Home     Contents     Previous     Next

Income protection insurance
Third-party provided benefits
On-premises exemption
Travel costs when employee posted overseas
Work-related clothing

Income protection insurance

14.1     In principle, the FBT treatment of income protection insurance policies should put the employee in the same position as if the employer had paid the employee a cash amount and the employee had then paid the premium directly. This is not the case currently because employees who pay the premium directly can be eligible for a deduction for the premium paid, on the basis that it is to ensure future income. Employees do not, however, receive a deduction when the employer pays the premium on their behalf.

Proposal

14.2     The government's proposed solution for rectifying this difference is that the premiums paid by the employer would be exempt from FBT if the employee would have received a tax deduction had he or she paid the premium directly, and if any claim under the policy would be subject to tax in the employee's hands. This means that those premiums relating to personal sickness or accident policy insurance (which is treated as exempt income under section CB 5(1)(h)) would not qualify for the exemption.

Third-party provided benefits

Incidental benefits

14.3     When an employer enters into an arrangement for a third party to provide employees with benefits, the employer is still regarded as having provided the benefits and is liable for the FBT on them.

14.4     There is an argument that FBT should not apply to benefits that arise when an employer has secured a bulk discount for its staff from a third party merely because they represent a significant group. The crucial criterion in these circumstances should be whether such a discount would be available to the employees were they members of some other group unrelated to their employment. If the third party generally provides a bulk discount to large groups to attract their custom then, from a policy perspective, it is difficult to consider the discount to be a fringe benefit.

14.5     The employer may not have provided any consideration for the discount, although this need not be an indication that the benefit is not really employment-related, particularly if the parties are associated persons.

Proposal

14.6     It is proposed that the current law be clarified to confirm that FBT should not apply to benefits that arise in instances such as when an employer secures a bulk discount for its employees, provided those discounts would be available to other groups on a basis unrelated to employment. This treatment is conceptually the same as that proposed for low-interest loans, outlined in chapter 11.

Third party pays the FBT

14.7     Another issue raised in submissions was whether the third party providing the benefit to the employee should have the option to meet the FBT liability. There may be good practical reasons for this, such as the third party having the information to calculate the value of the benefit, or the third party may consider the information on cost to be commercially sensitive.

14.8     The third party may also have chosen to provide the benefit to the employee in return for services provided by the employee to the third party through the employer. In such cases the third party is bearing the cost of the fringe benefit, and it seems appropriate that it, rather than the employer, be able to elect to pay the FBT. The employer would in these circumstances be exempt from FBT on the relevant fringe benefit.

14.9     This could, however, give rise to some complexities:

• because the third party would not have access to the salary details necessary to identify the employee's marginal tax rate, the 64% tax rate may need to be applied to the benefit; and
• to reduce the opportunity to use this treatment to take undue advantage of the minimum value threshold, the employer and the third party should not be associated persons and no payment should be made by the employer to the third party in respect of the benefit.

14.10     The government seeks comment on the practicalities of this treatment.

On-premises exemption

14.11     As discussed earlier, benefits provided on an employer's premises are excluded from FBT. This exemption does not, however, extend to the premises of another member of a group of companies, which can produce inconsistent outcomes. An employee may, for example, be employed by one member of the group of companies but receive a benefit while at the premises of another member - say, on a visit as part of his or her employment duties. It seems logical, therefore, that the on-premises exemption be able to be applied on a consolidated group basis or when companies are 100 percent commonly owned.

Proposal

14.12     For the purposes of the on-premises exemption, an employer's premises would include the premises of other companies in the consolidated group or when the companies are 100 percent commonly owned.

Travel costs when employee posted overseas

14.13     Although a number of submissions raised the issue of the FBT treatment of spousal travel, the government is not proposing to alter that treatment. In general terms, having the spouse or partner of an employee accompany the employee on a business trip cannot be considered to be for work purposes. This is because of the difficulty in establishing a clear nexus between the spouse's or partner's role during the trip and the generation of income for the employer's business. Therefore if an employer pays for an employee's spouse or partner's travel costs in such cases, the payment should be treated as a fringe benefit and subject to FBT.

14.14     One issue that has arisen in the FBT review, however, is the appropriate FBT treatment of family visits to employees working overseas that are paid for by the employer. If the employer pays for the employee to return home to visit his or her family, this cost may currently be exempt from FBT on the basis that it removes a need to pay the employee a reimbursement allowance for travel costs the employee would have incurred in travelling between the employee's home and place of work for the purposes of their employment. If, in the alternative, the employer incurs the cost of the family visiting the employee, the FBT outcome should arguably be the same - that is, any benefit should be exempt.

14.15     In principle, the government agrees that there are grounds for considering an exemption if:

• it can be shown that the travel by the family is required as part of the employee's employment;
• the business purposes that would have been met by the employee making the trip continue to be achieved by the family visiting the employee; and
• the exemption for family visits is limited to the amount that would have been exempt from FBT if the employee had made the visit.

14.16     The government invites comment on this point.

Work-related clothing

14.17     No changes are proposed to the FBT rules on work-related clothing. Distinctive work clothing provided to employees by their employer is exempt from FBT provided it meets the definition of "distinctive work clothing". This is defined as clothing that is worn for work purposes and would not be normally worn for private purposes, and can be identified with the employer by virtue of:

• a name, logo, or other similar identifier being prominently and permanently displayed on the clothes at all times; or
• the uniform's pattern, colour scheme or style being readily identifiable with the employer.

14.18     Given that some concerns were raised in submissions about the practical application of these requirements - in particular, what is meant by "readily identifiable" and "prominently displayed", the requirements were reviewed. While acknowledging that any definition creates interpretation issues and, therefore, compliance costs, this is part of the trade-off for having an exemption. The conclusion is that changing the definition would create more problems than it would resolve and that, therefore, no change should be made.

Home | Contents | Previous | Next