New Product Ruling opens up public transport FBT exemption

By Robyn Walker
 

It’s been just over two years since Fringe Benefit Tax (FBT) exemptions came into effect for the provision of public transport, bikes and scooters for the purpose of commuting to and from work. The exemptions had the potential to materially reduce the cost of commuting for employees using these modes of transport, but many employers, for a range of reasons, have faced practical obstacles to being able to utilise them.

The private sector has innovated, with two providers, WorkRide and Electric Bikes NZ obtaining Inland Revenue Product Rulings related to the provision of bikes to employees using a salary sacrifice; and most recently Extraordinary Pay obtaining a Product Ruling for the provision of a payment card for public transport. In all of these cases, Inland Revenue have agreed that the products satisfy the FBT exemptions and use a ‘valid salary sacrifice’ mechanism.

Tax Alert has previously covered the FBT exemption for bikes and salary sacrifices in detail, but not the public transport exemption on the basis that it was difficult to envisage an employer being practically able to utilise the public transport exemption. In this article we explain some of the key tax technical issues that the Extraordinary Pay Product Ruling has overcome in order to make this a viable option for employers to consider.

What is the exemption?

Section CX 19C of the Income Tax Act 2007 provides an exemption from FBT for employer subsidised public transport. The subsidy applies to fares which are “mainly for the purposes of an employee travelling between their home and place of work”. The exemption applies to public transport by bus, rail, ferry and cable car.

The exemption is one of the rare situations where the tax system has been used to influence behaviour with a tax incentive (most other FBT exemptions exist for compliance cost reasons or to make it clear a private benefit does not exist). For employees, the exemption provides an option to materially reduce the cost of public transport by being able to use a salary sacrifice to effectively pay for public transport costs using pre-tax income. For employers, if a salary sacrifice is used the provision of the benefit is largely costless, and with more employers being required to monitor and report on emissions associated with staff commuting, the existence of this exemption provides a mechanism for employers to encourage greater use of public transport by employees (and have a way of tracking this).

Most employers are likely to adopt a salary sacrifice arrangement in order to provide equity as between employees who may have varying abilities to use public transport due to life circumstances. A salary sacrifice results in an employee agreeing to reduce their salary by the amount of expected public transport use; for example, if an employee anticipates spending $50 per week on public transport, they might reduce their pre-tax salary by $2,600 per annum. Depending on their marginal tax rate, the after-tax difference in salary may be much less.

PAYE vs FBT

The classification of benefits as between the PAYE and FBT regimes has long been a source of confusion. The general rule to remember when considering which tax regime applies is “who’s expense is it?”

When an employer incurs an expense, this is subject to FBT. When an employee incurs a personal expense and this is paid by the employer, this is subject to PAYE. This could be in the form of a reimbursement, allowance or use of a corporate credit card.

The exemptions for public transport and bikes were only for FBT purposes, and it was made clear by Inland Revenue in its Tax Information Bulletin (pg 78) that allowances and reimbursements would not qualify. The issue with the provision of public transport is that it is very difficult for an employer to have the legal obligation for paying for public transport without entering into an arrangement directly with a public transport provider to pay directly for the public transport, which is particular impractical for employers based in multiple locations. Under the Extraordinary Pay Product Ruling, the employer is contracting with Extraordinary Pay to provide the facility for employees to top up their own public transport cards. This saves the employer from having to engage with multiple public transport providers.

Expenditure on account of an employee

Central to the PAYE vs FBT debate is the concept of “expenditure on account of an employee”. Any payment that an employer makes for expenditure incurred or to be incurred by an employee will be treated as income from employment in the hands of the employee (and subject to PAYE) unless the payment falls under a specific exclusion. The primary exclusion is for reimbursement of work-related expenditure, in particular, payments related to amounts for “which the employee would be allowed a deduction if the employment limitation did not exist”. This exemption works for things like reimbursing taxi travel to a work-related meeting, but for home to work travel, this is a private expense and therefore the expenditure would not be deductible because of the private limitation rather than the employment limitation.

Open loop vs closed loop

A popular solution adopted by employers to the general PAYE vs FBT conundrum has been to provide employees with vouchers and gift cards. The provision of these was generally thought of as being subject to FBT and consequently solved a lot of the headaches of having benefits fall within the FBT regime. That was until Inland Revenue reached a view that there are different types of gift cards and that ‘open loop’ cards are actually subject to PAYE. The Extraordinary Pay Card essentially functions like a voucher or gift card; however, because there are restrictions on where it can be used it is not an open loop card. When used for public transport benefits the Extraordinary card can only be used to top up Auckland Transport HOP Cards, Snapper cards, Metrocards and Bee Cards.

Future law changes

Tax Alert readers will be aware that FBT has been under a policy review. This review does not propose any changes to the public transport or bike exemptions, meaning employers can make plans to utilise the exemptions without unnecessary concern about legislative change. The FBT policy review does propose to amend the law to allow open loop cards to be taxed through FBT and to soften the complex boundary between PAYE and FBT. We’ll have to wait and see whether these law changes proceed and in what form. In the meantime, the Extraordinary Pay Product Ruling provides an avenue for employers to start using the public transport FBT exemption for good.

Disclosure: Deloitte assisted Extraordinary Pay to obtain its Product Ruling