Late submission on the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill

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1 28 February 2014 TaxTeam Mr John Thomson Clerk of the Committee Finance and Expenditure Select Committee Parliament Buildings Private Bag WELLINGTON 6160 PO Box44 Wellington 6140 New Zealand T F Dear John Late submission on the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill I refer to our recent discussions and your discussions with Ms Sara Brownlie of Central Agencies Shared Services. We hereby request that this late submission to the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill be accepted as the original submission that was made on 5 February 2014 should not have been made on behalf of: ~ Civil Aviation Authority ~ Department of Conservation ~ Department of Internal Affairs ~ Department of the Prime Minister and Cabinet ~ Land Information New Zealand ~ Maritime New Zealand ~ Ministry for Culture and Heritage ~ Ministry of Business, Innovation and Employment ~ Ministry of Education,.. Ministry of Foreign Affairs and Trade,.. Ministry of Social Development New Zealand Police Radio New Zealand..,.. Sport New Zealand..,.. State Services Commission..,.. The Treasury Consequently these organisations have been removed from this late submission. Tox Teom Um~ed Oir.,ctor> Jeff E ton Richard Toovey I Michelle Macdon ld I Phil Fisher Wl!lre right there with you

2 2 We thank you in advance for considering this late submission. Yours sincerely Michelle Macdonald Tax Director 1\TAXWLGSBS\Team Orive\TEAM\Technicai\Submissions\2014\Eyecare\ ate submission cover letter.docx Tax Team

3 Submission to Inland Revenue By TaxTeam Limited On behalf of: Civil Aviation Authority Department of Conservation Department of Internal Affairs Department of the Prime Minister and Cabinet Land Information New Zealand Maritime New Zealand Ministry for Culture and Heritage Ministry of Business, Innovation and Employment Ministry of Education Ministry of Foreign Affairs and Trade Ministry of Social Development New Zealand Police Radio New Zealand Sport New Zealand State Services Commission The Treasury On the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill 5 FEBRUARY 2014

4 2 The tax treatment of employee allowances - eyecare expenditure Introduction We make this submission on the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill ( the Tax Bill ) on behalf of our Central Government Agency clients. Our submission follows discussions with Geoff Leggett and Carolyn Elliott of Inland Revenue Policy Advice Division on the tax treatment of eyecare expenditure, and is in response to their request that we make a formal submission. In general, we support the proposed changes in the Tax Bill around employee allowances. However, we submit that additional provisions should be included in the Tax Bill in order to establish good tax policy for eyecare expenditure incurred by employees and employers. When Inland Revenue has considered this submission, we would welcome the opportunity to discuss the points raised, and to be involved with any further evolution of legislation relating to the tax treatment of eyecare expenditure. Background All employers have a statutory obligation under the Health and Safety in Employment Act 1992 to take all practicable steps to ensure the safety of employees while at work. With the establishment of WorkSafe New Zealand in December 2013, there is an increased focus on improving New Zealand-wide attitudes and performance in workplace health and safety. In order to meet their statutory obligations, Central Government Agencies promote and provide for good visual health of their employees. The obligation is typically met by paying/reimbursing the cost of eye examinations and paying/reimbursing a portion of vision aid (i.e. spectacles or contact lenses) costs. The amount paid/reimbursed is not, generally, the full cost of the corrective vision aids; rather it is capped to recognise that there is a private element to this expenditure i.e. the aim is to pay for the business portion only. In the majority of cases these entitlements are part of the Central Government Agencies collective employment agreements. These agreements have been negotiated on the premise that the eyecare entitlement is not subject to tax, on the basis that the expenditure is a necessary business expense of meeting the employers health and safety obligations, and any private element is incidental to the business purpose. Summary We suggest that provisions should be introduced into the Tax Bill to: Include in the PAYE rules a mirror of the health and safety Fringe Benefit Tax ( FBT ) exclusion (section CX 24 of the Income Tax Act 2007), to fix the disparity between the PAYE tax treatment and the FBT treatment of the cost of eye examinations; Include in the PAYE rules and the FBT rules a provision to exempt from tax a portion of vision aid costs. This could be achieved either by specific eyecare provisions or a general health and safety exclusion which includes eyecare; and

