Government does u-turn on car park tax
Many employers will be aware of the recent publicity around employer provided car parks and the withdrawal of the Government's proposal to tax a broader range of car parks. This bulletin considers where that leaves employers that provide car parks to employees under current law.
Key issue: "premises" and the lease vs licence distinction
Currently car parks provided to employees "on the premises" of an employer are not subject to fringe benefit tax ("FBT").
Ever since the FBT rules were introduced in the mid-1980s, the published interpretations of the IRD have consistently stated that, in order to constitute "premises" of the employer, the car parks must be either owned or leased by the employer. This means that legal rights amounting to less than a leasehold interest, such as a licence, will not be sufficient to constitute "premises" of the employer. The IRD's distinction has always seemed a rather technical one given that the same practical benefit may be obtained by employer and employee irrespective of whether a lease or licence has been obtained.
The IRD's published guidelines on the lease versus licence distinction have made it clear that the distinction is to be applied in the light of the traditional legal distinction which turns on whether the "user" of the car park has a right to exclusive possession of the car park. The distinction will depend on the terms of the documentation, not just on the location of the car park. For example, the IRD has stated that a space in a public car park may be the subject of a lease, but only if the contractual terms of the arrangement and surrounding circumstances indicate that the employer has "an interest in or exclusive possession of the parking facility or any part of it".
It is therefore critical for employers that provide employee car parks to be aware of the exact nature of their legal rights in relation to those parks. Because car parking arrangements may vary from location to location, monitoring compliance can be challenging. For that reason large employers may find it useful to have approved precedent documentation available, as well as check-lists summarising the factors to be considered in determining whether the employer holds a leasehold interest in the car park (which should make the car park FBT exempt) or rather has a licence to use it (in which case FBT may be applicable).
For completeness, it should be noted that there may be circumstances in which a licensed car park may not be subject to FBT if it is a "work-related" employee car park. For example, where car parks are used solely for pooled company cars used by employees in performing work-related duties then it may be that the car parks are not subject to FBT on the basis that such car parks do not constitute a "benefit" to the employee in the relevant sense (ie, employees are not using the parks to park private vehicles driven only to and from work). In that instance it would, however, be necessary to review the employment contracts of the employees concerned to determine the basis upon which the car parks are provided. An explicit reference to the provision of a car park as being part of an employee's remuneration package may be inconsistent with such a car park not being a fringe benefit.
How do I know if I have a lease or a licence?
In order to determine whether a lease or licence has been obtained in relation to a given set of car parks it is not simply a matter of looking to see whether the title of your agreement uses the label "lease" or "licence". It is necessary to undertake a careful review of the legal rights and obligations created by the document.
Even if a car parking agreement is headed up as a "lease", the following may be inconsistent with the provision of a lease and could mean that only a licence has been obtained:
- the ability for others to use or access an employer's car parks;
- access is provided to a certain number of car parks in a building, but without there being an allocation of particular spaces that an employer can point to as being their parks;
- an allocation of particular spaces is provided for but the "lessor" is able to amend that allocation from time to time in its sole discretion; or
- the agreement states that it does not create rights in the nature of a tenancy or of exclusive possession.
The lease/licence distinction may now be subject to increased scrutiny by the IRD given the recent withdrawal of the proposed law reform and the Government's current fiscal pressures. It is therefore timely for employers to review documentation in relation to existing car parking arrangements and/or to consider these issues before signing up to documentation for new premises under which car parking facilities are provid.
This is especially so given that the amounts of FBT involved can be significant given the value of car parks, particularly in CBD locations. FBT generally applies at a rate of up to 49.25% of the value of a car park and the IRD may impose penalties and interest at higher than commercial rates if it disagrees with the FBT treatment adopted.