Some existing Fringe Benefit Tax (FBT) exemptions are coming under the IRD's spotlight.

An official's issues paper calledRecognising salary trade-offs as incomewas issued recently by the Policy Advice Division of the IRD.

The proposals contained in the paper will have a significant effect on the current treatment of car parks and on-premises childcare facilities that employers provide to their employees, as well as fringe benefits provided to employees of charities. 

The objective of the proposed changes is to ensure that income from personal labour is fully taxed, and is taken into account when determining eligibility for social assistance such as working for families, and the parental income test for student allowances.

Based on that principle, the IRD want salary and salary substitutes to be taxed equally to eliminate any tax benefit from alternative structures. Situations where there is a salary trade-off of cash in return for obtaining a benefit, whether the cash alternative is explicit or implied will, under the proposals, result in the value of the benefit being taxed.

For car parks, under current rules, there is an on-premises exemption from FBT.  If a car park is on the employer's premises or is leased then this will be exempt from FBT in most cases, whereas if the car park is licensed it will usually be subject to FBT.  Under these new proposals, the exclusion from FBT for car parks provided on work premises would be removed   Instead, liability for FBT would be determined by whether the car park was provided as a trade-off with salary.

The key question then becomes: what is a "salary trade-off"?  The paper sets out three possible situations:

• Where an amount of salary or wages is traded for a non-cash benefit; or
• Where an amount of any other employment-related income is traded for a non-cash benefit; or
• Where there is no explicit trade-off but where the employee has anenforceable rightto the benefit, the benefit is actually available, and the employee takes up that benefit.  This is called an implicit trade-off.

The first two situations seem clear but the third, the implicit trade-off, is not.  An enforceable right is usually established by reference to an employment agreement.  However, an example given in the paper says an implicit trade-off arises in the situation where unallocated basement parking is available to a group of managers for use at any time and each manager is guaranteed a parking space.  There is no reference to whether the employment contract covers the car parks, or whether an amount of salary is foregone for the use of the car parks.  To the IRD, the guaranteed availability of the parking space creates an enforceable right, and therefore there is an implicit trade off if the employee then uses the car park.  This situation could potentially affect many employers who rely on the on-premises exemption. 

Those employees will then be faced with the challenge of how to value the "trade-off".  Inland Revenue say they may consider a standard value for benefits in some cases to simplify compliance.  

Childcare provided on employers' premises, which is presently exempt from FBT, would also be taxable when part of a salary trade-off.  Other examples of salary trade-offs are also mentioned in the paper, including the benefits to employees participating in a group life insurance policy, when this is  part of a salary trade-off. 

Fringe benefits provided to certain employees of charities are currently exempt from FBT in most cases. This FBT exemption is already limited in the case of charge cards or in the case of charities that are carrying on a business.  The FBT exemption for charities is to be amended to specify  that any vouchers provided to employees of charities will be subject to FBT.  This is because vouchers are easily substituted for salaries.  Other fringe benefit provided to the employees of charities could also be subject to FBT if they are part of a salary trade-off, as set out above. 

The issues paper discusses whether it is preferable to tax all salary trade-offs grossed up through the PAYE system, which then automatically brings it into the social assistance calculation.  If this approach is followed this would require changes to remove some benefits from the FBT system.  Alternatively, the FBT rules could be amended to subject to FBT benefits which are currently exempt.

The changes, once finalised, are expected to be introduced with effect from 1 April 2014.

The IRD is requesting the views of both employers and employees to the document.  Please let your usual Staples Rodway advisor know if there are any points on which you would like to make a submission.  Submissions are due by 31 May 2012.