Each year, the Government releases a bill to tweak the tax system. The bill announced yesterday includes a couple of transport-related changes.
Most importantly, the Government is proposing to make employer-subsidised public transport exempt from Fringe Benefit Tax (FBT). This is great and something we’ve long called for as well as something recommended by a Tax Working Group in 2019.
The Government says – maybe overcooking things a little, as we’ll see below:
“As Environment Minister as well as Revenue Minister, it is pleasing to put forward a taxation proposal that supports business as well as the environment,” David Parker said.
“Many employers already subsidise the commuting costs of their staff, for instance by commuting to work by car and employer-provided car parks.
“We can help to achieve a more neutral FBT outcome by including the option of the more environmentally-friendly mode of public transport. This was a recommendation of the Tax Working Group.”
But what does that mean?
If employers give their workers non-cash perks – such as free, subsidised or discounted goods – the value of those perks are subject to tax just like normal income is, but in this case called Fringe Benefit Tax.
However, there are exemptions where neither the employer nor the worker has to pay tax on the perk. That incentivises both parties to include the perk, rather than a higher salary/ wage. Often, the exemption is nothing to worry about, but in NZ we have at least two big issues:
- Employers get an exemption for providing staff parking. This encourages people to drive to work instead of using other modes.
- People have been buying utes and claiming an FBT exemption since they’re ‘work-related vehicles’. It’s a grey area whether this is allowed, but it’s rarely enforced and has likely contributed to the huge increase in big utes on the road, whether a vehicle this size is genuinely needed or (usually) not.
For #1, the former National Government tried to remove the carpark exemption in 2013 but quickly backed down after both business groups and unions joined forces to fight it. Given the political challenges of trying to do that again, at least levelling the playing field a little by removing FBT from public transport has considered the easiest option.
And issue #2 is mainly an IRD/enforcement thing apparently, and IRD are starting to get stricter.
It should be clear to everyone why the tax system shouldn’t encourage people to drive to work, but US transport advocates make the point really well:
“Imagine the creation of a new government program in which federal authorities send you a check at the end of the year to reward you for driving to work alone.
But there are a few catches. First, you only get the check if you work in a city—and you get a bigger check if you work downtown. Second, the size of your check depends on how much money you make. If you are a stockbroker or CEO, your check might be twice as big as that of the receptionist or salesperson working down the hall…
Surprisingly, such a program actually exists: the federal tax benefit for commuter parking”.
A Wellington report from last year was looking at another topic, but touched on Fringe Benefit Tax and sums up the issues with this:
The exemption is largest for people in higher income brackets (since they would otherwise pay a higher rate of tax) and those who work in places where parking is expensive (i.e. the CBD). As such, the exemption is regressive and it is most distortionary in city centres, where the negative externalities of parking and driving are highest. This is a source of inequity and it is certainly present in the Wellington CBD.
The perverse effects of the FBT exemption could be reduced somewhat by extending the exemption to public and active modes, but this is only a partial solution: parking can cost more than $20 a day whereas other modes tend to be much cheaper, so drivers still benefit the most. A fixed-amount travel allowance/ ‘cash out’ (e.g. $20 a day regardless of mode) would be a better candidate for exemption, although still regressive in tax terms.
Van Ommeren and Wentink (2012) carried out a Dutch study which found that “the policy not to tax parking as a fringe benefit increases the number of [employer-provided] parking spaces by about one third”.
The reality is very few companies are currently likely to be subsidising public transport for their employers right now and for those companies that are, the impact will be even smaller right now due to the 50% nationwide discount on PT fares. So the effect of an FBT exemption will be small but it is a step towards a level playing field, with some symbolic value, and it should be encouraged.
With FBT being removed from public transport, now is the perfect time for Auckland Transport (and other PT delivery authorities) to deliver another idea we’ve long suggested, a PT pass benefit that they can sell to businesses.
This could consist of full travel passes, like the current monthly passes, or alternatively a pre-set discount on travel. In that situation, the employee might get discounted PT with AT billing the company for the difference. Both options could help to encourage more people to use PT which fits perfectly with goals for both Auckland and the Government.
