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.