The great tax debate
Two taxation issues have been getting some publicity of late. They are about fringe benefit tax on company car parks and taxation on long-stay accommodation.
As I have said many times the best tax system is low rate, broad base and as few loopholes as possible.
At this stage, I find the the proposed tax treatment of car parks quite reasonable, but the new tax rules on long-stay accommodation quite troubling. Let’s look at both in turn.
3 News reports:
Finance Minister Bill English is backing a controversial move to make company carparks subject to fringe benefit tax. That’s despite strong opposition from an unlikely coalition of trade unionists and employers.
It’s an unusual union of convenience. New Zealand’s most left-leaning trade union is working with the country’s biggest business association to topple a Government tax bill, with bumper stickers.
“Sometimes we have common causes,” says Unite Union secretary Matt McCarten. “To fight an obnoxious tax like that is one of them. We are united in hating the Government on this one, I’m very pleased to say!”
The Government wants to tax company carparks. Revenue Minister Peter Dunne is proposing a 50 percent hike on the perk, but only in central Wellington and Auckland. He’s got support from the top.
“It’s going to not raise any money,” says Employers and Manufacturers assistant chief executive Kim Campbell. “It’s picking on Auckland and Wellington. It’s picking on CBD workers, not everybody.”
The proposed law change was announced by the Government on 11 December 2012.
He said public submissions on the proposed salary trade-off changes resulted in adjusted proposals to focus mainly on employer-provided car parks.
A wider set of car parks provided to employees (predominantly in Auckland and Wellington CBDs) will be taxed, through the fringe benefit tax (FBT) rules.
“These changes enhance the integrity of the tax and social assistance systems by providing a fairer, more equal, way of treating those who receive non-cash benefits as part of their remuneration and those who receive only cash remuneration,” Mr Dunne said.
The SOP is here.
Fringe Benefit Tax is designed to remove the incentive for employees to reduce their taxable income by having part of their remuneration in non cash terms.
Rather than (for example) pay someone a $100,000 salary on which they pay $33,000 tax, the employer used to be able to say we’ll give you $90,000 salary and $10,000 of fringe benefits (say medical insurance, superannuation contribution etc). That reduces the tax bill to $30,000 and advantages that employee over someone who is just on $100,000 with no fringe benefits.
Hence without an FBT, you’d get a huge number of employers and employees agreeing on as many fringe benefits as possible to reduce their tax liability. Which is why FBT was introduced in (off memory) the early 1990s.
So now the issue is whether car parks are a fringe benefit. It seems hard to me to argue they’re not. Not all employees travel to work by car, but those who do need to park it of course. There are dozens of private car parks available for hire, but they of course save money if the employer provides one.
The biggest argument against FBT on car parks is that the value is so low, that the administrative cost of doing so is greater than the revenue. But the value of car parking in the two main CBDs (the Christchurch CBD is now basically one big carpark!) is now quite significant, say $3,000 a year. This is why the FBT will only apply to the two big cities – because elsewhere the value of car parking is not great enough to bother.
But $3,000 a year is enough for employers to say we’ll either pay you $100,000 a year and no car park or $97,000 a year and a car park.
So I don’t have a huge issue with the principle of FBT on car parks. I want lower taxes, but you get those by lowering rates – not by having loopholes.
However it may be that the cost of extending FBT is not worth the revenue. Those against would be better focusing on that issue, rather than trying to argue in favour of tax loopholes which are in their self-interest.
The issue of taxing long-stay accommodation I find much more troubling. It is worth noting that this doesn’t come from a law change initiated by the Government, but from the IRD changing its position on what the lawful treatment is.
On 6 December 2012 the IRD Commissioner said:
Under section CE 1(1B), the market value of accommodation provided by an employer to an employee is income of the employee. Equally, the market value of an accommodation allowance paid by an employer to an employee is income of the employee. The employer must account for PAYE.
Issues arise most often in the situation of relocation or temporary accommodation arrangements.
Taxpayers have argued that where the employee is still maintaining a home in another location, employer-provided accommodation or accommodation allowances are not taxable. Taxpayers argue this is because there is no net benefit provided to the employee; the value of any accommodation or allowance received by the employee is nil as the employee continues to pay the cost of their own house.
This is a view I agree with. If you live in Wellington and maintain a house there and your employer says we need you to go to Christchurch for three months, then it is their responsibility to provide accommodation for you and it should not be regarded as taxable income as you are not receiving a benefit from it. It is no different (in my view) from having your employer pay for a hotel room when you stay overnight somewhere on their business. But the Commissioner says:
The Commissioner does not agree with this view. The law does not support a net-benefit approach.
