Chapter 3 - Recognising a wider range of fringe benefits in social assistance income
3.1 This chapter considers whether the definition of “family scheme income” needs to be widened to improve the integrity of various social assistance programmes. It concludes that fringe benefits that are part of a salary trade-off should be included in “family scheme income” as they are economic income available to meet a family’s needs. Depending on the tax mechanism adopted to apply the salary trade-off rule, these salary trade-offs would either be included automatically because they would be taxable income or employees would need to separately include them in their social assistance calculations.
3.2 There is a strong argument for extending the definition of “family scheme income” to also include all those near-cash equivalent fringe benefits received by employees, not just when those benefits are part of a salary trade-off. Accordingly, it is proposed to include employer-provided short-term charge facilities and vouchers in “family scheme income”. Such facilities provide a very ready means by which a family can meet its living expenses.
Current issues
3.3 The Government provides or funds a wide range of social assistance programmes. There are various broad approaches that could be used to determine a household’s entitlement to these social assistance programmes, and the actual approach used varies across the range of programmes.[20]
3.4 Entitlements and liabilities for a number of the programmes are principally based on taxable income and, as a result, the programmes are delivered through the tax system. These programmes are Working for Families, child support and student loans. A number of social assistance programmes not administered by Inland Revenue, such as student allowances and community services cards, also use taxable income as a basis for assessing entitlement.
3.5 In a number of these cases, taxable income is subject to various adjustments. The definition of “family scheme income” is an example. “Family scheme income” is used for determining a family’s entitlement to Working for Families tax credits, the parental income test for student loan purposes, and in relation to some community services card recipients. The objective of adjusting taxable income is to reflect the amount that is available to assist the family in meeting its day-to-day living expenses. Generally, the types of adjustments were relatively minor until the changes made as part of Budget 2010.
3.6 A social assistance programme has integrity if people receive the same level of assistance or incur the same level of liability regardless of how they structure their financial affairs. Budget 2010 highlighted that the perceived integrity of various programmes was being undermined by not taking into account all the types of income that a family might receive, so that how economic income was structured was having an important and unfair impact on social assistance entitlements.
3.7 To address these integrity concerns, Budget 2010 emphasised the need to include in family scheme income different types of economic income that had previously not been counted, with changes being made in late 2010 to broaden the definition of income for the purposes of calculating entitlements to Working for Families in particular. These changes were explained in the August 2010 officials’ issues paper, Social assistance integrity: defining family income, and were followed by legislative changes that were included in the Taxation (GST and Remedial Matters) Act 2010.
3.8 In addition, the Government’s 2010 discussion document, Supporting children canvassed the idea of broadening the definition of income for child support purposes.
Widening the definition further
3.9 One aspect that was set aside at the time of last year’s social assistance integrity review was whether a wider range of fringe benefits and FBT-exempt benefits should be included in social assistance income calculations. Currently, only attributable fringe benefits provided to shareholder-employees who control a closely held company are included.
3.10 Fringe benefits provided to other employees do not automatically count as income for social assistance purposes as the benefits are taxed in the hands of the employer. In principle, fringe benefits should be included in income for social assistance purposes if they are easily substitutable for cash or household expenditure. The availability of an employer-provided motor vehicle, for example, can save an employee substantial costs through not having to own and operate a vehicle. Some submissions on the officials’ issues paper, Social assistance integrity: defining family income supported the inclusion of fringe benefits in family scheme income.
3.11 Likewise, other material in-kind benefits, such as the provision of on-premises car parks and childcare, and benefits provided to employees of charitable organisations, that are exempt from FBT should arguably also be included in income for social assistance purposes on the basis that they contribute towards a household’s living expenses.
3.12 The exclusion of benefits from family scheme income means that employees on similar remuneration packages can receive significantly different amounts of social assistance depending on how their remuneration is structured. This not only creates inequities but also provides an incentive to receive non-cash benefits rather than salary, promoting behaviour that reduces economic efficiency.
3.13 There are several options for how the currently taxed and untaxed benefit amounts might be included in “family scheme income”.
Option 1: Including all fringe benefits and material FBT-exempt benefits
3.14 The first option involves including in “family scheme income” all fringe benefits and material FBT-exempt benefits provided to an employee. It is the most comprehensive option.
