The Finance and Expenditure Committee has reported the Taxation (FBT, SSCWT and Remedial Matters) Bill back to Parliament and recommended substantial changes to the SSCWT and FBT proposals contained in the bill, as introduced.
It has also recommended changes to the proposed amendments to the foreign investment fund rules. This legislative update outlines the major recommended amendments. They remain recommendations until the bill has had its second reading.
Superannuation fund withdrawal tax
The bill provides for a fund withdrawal tax of 5% of an employer's contribution to the amount withdrawn from a superannuation fund. The measure is intended to counter avoidance through the use of superannuation funds of the already legislated increase in the top personal tax rate, effective from 1 April 2000.
The Finance and Expenditure Committee has recommended a number of amendments to reduce compliance costs, reduce the number of withdrawals potentially subject to the tax, and increase the certainty of the rules.
The specified superannuation contribution withholding tax (SSCWT), set at 33%, is a tax on employers' monetary contributions to superannuation funds. Increasing the top personal tax rate to 39% and leaving the SSCWT rate unchanged at 33% introduced scope for avoidance. Employees earning over $60,000 could negotiate an increase in their employer superannuation contributions, subject to the 33% SSCWT rate, with a corresponding reduction in salary and wages subject to tax at 39%. They could withdraw the increased employer contributions shortly afterwards, thus avoiding the 39% top personal marginal tax rate.
The fund withdrawal tax is intended to remove this avoidance concern. It works by effectively applying a 5% tax on withdrawals which are not exempt.
Key features of the bill
The bill, as reported back from the committee, provides that:
- A withdrawal tax of 5% of the amount withdrawn from a superannuation fund will apply to withdrawals on or after 31 July 2000. This tax will be restricted to the amount of the employer contribution on an employee's behalf if the trustee can identify this.
- Existing contributions and contributions that continue at current levels will not be subject to the withdrawal tax. This was the intended position on introduction of the bill. The committee has recommended amendments which confirm this position.
- The tax on a withdrawal is payable in the following income year. This measure is intended to address provisional tax and use-of-money interest issues. Exceptions to this rule exist in the case of a wind-up of a fund, or a fund that becomes a foreign superannuation fund.
- Trustees can withhold the withdrawal tax on payment to a member or recover any amount necessary from a member to meet any withdrawal tax liability. The ability to withhold from payments made was recommended by the committee.
- Trustees may request any information necessary to apply the withdrawal tax. Further, trustees are entitled to rely on the information provided as being correct unless there are reasonable grounds for them to believe the information is incorrect.
- The withdrawal tax does not apply when funds are withdrawn by members on or after they cease employment.
- The bill provides that the withdrawal tax will not apply to withdrawals on the basis of significant financial hardship. A list of events which may give rise to significant financial hardship has been included by the committee to provide guidance to trustees.
- The committee has also recommended that the withdrawal tax not apply to withdrawals to settle the division of matrimonial property upon separation.
- The committee has recommended a reduction in the amount liable for the withdrawal tax for those earning less than $60,000. For each of the four income years preceding the year of withdrawal in which the member's taxable income and the employer specified superannuation contributions are less than $60,000, the withdrawal tax is reduced by 25%.
- The committee has recommended that withdrawals made on the basis of partial retirement also be exempt. Partial retirement means that if all employer and employee contributions to a superannuation fund cease, the member of that fund works less than 30 hours per week and has reduced his or her working hours as a lead-in to full retirement, the member may make a withdrawal with no tax applying. The member must provide written notification that he or she does not intend to increase hours in paid employment in the future. The written notice also requires a statement by the member's employer or employers that there is no agreement that work hours will increase.
- Withdrawals used to purchase a life annuity or pension, or an annuity or pension to be paid over 10 or more years, will not be subject to the withdrawal tax. The committee also recommends that withdrawals to meet fund administration costs and the costs of group and individual life, health, sickness or accident insurance on behalf of members be exempt.
Treatment of transfers to or from superannuation funds and superannuation schemes
The committee has recommended amendments to clarify the treatment of transfers of amounts between superannuation funds, as well as to and from superannuation schemes. Amounts moved between superannuation funds retain their nature if appropriate information is provided. When a superannuation fund invests in another superannuation fund or scheme, however, the investment in and withdrawals from the second superannuation fund or scheme are not transfers. This means that the notification provisions do not apply. Nor does the tax apply to the withdrawal from the second superannuation fund.
