 |
 |
Anti-avoidance rule
Interaction with share option schemes
Value of transport benefits
Policyholder loans
Changes to election provisions in subpart ND
|
Anti-avoidance rule
15.1 Although FBT has its own anti-avoidance provision in part G of the Income Tax Act 1994,[30] unlike many of the specific anti-avoidance rules in part G, it is not also bolstered by the general anti-avoidance rule in part B, which enables a tax avoidance arrangement to be voided and any associated tax advantage to be counteracted. This omission arises because of the wording in section BG 1, when read in conjunction with sections OB 6 and OZ 1. The omission in this legislation and its predecessor, the Income Tax Act 1976, does not appear to have been deliberate. In the circumstances, the general anti-avoidance rule should apply to FBT and the government proposes to make a remedial change to achieve this.
15.2 This change would apply as a back-stop measure to bolster other specific anti-avoidance rules, including the specific rule proposed in this document in relation to charities.
Interaction with share option schemes
15.3 Under section CH 2 of the Income Tax Act 1994, exercised share options provided to an employee by an employer are treated as monetary remuneration, with the value of the benefit being the difference between the value of the shares on the date of acquisition and the amount paid by the employee for them. To avoid double taxation, the FBT rules specifically exclude benefits that arise under section CH 2.
15.4 An issue has arisen as to the treatment of options that are cancelled in exchange for cash rather than converted into shares. In these circumstances the option holder still receives a benefit so that if section CH 2 were not to apply, then FBT should apply in theory, although there is confusion as to whether it does in fact apply. This confusion creates compliance costs for taxpayers.
15.5 To avoid these compliance costs, the government proposes to clarify section CH 2 to ensure that, as intended, any benefits in relation to share options are covered by that provision rather than the FBT rules.
Value of transport benefits
15.6 Transport-related fringe benefits provided by an employer are generally valued at 25% of the highest amount charged by the employer to members of the public. This means, for example, that an airline that provides its staff with free air travel for their private use generally pays FBT at the rate of 25% of the highest fare charged to a member of the public for a comparable flight. This discount was intended to represent a stand-by type of fare, given that employees may not be guaranteed a seat until shortly before departure.
15.7 Some submissions questioned whether the rate of 25% is still appropriate, given the range of discounted fares that are now available to the public. This should be able to be established empirically. Accordingly, the government invites submissions on this point. In considering the rate, the government would need to take into account the full range of transport options to which the rate applies.
Policyholder loans
15.8 Section CI 2(8) of the Income Tax Act 1994 applies the FBT rules to loans provided by a life insurer to a policyholder. This is done by treating the relationship between the policyholder and the life insurer as an employment relationship. The purpose of the provision is to capture the benefits of low-interest loans to policyholders in the same way that such benefits, when provided to shareholders of a company, are treated as dividends.
15.9 Over recent years many life insurers have demutualised but because there is an exemption in the dividend rules for amounts subject to FBT, the FBT rules continue to apply to low-interest loans to policyholders even when the life insurer is now a company.
15.10 Because some life insurers have not demutualised, section CI 2(8) needs to be retained. But the government invites submissions on whether loans to shareholders in life insurance companies should be subject to the dividend rules rather than the FBT rules. One aspect to consider is the implications of changing who pays the tax. At present, the life insurer pays the FBT, whereas if the benefit were treated as a dividend, the shareholder would pay the tax, which would likely increase compliance and administrative costs.
Changes to election provisions in subpart ND
15.11 Some technical issues have been raised with the election requirements in subpart ND. Subpart ND sets out the specific tax rules, such as the multi-rate, in relation to the fringe benefits identified in subpart CI. The proposed changes are:
- Section ND 2(3) provides that an employer elects to pay FBT on a quarterly basis by filing a return and paying tax at the rate selected. Since not all taxpayers pay when they file, the proposal is that the section be amended so that an election is made at the time of filing.
- Employers can elect to pay FBT on an annual rather than a quarterly basis if they meet certain criteria. The election must be in writing. In practice this means that employers complete an Inland Revenue form. It is proposed that sections ND 13, 14 and 15 be amended to provide employers the option of making their election by telephone. An advantage of making a telephone election is that the employer can discuss such detail as whether they meet the annual filing criteria and when the change of filing will apply from.
[30] See section GC 17.