3.15 Including all fringe benefits would impose high compliance costs, particularly on employers. The value of all benefits would need to be attributed to each employee so that the employee has the information available when applying for social assistance. This is more than is required from employers under the FBT rules. For example, pooled or lower value benefits are not required to be attributed because of the complexity of doing so.
3.16 There is also a potential equity issue if the ascribed benefits do not truly reflect contributions towards meeting a family’s day-to-day living expenses. The FBT rules endeavour to reasonably value the likely benefit that an employee derives but some employees may consider the benefit to be of less value to them than that ascribed under the FBT rules. They may not have a choice over whether they receive the fringe benefit[21] and may not be able to forgo it, yet their social assistance entitlements could be materially affected by including the benefit in their income calculation.
3.17 As with option 2 below, employers would be required to advise employees of the value of the benefits they have received (and the FBT that has been paid on those benefits) so that they could include them in their relevant social assistance income calculations.
Option 2: Including only attributed benefits and material FBT-exempt benefits
3.18 A second option is to include only those benefits that are attributable to individual employees under the fringe benefit tax rules when applying the FBT multi-rate calculations, plus any material FBT-exempt benefits (car parks and childcare provided on the employer’s premises and benefits received by employees of charitable organisations).
3.19 Table 1 illustrates the rules that apply to different categories of fringe benefits, including the respective minimum values below which attribution is not required.
Table 1: Fringe benefit categories and attribution
| Benefit category | Threshold | Attribute | Pool |
|---|---|---|---|
| Motor vehicles | None | Yes except if pooled | If no employee has the principal use, enjoyment or availability of the benefit |
| Low-interest loans | None | Yes except if it is a low-interest loan by a life insurer to policyholders | Loans by life insurers to insurance policyholders |
| Subsidised transport (for employers in the public transport business only) | Yes | Attribute if annual taxable value for the employee is $1,000 or more except if all employees have the same or a similar entitlement to the benefit* | Can be pooled if all employees have the same or a similar entitlement to the benefit |
| Employer contributions to sick, accident or death fund | Yes | Attribute if the annual taxable value for the employee is $1,000 or more* | |
| Employer contributions to specified insurance funds of friendly societies | Yes | Attribute if the annual taxable value for the employee is $1,000 or more* | |
| Employer contributions to any superannuation scheme where employer superannuation contribution tax (ESCT) does not apply | Yes | Attribute if the annual taxable value for the employee is $1,000 or more* | |
| Unclassified benefits | Yes | Attribute if annual benefits for the employee are in aggregate $2,000 or more* |
*Note: Employers can choose to attribute all benefits within a category regardless of the category thresholds.
3.20 This would be a workable solution as it would be relatively comprehensive.
3.21 In this regard, option 2 could be seen as an extension of the approach used for major shareholder-employees where attributed fringe benefits are included in “family scheme income” because such shareholders are regarded as having influence over the composition of their remuneration. However, as with option 1, there is a potential equity issue if the ascribed benefits do not truly reflect contributions towards meeting a family’s day-to-day living expenses – for example, if an employee has an employer-provided car but also has their own car that they could just as easily be using.
3.22 Information on attribution would be available to the employer as it is required to be calculated already for FBT purposes.[22] As with option 1, there would be an additional compliance cost for the employer in providing this information (and information on the FBT that has been paid on those benefits) to employees so that they can include it in their relevant social assistance income calculations.
Option 3: Including only those benefits that form part of a salary trade-off
3.23 Confining coverage to those benefits that are included in a salary trade-off would help to limit arguments about the true value of a benefit to a particular employee as it is more likely to reflect situations when an employee acknowledges the value of the benefit and is willing to explicitly trade off salary for it.[23]
3.24 This would be similar to the Australian approach of recognising “salary sacrifices” when determining eligibility for social assistance programmes.[24]
Interaction with proposed tax changes
3.25 The compliance costs for employees associated with implementing this option could be lower when it is combined with the option in chapter 2 of including all material salary trade-offs in taxable income (the PAYE option). As we have noted, the PAYE option would mean that trade-off amounts are automatically included in income for social assistance purposes, saving the employer the need to separately advise the employee of the value of the underlying attributed fringe benefits included in the salary trade-off (which would be necessary under the FBT option).
Conclusion
3.26 Option 3 is our preferred approach as it best meets the objective of including benefits that meet the family’s living expenses. The question is then whether this should be achieved through the PAYE option or the FBT option, a key determinant being the overall impact on compliance costs.