One company that is already doing this is Genesis Energy as part of their move to Wynyard quarter. In their annual report last year they said:
The move provided the catalyst to introduce initiatives that would reduce emissions, traffic congestion and enable active and shared travel. As part of the move we no longer provided staff carparks, removed company cars from salary packages and replaced our corporate car fleet with EV carsharing start-up, Zilch. In their place we provided a 25% subsidy for public transport, car-pool hubs in South and West Auckland, a free shuttle service from the eastern suburbs and with top-end changing facilities to encourage staff to ride, run or walk to work.
Our people loved it.
Compared to the travel routines in our previous offices which had 205 carparks, we’ve seen a 50% increase in people taking public transport or using EVs, 102% increase in biking, running, walking or e-scootering to work, 81% of staff have signed up to the public transport subsidy and there are 984 less carbon contributing trips each week (petrol, diesel, motorbike), a reduction of 71%. Staff have collectively reduced carbon emissions by 158t per annum, so far.
I also understand the PT subsidy ended up costing them much less than they thought it would.
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A great move, although the current provision of such schemes is low, the tax change over time will incentives more employers to offer public transport benefits. Build it and they will come.
A couple of further steps we should aspire too that we can learn about from overseas, these 2 examples from the UK:
1. Allow schemes where staff pay for their public transport pass out of their pre-tax income (saving 17% ~ 39%). I.e. it save the employee money but without costing the employer anything (except the admin effort). Perhaps depending on how the rules are written this might be allowed by the current change, I hope so but would need a tax expert to say. UK example https://www.gov.uk/expenses-and-benefits-public-transport
2. Now let’s do the same for cycle commuting. Eg allow employees to purchase a bike an cycling commuting accessories (lock, lights, fluoro jacket etc) out of their pretax income (again saving 17%~39% income tax) up to a some annual $ limit. Again an example from the UK https://www.bikeradar.com/advice/buyers-guides/cycle-to-work-scheme-everything-you-need-to-know/
That UK cycle scheme is a mess. I looked into it when I was living there, most employers only allowed you to sign up one month of the year to the scheme (usually October when people are stopping their cycling). The reason for this is the hooks into the scheme.
You get a voucher to buy the bike upfront, the value of which is then deducted from your salary over the following 12 months. And during that year the bike is technically owned by your employer (and should only be used for commuting to work) and there is an asset transfer that has to take place at the end of the year once the voucher has been paid off.
I found the cycle scheme in the UK effective when I was there. I guess the employer has some admin to deal with. Perhaps the quality of your experience might relate to how well the employer sets up the processes so that staff find it easy, favouring large employers with the scale to put effort into doing it properly, or for whom such things a priority. Not doubt it could be improved but it is certainly better than the current NZ system.
Yeah C2W in the UK is a dog’s breakfast
– It’s heavily regressive (you save your marginal tax rate so less savings for lower earners
– The schemes are limited to certain retailers each, so you might only get a choice of one store
– The stores often charge “admin fees” on top of your purchase that increases the price before your tax savings
– As you note, you can’t get a voucher whenever you want, there might have to wait 11 months
On the upside, if you are a well paid office worker, you can save 40% on a £4,000 e-bike year after year
Love the Genesis story. Win, win, win, proof people and business do want change, want the opposite of BAU.
“And issue #2 is mainly an IRD/enforcement thing apparently, and IRD are starting to get stricter.”
IRD now clearly states on their website:
“Double cab utes
A common error we see is the FBT treatment of double cab utes. Utes may be considered work related as they are dual purpose vehicles, however this does not mean they are automatically exempt from FBT.”
Should AT subsidise/provide their own staff’s HOP cards? Or is it better that they ‘feel the pinch’ of the fares, so they appreciate the costs involved and have a personal experience and incentive to maintain good fare structures?
One of the greatest perks of working at Transport for London was that all staff and their spouse (or one other family member) were given a zone 1-6 Oyster card. It was certainly a benefit that help attract and retain good staff.
AT on the other hand, ran a private shuttle service for its employees. This was before the “10 minute revolution” and the new bus new network.
