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Legislative changes to salary trade-offs and land-related payments
A supplementary order paper (SOP) containing the much awaited changes to the Government’s announcements on the taxation of salary trade-off arrangements has been released.
The SOP to the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Bill which is currently before the Select Committee, includes the proposed changes to the taxation of salary trade-offs as well as the legislative amendments relating to the taxation of lease inducement and lease surrender payments.
Salary trade-offs: employer provided car parks
Public submissions received on the proposed amendments to the taxation of salary substitutes included in the issues paper, “Recognising salary trade-offs as income” (released in April this year), has meant the focus of the changes has been extensively narrowed to predominantly cover employer provided car parks. The proposals in the issues paper to bring child care provided on an employer’s premises within the tax net have not proceeded.
The FBT rules generally exclude benefits provided to employees on the premises of an employer. The amendments contained in the SOP will broaden the rules relating to the taxation of employer provided car parks by removing the current distinction between car parks provided on and off premises.
Car parks provided to employees will be subject to FBT in the following circumstances:
- The parking space is in a specified urban area. The areas have currently been limited to the central business districts of Auckland and Wellington marked as “Central Area” on the respective district plans for those cities. However, the proposed legislative amendments allow for the urban areas to be altered by the Governor-General by Order in Council; or
- The parking space is provided to the employer by a commercial car park operator and the consideration paid by the employer for a parking space (i.e. area for parking 1 motor vehicle) is more than a specified amount (that amount has currently been set at $210 per month); or
- The employee would be entitled to greater amount of employment income if they chose or have chosen not to receive the parking space (that is, there is an explicit salary trade-off).
The value of the fringe benefit will be calculated on a daily basis for each employee, and will depend on whether the employee is provided a parking space that is specifically allocated to them (regardless of whether the employee's name is displayed), or whether there is a pool of parking spaces that allow the employees to choose where to park. Where there is a pool of parking spaces the value of the fringe benefit will depend on whether there are more parking spaces than employees entitled to use them.
The changes are due to apply from 1 April 2014.
What do the changes mean for you?
It is important to keep in mind that the proposed changes mean that FBT in respect of car parks will not only apply to employer provided parking in the Auckland and Wellington CBDs. The SOP introduces FBT in a broader range of situations. Regardless of your location in the country if you use a third party provider to provide parking to staff and the cost per parking space is greater than $210 per month (at this stage the SOP does not indicate whether that is exclusive or inclusive of GST) you will be caught by the new rules. The new rules will also catch situations (again regardless of location) where car parks are provided under explicit salary sacrifice arrangements. For example, if a staff member is offered cash in lieu of having a parking space the benefit provided would be subject to FBT.
The rules for calculating the value of the fringe benefit are complex, especially where businesses have more staff than car parks (which is commonly the situation). Care should therefore be taken when doing the calculations. It may even be beneficial for businesses to get their tax advisor to review their initial calculations when the changes are first implemented.
Salary trade-offs: family scheme income
The SOP proposes to include the value of employer provided car parks or motor vehicle for the purposes of calculating family scheme income (in respect of calculating a person’s entitlement to Working for Families tax credits, student allowances and the community services card) where the benefit is received under an explicit salary trade-off arrangement. The new rule would apply regardless of the value of the benefit or location of the car park.
An employee that receives a short term charge facility will also be required to include the benefit for the purposes of calculating family scheme income if the aggregate value of the benefit provided to that employee for the tax year exceeds the lesser of:
- 5% of the employee’s salary or wages for that tax year; or
Salary trade-offs: short term charge facilities and charitable organisations
Charitable organisations are generally exempt from paying FBT on benefits provided to their employees (as long as the benefit is not received in connection with an employment that relates to a business carried on by the organisation that is outside its charitable purposes). A circumstance in which the exemption does not apply however, is when the benefit provided to the employee is a “short term charge facility” that exceeds 5% of the employee’s salary or wages for a tax year.
The SOP amends the definition of “short term charge facility” to clarify that vouchers (for example, grocery or petrol vouchers) are included within the ambit of that term. The minimum threshold of 5% has also been capped so that a “short term charge facility” provided by a charitable organisation to an employee will be subject to FBT if the aggregate value of the benefit provided to that employee for the tax year exceeds the lesser of:
- 5% of the employee’s salary or wages for that tax year; or
Lease inducement and lease surrender payments
The changes in the SOP intend to legislatively modify the capital-revenue boundary that currently applies under ordinary principles to lease inducement and lease surrender payments.
A lease inducement payment is a lump sum payment given by a landlord to incentivise a prospective tenant to enter into a lease arrangement (generally for a commercial lease). As there are no specific legislative provisions that deal with the taxation of such payments their treatment is presently determined under general tax law principles, which treats the payments as deductible to the payer (landlord) and as non-assessable capital receipts in the hands of the recipient (tenant). An officials’ issues paper released in July this year addressed officials’ concerns regarding this asymmetric tax treatment.
Following public consultation, the scope of the reform proposed in the issues paper has been extended to include lease surrender payments. A lease surrender payment is generally made by a tenant to a landlord in order to surrender an existing lease arrangement.
The proposed amendments in the SOP will mean lease inducement payments and lease surrender payments in respect of commercial leases or licenses (residential premises will be excluded) will be taxable to the recipient and deductible to the payer from 1 April 2013. The income or expenditure will generally be spread over the term of the lease arrangement.
Amounts incurred or derived prior to 1 April 2013 will continue to be subject to the tax rules as they currently apply.
Inland Revenue has indicated that it will carry out a further review of the tax treatment of other commercial land-related lease payments such as lease transfer payments in the New Year. It is expected than an officials’ issue paper seeking public consultation on the issue will be released early next year.
Please contact your local EY advisor or any of the contacts listed below, if you have any general comments or would like to discuss the above further.
Partner – Tax, Auckland
Tel: +64 9 300 7059
Partner – Tax, Wellington
Tel: +64 4 495 7399
Partner – Tax, Christchurch
Tel: +64 3 372 2439