If that is the case, then I think the law needs changing.
The Commissioner acknowledges there has been some uncertainty and inconsistent practice, by both Inland Revenue and taxpayers, regarding the taxation of employer-provided accommodation and accommodation allowances. The Inland Revenue Technical Rulings Manual paragraph 57.11 reflected a net- benefit approach to determining the value of employer-provided accommodation and accommodation allowances. However, taxpayers were advised in September 19981 that the Technical Rulings Manual was being discontinued and that Technical Rulings should not be relied upon as representing Inland Revenue’s views or practice. In addition, the legislation has changed considerably since the relevant Technical Rulings chapter was written.
This is a polite way of saying we’ve changed our mind.
This ruling has been much criticised. David Cunliffe has said:
The Government’s plan to tax accommodation for earthquake rebuild workers is more akin to the actions of a vulture picking over a carcass for every last morsel than it is to sensible fiscal management, Labour’s Revenue spokesperson David Cunliffe says.
“The Commissioner of Inland Revenue has ruled that employers who send workers away from their usual homes must pay tax on provided accommodation. The ruling seemingly ignores how little remuneration benefit there is to the worker, who must still maintain their family home even though they can’t use it.
I agree with the criticism of the ruling, but would point out the Government (in the sense of Ministers) have no say on this issue. Once a law is passed, the IRD Commissioner decides how IRD will interpret it – not Ministers (thank God). An issue can be litigated in court of course – or Parliament can change the law.
The decision was criticised at the time:
The rule change requiring employers to pay PAYE on any accommodation provision an employee gets when working in another location – particularly the decision to make it retrospective – has taken the tax fraternity by surprise.
Hooft said the move was in contrast to recommendations made by the IRD’s own policy advice division last month.
The Institute of Chartered Accountants (NZICA) said it was “deeply concerned” about the new tax.
It would have a significant impact on industries which relied on itinerant workers, such as agriculture, the film industry, and the Christchurch rebuild effort, the accounting industry body said.
Acting general manager tax, Jolayne Trim, said it was a retrospective law change “of the worst kind”.
The Herald editorial has been critical:
Auckland firms that send engineers and construction staff to Christchurch for the rebuild have just learned their projects are going to be much more expensive. The Commissioner of Inland Revenue has ruled that employers who send people to work away from their usual home for a period must pay tax on the value of accommodation provided for them.
The decision, which is not confined to the earthquake recovery operation, of course, has astonished tax advisers and no wonder. It defies reason and common sense.
Accommodation provided by an employer is quite properly treated as taxable income when it is a benefit to the employee. But a worker who is provided with free or subsidised accommo-dation away from home is not getting a benefit; he or she still faces the normal costs of maintaining a home without the benefit of being able to live in it.
The commissioner in her ruling last week readily acknowledged that reasoning but “the law,” she said, “does not support a net-benefit approach”. She has not explained why the law does not support it. This appears to be another of those arbitrary decisions that is based on a literal and unreasonable reading of tax law.
Also NBR reported:
However, KPMG tax partner Murray Sarelius accused IRD of rewriting the rules in order to deal with what appeared to be “a few extreme cases on audit”.
The new position was contrary to common practice and “is stretching to justify its position in a way that applies much too broadly. The result penalises the majority of situations where there should not be an issue”.
Now IRD does appear to be backing down somewhat. Last week they said:
“Generally, accommodation payments made by an employer, or the value of accommodation provided by an employer are taxable. However, when an employee temporarily shifts to a new location for work, the payments or the value of the accommodation provided is not taxable.”
Mr Tubb said that this approach will not apply if the person has relocated to take up a new job with a new employer.
“There are a number of factors that the Commissioner will consider in determining the tax treatment of accommodation and whether a person has made a temporary shift.”
“This includes whether they have retained their substantive employment position in the original location or have relocated to take up new employment, for the duration of the transfer, and if their original location has remained the centre of their domestic life.”
What they seem to be saying is that if (for example) your family still live back in (say) Wellington, and that is still your primary home, then providing you accomodation in (say) Christchurch is not taxable. But if you have actually taken up a long-term position in (say) Christchurch and that is now effectively where you live, that may be taxable.
That sounds like an improvement over their original position in December, but is still very uncertain (and tax law should be clear). I think the best solution is for the Government to amend the tax law to say that the “net-benefit” approach should apply.