Amounts received from a superannuation scheme are treated as employee contributions with amounts paid to a superannuation scheme being treated as a withdrawal.
Defined benefit funds
The committee has recommended that withdrawals from defined benefit funds be taxable to the extent they are not member contributions or pre-1 April 2000 reserves.
- Individual members may elect, with the approval of their employer, that a 39% SSCWT rate apply to specified superannuation contributions made by their employer on their behalf. Only employees who earn over $60,000 a year are likely to use this option.
- Employers may elect to apply the optional 39% SSCWT rate from 1 October 2000.
At 5%, the fund withdrawal tax should remove any tax benefit for those earning over $60,000 from substituting employer contributions to a superannuation fund for salary and wages. However, the officials' report to the Finance and Expenditure Committee on the submissions received noted that the measure is anti-avoidance in nature and if significant revenue is received by way of this tax the rate will be reviewed.
The application date of the measures is 31 July 2000, the date the bill is to be reported back to Parliament. The grandparenting provisions, however, apply as at 1 April 2000.
Multi-rate fringe benefit tax
The bill introduces a three-tier fringe benefit tax (FBT) system that will allow fringe benefits that can be attributed to an employee to be subject to FBT at a rate based on the employee's marginal tax rate.
The Finance and Expenditure Committee has recommended a number of the amendments to remove avoidance opportunities and possible inefficiencies in remuneration decisions, clarify the rules and reduce compliance costs in certain circumstances.
The FBT rate was increased to equate with the top personal tax rate of 39% to prevent high-income earners substituting salary or wages for fringe benefits to avoid the increase in the top personal tax rate. Without these changes, the 64% would have further exacerbated the over-taxation of low-income employees and would have overtaxed middle-income employees subject to a 33% personal tax rate.
The multi-rate fringe benefit system will generally allow employers to choose to apply a FBT rate based on the remuneration they pay to the employee receiving the benefit. Employers will continue to pay FBT on the value of benefits provided to or granted to employees.
Inclusion of the value of attributed benefits in the calculation of FBT payable
The bill, as introduced, provides for the fringe benefit tax payable on attributed benefits to be calculated by reference to the cash remuneration received by the employee from the employer who provided or granted the fringe benefit.
The committee has recommended that this calculation be amended to require the value of attributed fringe benefits to an employee to be taken into account in calculating the fringe benefit tax payable on those benefits. To enable this calculation to be undertaken a fringe benefit inclusive cash remuneration tax scale has been devised. This is a progressive tax scale that has the effect of taxing the value of the attributed fringe benefits on a marginal income basis, as opposed to a flat rate basis. The income scale is based on net income rather than gross income, with the individual tax rate scale grossed up, and is equivalent to the personal tax scale, taking into account the low income rebate. The fringe benefit-inclusive cash remuneration tax scale, which is set out in table 1, is applied to the aggregate of the net cash remuneration received by the employee and the value of the attributed benefits.
|Value of the fringe benefit-inclusive cash remuneration||Rate - cents in $|
Less than $8,075
More than $8,075 but less than $30,590
More than $30,590 but less than $45,330
More than $45,330
The new calculation requires the employer, for each employee to whom fringe benefits have been attributed, to:
- Calculate the net cash remuneration - this amount is the result of deducting the tax payable on the cash remuneration paid to the employee by that employer, as if that remuneration was the only income received, and taking into account the low income rebate.
- Add to the net cash remuneration the value of the attributed fringe benefits provided or granted to that employee.
- Calculate the tax payable on the aggregate of the net cash remuneration and the value of the attributed benefits using the rates in table 1.
- Deduct from the tax calculated in (3), the amount of tax calculated in (1) on the cash remuneration.
- The resultant amount is the FBT payable on the fringe benefits attributed to the employee.
The example demonstrates how the calculation would apply in practice.
Employee receives a salary of $50,000, a bonus of $2,000, and attributed fringe benefits valued at $5,000.
