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CAR PARKS FOR EMPLOYERS TO BECOME A FRINGE BENEFIT


Under the current fringe benefit tax ("FBT") rules, many benefits provided by an employer to an employee are taxed either as part of the employee's income or under the FBT regime. One exclusion is the provision of car parking on the "employer's premises".

The Inland Revenue Department ("IRD") has concluded that car parks provided by an employer to its employees on owned or leased premises are within the exemption, but the exemption does not extend to car parks where the employer only has license to use the car park. Such car parks are not provided on the "employer's premises".

According to a report prepared by the New Zealand Transport Agency ("NZTA"), the Government is being encouraged to once again investigate changing the FBT rules to include employer-subsidised parking. The reason is because of NZTA concerns that employers are undermining attempts to "encourage more efficient commuting behaviour". Employers who provide free car parking for their staff could therefore, under this proposal, be taxed as part of an NZTA move aimed at getting more people on to public transport.

We understand that more than half the country's workforce is estimated to have access to free car parks provided by their employer. The NZTA report calculates the value of employer-provided car parking in Auckland, Wellington and Christchurch at around $2,700 per employee and suggests these untaxed benefits total at least $675 million annually.

In Australia, employer owned car parks are subject to FBT but with concessions. The NZTA argues that New Zealand should adopt a similar approach, which it claims will reduce the "significant tax revenue loss that this untaxed benefit currently represents".

Asked if the Government was seriously considering the issue, the Hon Peter Dunne said the Government had signalled in last year's Budget an interest at looking at "wider salary sacrifice issues" with a view to issuing a future discussion paper for consultation. That work was ongoing, he said.

How it affects you

Whether you are an employee or an employer, if there is a change to the rules regarding the taxation treatment of car parking provided to employees by employers, you are likely to see a renegotiation in the overall remuneration package being offered, as this will be an additional cost to employers with no additional "benefit" being provided to employees.


FRINGE BENEFIT TAX RETURNS DUE SOON


There are a number of FBT rate options available for employers providing fringe benefits to staff. First, employers can choose to calculate FBT at a flat rate of 49.25% on all benefits provided. The effect for staff earning less than $70,000 is that the employer is paying more tax than is necessary.
received immediate tax credits totalling just over $91,000.

Another option is to complete an alternate rate calculation. This effectively allows for fringe benefits to be taxed at the employee's marginal tax rate. This option allows an employer to pay FBT at either 43% or 49.25%, with a final "mop up" to ensure an appropriate amount of FBT is paid by year end.

If an employer has a number of employees at varying salary levels, it will be in their interest to consider the alternate rate option. Although there is a greater administration cost in completing the alternate rate calculation, it will ensure that the employer pays the least amount of FBT. If the single rate option is used, the FBT cost for many employers will be higher than it needs to be.

Consideration needs to be given to the rate used in each quarter. If FBT is paid at 43% in quarters one, two, and three, even if a higher payment of 49.25% is required in the fourth quarter, the employer has paid less throughout the year and has achieved a use of money interest saving. If it looks like FBT might be payable at 49.25% for all employees, the employer could pay at 49.25% in any one or more of quarters one, two, and three. The alternate rate option will give the choice of a lower wash up if a lower amount would have been payable by year end.

Employees that are providing fringe benefits to their staff will need to start thinking about their 31 March 2012 FBT returns now.

For those that return FBT quarterly, this will be the employers fourth quarter return. Complete section C, not section B in this return, which notifies which alternate rate option they are choosing. The two options available as discussed above are:

  • If the employer paid FBT at 49.25% in each of the three previous quarters, they can choose to use either the 49.25% rate or complete one of the alternate rate calculations.
  • If the employer paid FBT at 43% in any of the previous three quarters, they must complete either the short form or full alternate rate calculation.

How it affects you

A number of options are available for the payment of FBT. To calculate your final alternate rate return for quarter four, we suggest you contact your business advisor.

POINTS OF INTEREST…

From 1 April 2012, the Working For Families annual family tax credit for the first child under 16 increases from $4,578 to $4,822. A subsequent child under 13 increases from $3,182 to $3,351, and a third child between 13 and 15 increases from $3,629 to $3,822.

Benefits, student allowances, student loan living costs, and the foster care allowance will rise by 1.77% from 1 April 2012.

Treasury Secretary, Gabriel Makhlouf, says lowering the company tax rate is unlikely, in the short-term.

