*On 18 March 2013 the government announced it will no longer be pursuing the tax on employee car parks.
The Government has introduced legislation to expand the reach of the fringe benefit tax (FBT) regime to apply to more car parks provided to employees. The changes are currently being considered by the Finance and Expenditure Select Committee, which is due to report back to Parliament at the end of May. The proposed changes, if implemented, will apply from 1 April 2014. The proposals have been criticised strongly by various groups this month. Below we discuss the proposed changes.
Targeted Car Parks
Currently, car parks are only subject to FBT if they are not on the employer's premises. It is proposed that the distinction between car parks, on or off premises, be scrapped. The focus of the changes is to treat a car park made available to an employee by the employer as a fringe benefit if:
- the car park is in the Auckland or Wellington CBD (marked as the "Central Area" on the relevant District Plan); and/or
- the car park is provided to the employer by a commercial car park operator for a consideration of more than $210 per month; and/or
- the employee has "sacrificed" salary to receive the car park.
These are referred to below as Targeted Car Parks.
Before we discuss the detail, the real target of these changes should be made clear. Official commentary justifies the FBT changes on the basis that they achieve a more equitable outcome by ensuring greater fairness between those who receive non-cash benefits as part of their remuneration and those who receive only cash remuneration.
However, the real target of the change is employees who work in the Auckland and Wellington CBDs and are provided with car parks. Other employees will be largely unaffected. This is because it is unlikely that outside those two CBDs:
- there will be many (any?) car parks which are leased for more than $210 per month; or
- employees are foregoing salary to receive a car park.
The compliance costs that the new rules will impose on employers may well result in fewer employees in the Auckland and Wellington CBDs being provided with car parks. While this might increase the use of public transport or provide a fillip to some commercial car park operators, it may well reduce the already modest amount of additional tax revenue that the Government hopes the proposal will raise, while leaving both employers and employees aggrieved.
Bearing that in mind, we turn to the detail of the proposals.
A fringe benefit will arise on any day (whether a working day or not) that a Targeted Car Park is allocated for the sole use of an employee, whether or not used by the employee on that day.
In addition, if a pool of Targeted Car Parks is provided by the employer, and the number of employees who may use the pool is no greater than the number of Targeted Car Parks, a fringe benefit will arise on any day of the week that a Targeted Car Park is available for use by an employee (except between the hours of 10 pm and 6 am).
If the pool of Targeted Car Parks is less than the number of employees who may use the pool (at any time between 6 am and 10 pm on any day), a formula will be used to calculate the fraction of Targeted Car Parks potentially available to each eligible employee (essentially dividing the pool of Targeted Car Parks by the number of potential users).
These rules will not apply in three situations involving a "business or certificated vehicle":
- If the employee may only use the Targeted Car Park for a vehicle with a valid disabled parking permit (at present, the draft legislation does not also require the employee to be disabled).
- If, on the day of parking, the vehicle is a "work-related vehicle" (which excludes most cars, unless modified so that their primary purpose is not to carry passengers). If owned by the employer, this is a vehicle that prominently and permanently displays on its exterior the form of identification the employer regularly uses for its business. If rented by the employer, the vehicle must display either the identification of the employer's business or of the business from which it is rented. A vehicle is not a work-related vehicle on any day that it is available for the employee's private use, except for travel to and from home that is necessary in, and a condition, of employment or private travel in the course of employment which is incidental to the business use.
- If, on the day of parking, the vehicle is a car that the employer owns or leases (other than from the employee or an associate of the employee) that is made available to more than one employee for business purposes only during work hours (private use arising incidentally during business travel is permitted, not being travel to and from home).
Value of the Taxable Benefit
Official commentary states that IRD is expected to value all Auckland and Wellington CBD Targeted Car Parks (not provided by a commercial car park operator) at $250 per month, converted to a daily value (treating each month as having 30 days). If the Targeted Car Park is provided by a commercial car park operator (inside or outside of those two CBDs) for more than $210 per month, the employer will convert the actual monthly charge into a daily value (based on a 30 day month).
The value of the fringe benefit will be determined by multiplying the daily value by the number of days in the month that the Targeted Car Park is made available to an employee. If the pool of Targeted Car Parks is less than the number of employees who may use the pool, then the daily value will be reduced by the fraction of Targeted Car Parks treated as available to an employee (as described above).