Calculate the net remuneration: $52,000 (gross cash remuneration) less $12,030 (tax on gross cash remuneration) = $39,970
Add the value of the attributed benefits to the net remuneration: $39,970 + $5,000 = $44,970
Calculate the tax payable on the fringe benefit inclusive cash remuneration using the tax rates in table 1: $14,491.86
Deduct from the tax calculated in (3) the tax payable on the gross cash remuneration: $14,491.86 - $12,030 = $2,461.86
In the example the employer would be required to pay $2,462.15 on the value of the attributed fringe benefits.
Requirement to annualise "cash remuneration"
The committee has recommended that the requirement to annualise "cash remuneration" such as salary and wages if the employee works only part of the year be removed.
Increase in threshold for catch-all category of fringe benefits - section CI 1(h)
The bill, as introduced, requires fringe benefits with a taxable value of more than $1,000 per category per year to which any one of paragraphs (d) to (h) of section CI 1 applies to be attributed to the employee to whom the benefit is provided or granted.
The committee has recommended that the attribution requirement apply when the value of the benefit is $1,000 or more. This recommendation clarifies the threshold level, since the bill, as introduced, does not cover the situation where the value was equal to $1,000. Furthermore, the committee has recommended that the threshold for benefits to which paragraph (h) of section CI 1 applies be increased to $2,000 or more per year.
These thresholds can be increased by the Governor-General by Order in Council.
Option for subsidised transport to be pooled
The committee has recommended that employers have the option to attribute or to pool subsidised transport to which paragraph (d) of section CI 1 applies if the taxable value of the benefit is $1,000 or more. This option applies only if the employer is not a close company (controlled by five or fewer persons) and all the employer's employees have the same or similar entitlement to the fringe benefit. If the employer decides to pool such benefits, the taxable value of the benefits will be taxed at 49%.
Principle recipient or user of fringe benefits
The bill, as introduced, requires the benefit to be attributed to the employee who principally used, enjoyed or received it. The committee has recommended that the bill be amended so that the employee who principally uses, enjoys or receives the benefit is determined by the use or enjoyment during the quarter. In the case of employers who file on an income year basis in respect of fringe benefits provided to shareholder-employees, the usage or enjoyment during the income year will determine which shareholder-employee principally used, enjoyed or received the benefit. If no one employee has principally used, enjoyed or received the benefit, it is treated as a pooled benefit.
Requirement to pay 64% extended to the second quarter
Because the bill is not likely to be passed until early September, and Inland Revenue needs to undertake its systems changes and inform employers of the changes, the committee has recommended that all employers be required to pay FBT at 64% on fringe benefits provided during the second quarter beginning 1 July 2000. In other words, employers will not able to elect the 49% FBT rate for this quarter.
Employers unable to undertake final quarter calculation process
The committee has recommended that employers be able to pay FBT on all benefits provided during the 2000-01 year at the 64% flat rate. This provision will apply when an employer has elected to pay 49% on the benefits provided in the third quarter, but cannot for the final quarter undertake the calculation process of attributing benefits to individual employees and calculating the tax liability on those benefits owing to a lack of the systems and records necessary to do this. This provision will apply only for the 2000-01 year.
The bill, as introduced, requires pooled benefits to be taxed at 64% if one of the recipients of the pooled benefits was a major shareholder-employee, and at 49% in all other cases. The committee has recommended that employers be able to create two pools for such benefits. The first pool would include only those benefits for which one of the recipients is a major shareholder or associate of the major shareholder. This pool would be taxed at 64%. The second pool would include all other benefits for which none of the recipients is a major shareholder or associate. This pool would be taxed at 49%.
Due date for filing of return for final quarter
The bill, as introduced, provides two return filing and payment dates for the final quarter return, depending on whether an employer used the 64% flat rate or opted to attributed fringe benefits and undertake the final calculation. The committee has recommended that the filing and payment date for all final quarter returns be aligned to the 31st of May next following the end of the quarter.
The committee has recommended that the bill be clarified so that the filing of FBT return for any quarter is treated as an irrevocable election as to the rate elected by the employer.
The FIF rules and company migration
The bill amends the foreign investment fund (FIF) rules to clarify how they apply when a resident entity migrates from New Zealand.
The committee has recommended raising from $20,000 to $50,000 the threshold under which taxpayers with small interests in foreign entities are exempted from the FIF rules, in light of the time that has passed since the threshold was set.
For similar reasons the committee has also recommended raising from $100,000 to $250,000 the threshold below which taxpayers can elect to use the deemed rate of return method when calculating FIF income.