The rate for calculating FBT on low-interest employment-related loans for the quarter 1 January to 31 March 2012 remains at 5.90%

TO THE POINT…

"I'm looking more like my dogs every day, it must be the shaggy fringe and the ears".

Christine McVie


FARMERS TAX RELIEF HAS GONE


In the article below, we discuss the herd scheme and the national standard cost methods of valuing livestock and the impact of the elections that had been available. Late yesterday, an announcement was released that the rules for valuing livestock have changed.

Elections to use the herd scheme will be irrevocable, except where there has been a change in the commercial circumstances of the taxpayer, but at this stage no detail has been provided as to what criteria will need to be met for this concession to apply. This change will apply from 18 August 2011, which is the date the Officials' Issues Paper "Herd Scheme Elections" was released. Therefore, elections to exit the herd scheme made since then will not become effective. The ability for farmers to change between the herd scheme and the national standard cost valuation methods has been retrospectively removed with effect from the 2012/2013 income year. No longer will it be possible for farmers to use the livestock valuation methods to obtain the tax advantages of old. We note however that there is no effect on tax payments that have already been made.

Also, going forward, where the purchaser is an associated party to the vendor, the purchaser will be required to adopt the vendor's herd scheme elections and base herd numbers. The only exception to this is when there is a complete inter-generational change of ownership. This will apply to associated persons transactions from 28 March 2012.

Both these changes have been made because a number of farmers used these elections to generate tax savings from tax-free write-ups and tax deductible write-downs.

How it affects you

If you made a livestock valuation election on or after 18 August 2011 to exit the herd scheme, the election will be cancelled and you will continue to use your current valuation method in the future, unless you fall into one of the narrow circumstances that allow a change to be made. If you have obtained finance, or you have completed cashflow projections based on a change in valuation method, you will need to revisit those projections and financing arrangements.

If you are looking at restructuring your farming enterprise in the future, you will need to take into account the associated person limitation discussed above.

We suggest that you contact your advisor to discuss what, if any, impact these changes will have on your farming operation, both in the immediate and in the longer term.


LIVESTOCK VALUATION RULES AS THEY WERE


The herd scheme was designed in the late 1980's to allow a taxpayer to effectively treat their livestock as a capital asset. The two most common methods of valuing specified livestock are the herd scheme and the national standard cost ("NSC") scheme.

The herd scheme effectively treats qualifying livestock as a capital asset. Changes in herd values (specifically "national average market values") from year to year are tax-free, but changes in numbers are on tax revenue account. The herd scheme's capital asset treatment is effected by revaluing each year's opening stock to the closing values for that year. This revaluation amount is a capital (and therefore non taxable) gain or loss. This revaluation is what makes the herd scheme unique. No other trading stock is subject to such an adjustment.

In contrast to the herd scheme, the NSC scheme is a valuation regime similar to one manufacturers would use to value trading stock, but to simplify the valuation of livestock it uses national averages to calculate the on-farm costs of breeding, rearing and growing livestock. This means that changes in stock numbers and/or stock values are on tax revenue account.

Farmers who owned specified livestock (dairy and beef cattle, sheep, deer, goats and pigs) and valued them under the herd scheme method had the ability to elect to use different methods to value livestock from year to year by giving the appropriate period of notice. In practice the notice period could be as little as 12 months.

For continuing farmers, the election to exit the herd scheme and use a different valuation method was the most common method for farmers to cease using the herd scheme.

However, in 2008 when herd values of dairy cows peaked, evidence suggests that several hundred farming enterprises used the "sale cease farming election" where the "sale" was to an associated person so that there was no real change in economic ownership but the tax cost was significantly reduced.

How it affects you

The decision regarding your choice of specified livestock valuation method has now become far more important because that election will now be irrevocable. We suggest you discuss this with your advisor.

For anyone who used the change in election to take into account the 2008 peak, be aware that the Inland Revenue Department is conducting a pilot audit review to determine whether there is an avoidance issue.

POINTS OF INTEREST…

It has been estimated that allowing some farmers to switch out of the herd scheme at a time of high livestock values would have left other taxpayers exposed to an estimated loss of $275 million over the next six years.

Further changes to livestock valuations are predicted.

Having taken into account submissions on the herd scheme election issues paper, all changes have been proposed.

TO THE POINT…

Cows are my passion. What I have ever sighed for has been to retreat to a Swiss farm, and live entirely surrounded by cows - and China

Charles Dickens

LIVESTOCK VALUATION RULES AS THEY WERE


Since PSA first became a problem for kiwifruit orchardists, many orchardists have incurred significant costs in an attempt to eliminate the disease. In Issue 8 we noted the Inland Revenue Department (IRD) had issued an information sheet to assist those affected by PSA. Below is a summary of things to consider when completing 2012 tax returns.