The best part was, the private shuttle followed the Western line train route almost exactly!
Not true – but it was still an ill-considered and hypocritical idea.
I think the employee parking thing is one of those chicken and egg problems. We haven’t built our cities to facilitate public transport, so many people, especially those who work shifts, have no choice but to drive to work. Employers can’t get staff unless those staff can get to work so they provide parking.
As a first step, taking FBT off employer paid public transport makes sense and should include PT passes that extend over weekends and holidays. FBT should also come off employer loans to employees to buy bikes & associated safety gear. (We might want to consider taking it off any health related fringe benefits too). The caveat should be that the benefit should be equally available to all staff.
A possible second step would be to exempt company provided car parking from FBT only if it, too, is equally provided to all employees. That would acknowledge reality where PT is not an option but discourage companies in central city locations from providing parking only for some staff.
If income is to be taxed then all income should be taxed without exception. That includes bus tickets, parking, capital gains or any other economic rent or profit. To do anything else is distorts society.
That would work in an ideal world, where society isn’t already distorted by other factors, such as externalities. Tax policy can be useful for starting to level other inequities.
No every exception breeds more. People who make movies don’t pay tax because they are better than the rest of us- next the game developers don’t want to pay either. There is always reasons and excuses. The best way is to by universal in coverage.
Todd Nial wrote http://www.stuff.co.nz/opinion/129623317/getting-aucklanders-out-of-their-cars-will-be-the-sales-job-of-the-century?cid=app-android
While the FTB part of this current announcement has slipped under the radar ,the rest has blown up in the Govt’s face,this highlights how the first messaging of changes affect BAU is critical,this could have been couched in dragging the” big bad foreign owned banks into line”.Having lost the narrative, any explaining now is futile.
Smart businesses run any changes past a range of people before making changes,what’s good for middle management, might be problematic for the cleaners.
Trusting AT,AC to get the messaging right on any TERP related changes,leaves me with a sense of dread, maybe they could follow Genesis example, turning a potential negative into a positive, l have had difficulty in seeing the value of PR,but it seems important to “front foot” any changes proposed.
AT’s monthly pass doesn’t make financial sense for most people, unless they have extremely long commutes. I doubt it will change even with a minor tax benefit.
(regular, not temporary half price pricing)
$215/month means I would have to commute to and from work 31 days out of a month for it to be worthwhile. And if I did commute 31 times in a month, I would save exactly three dollars and twenty-four cents.
I know people will say the monthly pass is for people who also use PT for non-commuting purposes, but even if I didn’t own a car and relied on a bus to get everywhere, I still wouldn’t be taking 72 trips a month, which is the threshold for making the monthly pass worthwhile.
The sensible way to go would be to have a fare cap on daily, weekly and monthly travel. That way, anyone using PT intensely for as little as a day (but up to a month) can benefit and get the “reward” of free travel once they’ve reached the cap.
Indeed. There are many better ways to do it. When I lived overseas the cost of a monthly or annual pass seemed to be set around 70-80% of the cost of buying a ticket every day for a 5-day commute. It meant it was a no brainer to buy the pass, use it to commute every day, and then every off peak opportunity I had since it was a sunk cost.
There was also the “short trip”, which meant if you were going three stops or fewer only cost 50 cents. Stopped a lot of people getting in the car for those 1 km trips.
Is there talk of doing exceptions for bike costs? Currently a business either breaks the rules and hopes they don’t get caught or they take a financial punishment for doing a good thing for their staff and the world. The rules are messed up
Wow – FBT on PT – how miserable.
The perk of sharing confined public space in covid times.
Who thought that perk-buster up.
Take your own car, or treat yourself to PT, go-on.. you deserve it.
That’s the choices we have now, this article is highlighting the tax benefits of either or.
FBT should also apply in e-scooter subscriptions, as well as lease-to-buy e-scooters and e-bikes, car-sharing as well.
This is great, just one of those little uncontroversial changes that all add up. Hopefully employers and AT take advantage and make it into something good.
This tax change is a good little step in the right direction.