of the same type.
12.9 Furthermore, difficulties with valuation is not a rationale for the current exemption. Vaccinations, health checks, and counselling are all available to the general public and can be valued at the open market value.
12.10 In principle, the fact that a fringe benefit may also benefit the employer or society in general should not mean that tax should not be charged on the benefit to the employee if it is in the nature of remuneration. The link to remuneration, however, is more difficult to establish in the case of these types of benefits. Would employees have purchased the benefit themselves had the employer not provided it? If not, then it is difficult to argue that the employees have been saved a cost that they would otherwise have incurred out of their remuneration.
Proposal
12.11 The specific exemptions from FBT would be extended to cover such items as flu injections and eye tests on the basis of their being part of employer health and safety obligations. Those obligations may arise from the Health and Safety in Employment Act 1992 or the State Sector Act 1988.
12.12 This proposal would not extend to a more general exemption of employer-paid health insurance premiums or childcare facilities, where the employee can be regarded as clearly receiving a subsidy from the employer for activities for which the employee would normally bear a cost.
Minor unspecified benefits
12.13 Section CI 5 creates an exemption from FBT for unspecified benefits when the aggregate taxable value of those benefits provided to the employee during the quarter amounts to $75 or less, and the aggregate taxable value of all benefits provided by the employer to all employees during the quarter does not exceed $450.
12.14 The provisions were intended to act as a buffer, excluding small benefits that are not in the nature of remuneration and benefits that are so low in value that the cost of paying FBT on them is unreasonably high relative to the value of the benefit.
12.15 The provisions have not been adjusted for over ten years[29] and are now generally seen as too low for the current commercial climate. In particular, the $450 cap for all benefits provided to employees is seen as disadvantaging larger employers.
12.16 Many submissions on the issues for inclusion in the FBT review advocated an increase in the threshold and/or the removal of the $450 cap on the basis that too many benefits that were not within the intended scope of FBT were being caught by the rules.
12.17 Raising the thresholds would remove FBT on some benefits that should not be subject to FBT, although it would be a blunt instrument to achieve this purpose because it would also remove FBT on benefits of low value that should, in principle, fall within the FBT rules because they have the character of remuneration.
12.18 Moreover, the minimum thresholds do not necessarily offer a trade-off between accuracy and cost because in order to use the provisions an employer must track all unclassified benefits to establish whether the thresholds have been exceeded. The provisions are, therefore, unsuitable for fringe benefits that are difficult to monitor or value. In such cases specific exemptions are more effective. From a policy perspective, therefore, minimum thresholds are a useful adjunct to specific exemptions in relation to small measurable benefits. Their main benefit, from an employer's perspective, is in lowering overall FBT liability.
Proposal
12.19 The government proposes to:
- increase the employee-related minimum threshold from $75 to $200 per quarter; and
- increase the employer-related threshold from $450 to $2000 per quarter.
[29] The threshold was set at $50 when FBT was introduced in 1985 and was subsequently increased to $75 in 1992. The current structure of having both an employee and employer threshold was introduced in 1993.