One of the orchardists' options to deal with PSA was to remove the kiwifruit vines, either by pulling them out or cutting them off below the graft. Two taxation deduction options are available. First, the tax book value of the vines and/or the grafts can be claimed as an expense in the year of destruction. If the vine is cut off below the graft but the rootstock is later pulled, any remaining tax book value will be deductible in the year the rootstock is destroyed. Secondly, under s DO 6 of the Income Tax Act 2007 (the Act), where less than 15% of an orchard of "listed horticultural plants" is replaced over a three year period (but limited to a maximum of 7.5% per year), the replacement costs may be deductible. The tax book value of the original plants carries forward as the tax book value of the replacement plants. An election to use s DO 6 is made in the orchardist's tax return.

Currently, the costs of removing the vine or the rootstock cannot be claimed, but the IRD advises the tax treatment of the costs of removal is being considered.

The cost of replanting or re-grafting a new variety of kiwifruit are effectively amortisable unless deductible under s DO 6. The same treatment applies to a new crop grown using existing orchard structures, but where the structures are removed, the tax book value of the structures is non deductible expenditure. The IRD advises this is being reviewed.

Growers that purchased licenses to grow varieties of kiwifruit and have been "amortising" them may be entitled to a deduction for any loss on sale, or a deduction for the tax book value at the start of the income year that it becomes worthless.
The taxation treatment of any financial assistance depends on the facts. If it is for loss of income or it is related to a tax deductible expense or loss, the amount will be taxable.
Assistance for replanting and removal will be dealt with as any other replacing or removal costs. If the assistance is to subsidise the capital costs of replanting, the amount will be tax free. We understand from the IRD that this position is being reviewed.

How it affects you

If you are a kiwifruit orchardist affected by the PSA, we recommend you contact your taxation advisor to understand exactly how the taxation laws will affect you.


THE WORD IS OUT – IRD TARGETS PROFESSIONALS


The IRD is about to send risk review letters to the country's top professionals that the IRD considers have been avoiding tax.
 
The IRD has identified people it believes may have been funnelling income through companies and trusts.

The word is that the IRD is intending to go back two years if people come clean in cases where they have been operating under "Penny and Hooper" structures.

Ian Penny and Gary Hooper are the Christchurch orthopaedic surgeons that we have discussed in earlier issues of Sharp-As Tax.

The Supreme Court found they should not have diverted their income through company and trust structures to avoid the top personal tax rate.

One accountant has been reported in the New Zealand Herald as saying it was common practice, largely in the service industries. People would draw a salary of $70,000 with a company turning over hundreds of thousands of dollars a year.

It has been widely noted that there had been a noticeable increase in the number of companies and trusts set up while the top tax rate was 39 per cent. The Law Commission review of trusts has reported that New Zealand has a higher number of trusts per capita than comparable countries. Quoting from the Law Commission's Second Issues Paper, "based on the 2008 figure, the most cautious assessment is that there is one trust for every 18 people in New Zealand".

New Zealand Institute of Chartered Accountants tax director Craig Macalister told the New Zealand Herald it would mean moderate bills for most people. Mr Macalister went on to say that he encouraged people to make voluntary disclosures to the IRD because if they owned up, people would not be charged shortfall penalties but they would still have to pay use of money interest on top of the tax owed for the past two years. He said anyone who had previously earned a high income and then all of a sudden was earning $70,000 would potentially be in the spotlight.

We understand the IRD had expected a large number of professionals would make disclosure without the need for risk review letters, but that has not been the case.
For continuing farmers, the election to exit the herd scheme and use a different valuation method was the most common method for farmers to cease using the herd scheme.

How it affects you

Professionals that receive risk review letters will be faced with the choice of either disclosing the details of "their unpermitted structure" or proving there were commercial reasons for the way they structured their affairs.

POINTS OF INTEREST…

A reminder that the 2% compulsory employer contribution to KiwiSaver accounts of employees has come to an end as at 31 March 2012.

New use of money interest rates are due to come into force on 8 May 2012:
  • The underpayment rate reduces from 8.89% to 8.40%
  • The overpayment rate reduces from 2.18% to 1.75%
Some tax relief is available for those affected by the Rena grounding.

TO THE POINT…

A smile is a curve that can straighten out a number of things

Unknown

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