Extending this approach
3.27 Another tax change suggested in chapter 2 was the need for legislative clarification with regard to the exclusion of arrangements involving vouchers from the FBT exemption for charitable organisations’ employees. The key concern here is the close equivalence of vouchers and cash when vouchers can be used to purchase items that all employees are likely to want, such as groceries. A broad exclusion already applies to short-term charge facilities provided to employees of charitable organisations and arguably vouchers may come within that exclusion. However, the matter should be put beyond doubt by specifically excluding vouchers.
3.28 There is a strong argument for including all short-term charge and vouchers facilities in “family scheme income”, not merely when they involve a trade-off of salary, and not merely in relation to employees of charitable organisations, as they clearly provide a very ready means by which a family can meet its living expenses. A facility that enables payment of an employee’s family’s grocery bill is clearly going to be of wide appeal irrespective of whether it is explicitly included in a salary trade-off.
3.29 Accordingly, this issues paper suggests including employer-provided short-term charge and voucher facilities in “family scheme income”. This would mean that employers would need to advise their employees of those fringe benefits (and the associated FBT) arising in relation to such arrangements so that they can include them in their “family scheme income” calculations. The Tax Credits Registration form – FS l – that employees complete when applying for Working for Families tax credits would be expanded to include these fringe benefits. In such cases the fringe benefit would be the net amount after taking into account any “contribution” from the employee through salary that has been traded off.
Which programmes would these changes apply to?
3.30 The social assistance programmes that these changes might apply to depends on whether the PAYE or the FBT option is implemented. Under the PAYE option the changes would apply automatically, through the employee’s taxable income incorporating the various non-cash benefits that form part of a salary trade-off, whereas under the FBT option the changes would require specific inclusion.
3.31 If the PAYE option is implemented, the changes would apply to any social assistance programmes that used taxable or net income as a basis and would include:
- Working for Families
- Student allowances (parental income test)
- Student loans repayment obligations
- Community services card (entitlements for superannuitants and families with children, other than beneficiary families)
- Child support.
3.32 If the FBT option is implemented and the definition of family scheme income is amended to include salary traded off amounts, these changes would apply to Working for Families tax credits, the parental income test for student loans, community services card entitlements for families with children (other than beneficiary families) and child support calculations[25].
Application date for social assistance changes
3.33 As noted in chapter 2, any changes to taxable income and the relevant FBT provisions would apply from 1 April 2014. The change to include employer-provided short-term charge facilities and vouchers in “family scheme income” would also apply from that date. Further consideration will be given to the implications for those social assistance programmes, such as student allowances, that have a calculation year other than 1 April to 31 March.
20A number of benefits, for example, focus only on cash amounts received.
21This was the reason given for including in the 2010 changes only attributable fringe benefits received by shareholder-employees who, together with associates, hold 50 percent or more of the voting interests (or market value interests if a market value circumstance exists) of the company. A major shareholder is able to arrange for a substantial proportion of their remuneration to be paid as fringe benefits instead of wages. Usually, employees who do not have a controlling interest in the company have less influence over the composition of their remuneration.
22Specifically this would mean just those benefits that the employer attributes to an employee for the purposes of the fringe benefit tax rules in sections RD 47 to RD 49 of the Income Tax Act 2007.
23It may also reflect when the employee has explicit control over whether they receive the benefits although “control” in this context can be very subjective as employees who agree to a salary trade-off arrangement may not always have control over the make-up of their total remuneration package. Control was a reason given for including fringe benefits received by shareholder-employees of closely held companies in the 2010 changes to the definition of “income”.
24Under the Australian approach, the grossed-up (at the top marginal tax rate) taxable value of fringe benefits is included in the employee’s annual payment summary when the benefits exceed $2,000 in aggregate. This reportable fringe benefit amount is required to be included in the employee’s tax return and is taken into account when determining eligibility for a range of social assistance programmes, including certain income-tested government benefits and child support obligations. The sacrificed amount is not, however, subject to FBT unless the benefit would normally be subject to the FBT rules. This means, for example, health promotion charities and public hospitals are not liable to FBT on benefits provided to their employees (unless the relevant thresholds are exceeded) irrespective of whether the employee has salary sacrificed in exchange for the benefit.