NZ Government Waters Down New Rules on Salary Trade-Offs and Lease Related Payments

It is noted with interest that in recent days there was a softening of two significant tax policies, which were put out for consultation.

The first backtrack was about two weeks ago, and was in relation to lease-related payments.  In response to strong concerns, the Government backed off from an Inland Revenue proposal to tax lease inducements from the date of announcement and instead pushed the application date forward to 1 April 2013.

The second backtrack was last week and was in relation to recognising salary trade-offs as income.  Taking into consideration the public submissions, the Government decided to significantly narrow the scope of planned changes relating to salary trade-off benefits – focussing predominately on employer provided car parks.

These changes are explained in some detail below.

Lease Related Payments

In a recently released media statement, the Government has indicated that there will be new rules in relation to lease inducement payments. These proposed changes will be included in a Tax Bill which will be tabled later in the year. The proposed changes will apply from 1 April 2013.

The changes stem from an issues paper released by the Inland Revenue Department in July (“issues paper”). In the issues paper it proposed an overhaul of the way that lease inducements are taxed and that the changes should apply retrospectively, to leases entered into on or after 26 July 2012.

As highlighted above, the Government has chosen to change the application date to 1 April 2013. The new application date is a welcome relief for those that were in the process of negotiating new leases at the time the issues paper was released.

In terms of the changes to the way that lease inducements are taxed, the Government have proposed the following changes:

  • The Government will confirm the deductibility of lease-related payments (such as lease inducement payments and lease surrender payments). At the moment this is left to an interpretation of general principles. This is part of the Government’s 2012-13 tax policy work program, of which one of the goals is to reduce black hole expenditure.

  • The Government will confirm that the recipient of the lease-related payment will be taxed on this income. This will ensure that there is symmetry in the tax treatment of lease-related payments.

  • The income and expenditure arising from these lease payments will be spread evenly over the term of the lease.

The media statement by the Government and the proposed changes provide some much needed clarity for taxpayers. In addition, the new application date of 1 April 2013 provides certainty for those that are currently in the process of negotiating new leases. It appears that the Government and Officials have listened to the concerns raised by many people.

Salary Trade-Offs

On 3 October 2012, the Government announced that the proposals to tax salary trade-off benefits such as car parks, childcare and benefits provided by charities will be narrowed.  This is in response to public concerns about the proposals’ practicality.

Those concerns were raised in submissions on an Officials’ discussion paper released in April 2012, which proposed taxing salary trade-off benefits and attributing them for social assistance purposes (Working for Families, Student Loans and Child Support).

The following table compares the original proposals against the revised ones.

Matters

Original Proposals

New Proposals

Car Park Benefits

All car parks would be covered if provided by an employer as part of an explicit salary sacrifice arrangement or provided as an implied benefit – i.e. the employee has an “enforceable right” to the car park.

Will focus predominately on car parks provided to employees in the Auckland and Wellington Central Business Districts (the areas where the benefits to the employee are greatest). Car parks used by work vehicles or for late night shifts and disabled car parks will be excluded.  Standard values will apply when the car park is not provided through a commercial car park operator.

Approaches to taxing salary trade-offs

Feedback was requested on whether taxation/attribution should be under the FBT or PAYE rules

Car parks will be taxable under the FBT rules (while not explicit, it is understood that childcare and other benefits provided on employers’ premises will not be subject to FBT as originally proposed).

Charitable Organisations

FBT exemption be removed altogether for charitable organisations

Charities will not be subject to the new rules, i.e. charities’ current FBT exemption will continue, except in the case of vouchers (e.g. for petrol and groceries).

Attributing salary trade-off for social assistance purposes

The entire attributable benefits, for tax, having to also be included as “income” for social assistance.

Cars, car parks and vouchers provided as part of explicit salary trade-off arrangements will only need to be accounted for social assistance purposes.

 

The changes will be included in a tax bill scheduled for introduction next month and will apply from 1 April 2014.

For more information please contact your local advisor.