If the provision of a Targeted Car Park is only taxable because the employee sacrifices salary for it (ie the car park is not in the Auckland or Wellington CBD and the employer does not pay a commercial car park operator more than $210 per month for the park), then the benefit will be based on the amount of salary foregone after tax (at the highest rate applicable to the employee in the income year), converted to a daily value based on a 360 day year and treating each month as having 30 days.
Where a pool of Targeted Car Parks is made available, then as an alternative to monitoring on a daily basis, an employer will be able to choose a parking test period of at least two months (with restrictions on when the time period begins), logging for each day in that period the number of available Targeted Car Parks in the pool, the number of employees who may use the pool on each day and the number of "business or certificated vehicles" that use the pool. Having collated this information, the employer can then calculate a daily average to apply for up to three years. Either way, an employer who continues to make a pool of Targeted Car Parks available will be facing a mishmash of compliance requirements and associated costs.
Goodbye to Salary Sacrifice
The changes mean that the practice of salary sacrifice, whereby a Targeted Car Park was effectively paid for out of pre-tax income, will no longer be attractive. As above, this puts all employees who drive to work in the Auckland and Wellington CBDs on the same playing field (if not in the same car park building), while being unlikely to have much impact on employees outside of those centres.
Any salary sacrifice for a Targeted Car Park will also be included in "family scheme income" for the purposes of determining various forms of social assistance (Working for Families tax credits, student allowances parental income threshold and community services card entitlements), as will certain other benefits.
Here Comes the Weekend
The new rules will also mean that weekend use of Auckland and Wellington CBD car parks by employees will be subject to FBT. Perhaps this is fair enough if the car park is available for an employee's private purposes in the weekend. This possible justification only goes so far, however, since the value of the park is less outside of the working week, something which the new rules fail to take into account by converting the deemed value (in the case of Auckland and Wellington CBDs) or the actual value (of a more than $210 per month commercially leased Targeted Car Park) to a uniform daily value based on a 30 day month.
Any fairness is harder to discern in the case of an employee who is required to work on what should be a day off (and generally for which salaried employees receive no additional remuneration). In that case, it seems galling that alleviating the burden by allowing the employee to use the employer's car park is viewed by the Government as a benefit that should be taxed - and taxed as if the car park had the same commercial value in the weekends as it does during the week.
For car parks outside the Auckland and Wellington CBD, it is unlikely that employee use of a car park outside of normal work hours will attract FBT, whatever the reason for the employee's use. That is, until the next round of tinkering with the FBT rules.
Jack is an employee of a business based in the Auckland CBD. His employer allows Jack (and three other employees) to park in any of four particular car parks on the firm's premises during work hours. A fringe benefit will arise because the car park is in the Auckland CBD.
By contrast, Jill is an employee of a business based in the Hamilton city centre. Jill's employer allocates for her sole use a car park on the firm's premises during work hours. Her salary is not affected by the provision of the car park. No fringe benefit will arise.
Brodie works in one of Auckland's outer suburbs and pays tax at the highest marginal personal tax rate. Brodie sacrifices pre-tax salary of $2,600 per year for the use of a secure car park on his employer's premises, to ensure the safety of his expensive sports car. Again, a fringe benefit will arise under the new rules due to the salary sacrifice.
Jacquie is an employee of a business based in the Wellington CBD, working Monday to Friday. Her employer allows Jacquie to use any of the firm's car parks only if she is required to work in the weekend. A fringe benefit will arise because the car park is in the Wellington CBD.
By contrast, Giles is an employee of a business based in the Dunedin city centre which rents a number of car parks from a commercial car park operator for $130 per month per park. Giles is permitted to use any of the firm's car parks outside normal work hours during the week and at any time in the weekends, for whatever purpose. No fringe benefit will arise. Further, even if Giles was allowed to use one of his employer's car parks during work hours, no fringe benefit will arise due to each car park not costing the employer more than $210 per month.
No New Tax is Ever Popular, but ...
The proposed rules will involve a level of complexity and compliance costs that, on any analysis, is disproportionate to the meagre additional tax revenue projected to be collected ($17m). There is a growing chorus of public opposition to the proposals, extending to formation of an FBT Action Group whose members include both the Employers and Manufacturers' Association and at least one trade union. It is hoped that, if the Government does not abandon the proposals completely, at least the Select Committee recommends they be significantly watered-down.