5 3 Allow the provisions to be applied on a retrospective basis to reflect that the non-taxation of such payments/reimbursements has been the historic industry-norm and reflects current practice. Our submission eye examinations We submit that a provision should be introduced in the PAYE rules that mirrors the FBT health and safety exclusion in section CX 24 of the Income Tax Act The intention would be that, where an employee is reimbursed by their employer for the cost of an eye examination, the amount reimbursed is not subject to PAYE. This could be achieved either by specific eyecare provisions or a general health and safety exclusion which includes eyecare. COMMENT The FBT exclusion in section CX 24 of the Income Tax Act 2007 allows employers to provide benefits that relate to an employee s health and safety and manage hazards in the workplace, without incurring an FBT cost. However, there is no similar exclusion in the PAYE rules to cover the situation where the employee incurs the expenditure and is reimbursed by their employer. Inland Revenue has stated in a letter to one Central Government Agency that direct payments by the employer to a provider for eye examinations fall within the health and safety exclusion in the FBT rules, meaning that no FBT is payable. Inland Revenue stated in that correspondence that any private benefits arising from an eye examination are considered to be very incidental 1 when applying the FBT rules. However, where the cost of an eye examination is paid by the employee and reimbursed by the employer, there is currently no equivalent of the health and safety exclusion in the PAYE rules. Inland Revenue has recently been reassessing Central Government Agencies on the basis that the reimbursement of eye examination costs is subject to PAYE. Whether the expenditure is incurred directly by the employer or by the employee and reimbursed, the purpose and the nature of the expenditure is the same i.e. there cannot be said to be any greater private element to an employee or lesser business element if the optician is paid by the employer, or by the employee and the employee is then reimbursed by their employer. There is a clear disparity between the PAYE tax treatment and the FBT treatment of the same type of expense (being the eye examination). An employer should not need to incur the administrative costs of engaging directly with eyecare providers in order for the cost of eye examinations to be treated as nontaxable. This results in a clear distortion and is bad tax policy. We note that a similar distortion is being remedied in relation to distinctive work clothing in the Tax Bill. Although our submission suggests parity could be achieved either by introducing specific provisions to cover eyecare expenditure or by introducing a general health and safety exclusion in the PAYE rules, we believe that a general exclusion would be preferable to allow for the correct tax treatment of all qualifying health and safety expenditure. For example, expenditure on flu vaccinations falls within the FBT exclusion in section CX 24 of the Income Tax Act 2007, but should also be covered by a PAYE exclusion. 1 Excerpt from Inland Revenue correspondence to a Central Government Agency

6 4 Our submission vision aids We suggest that either: It is made clear that a portion of the cost of vision aids falls within the FBT health and safety exclusion in section CX 24 of the Income Tax Act 2007 and a provision is introduced in the PAYE rules that mirrors the FBT health and safety exclusion so that, where an employer pays a portion of the cost of vision aids or an employee is reimbursed by their employer for a portion of the cost of vision aids, that portion of the cost is not subject to FBT or PAYE. In addition, we believe that a list of what is included under these provisions should be detailed in the legislation; or Specific provisions are introduced in the FBT rules and the PAYE rules focused solely on the tax treatment of eyecare expenditure so that, where an employer pays a portion of the cost of vision aids or an employee is reimbursed by their employer for the cost of vision aids, the amount reimbursed is not subject to FBT or PAYE. Although, as explained above, our preference is for a more general exclusion to cover other health and safety expenditure. In addition, we believe that further guidance, such as a Tax Information Bulletin article, would be essential for the practical application of the provisions. The guidance should address the apportionment of vision aid costs. COMMENT It is common for Central Government Agencies to reimburse a portion of the cost of vision aids if employees need vision aids in order to perform their job. Under the Health and Safety in Employment Act 1992, an employer has a duty to take all practicable steps to identify hazards in the workplace, and to eliminate, isolate or minimise those hazards. The provision of vision aids assists Central Government Agencies in fulfilling this duty, by: Allowing a qualified professional (an optometrist) to determine whether the deterioration of the employee s eyesight is due to their exposure to any hazards at work (e.g. the use of visual display units); and Allowing employers to take steps to eliminate or minimise the deterioration that has been caused to the employee s eyesight as a consequence of their work and to eliminate or minimise the ongoing effects of that deterioration (e.g. headaches), by contributing towards the cost of vision aids. Many of the Central Government Agencies promote good visual health among their employees through providing eye examinations and paying/reimbursing a portion of vision aid costs. The amount paid/reimbursed is not generally the full cost of the corrective vision aids, rather it is capped to recognise that the employee should also make a contribution towards the cost. In the majority of cases these entitlements are part of the Central Government Agencies collective employment agreements. This means that if Government Agencies are required to tax eye care, either significant cost will need to be incurred in trying to renegotiate this element of the agreements, or the eye care expenditure will need to be grossed up, resulting in a significant financial and administrative compliance costs to the Central Government Agencies. Indeed, it is the administrative cost of compliance that is causing the greatest concern for Central Government Agencies, particularly relative to the tax at stake.

7 5 Our submission Retrospective application Any new tax provisions relating to eyecare expenditure should have retrospective application. COMMENT Retrospective application would be consistent with advice received from Inland Revenue in 2002 that stated: Inland Revenue will accept eye tests and prescription spectacles provided to employees as non-taxable, provided that there is a policy that states: That employees who use VDUs for more than four hours per day will have a benchmark eye examination; and That employees using VDUs will have regular eye examinations, say every two years; and That, if a deterioration in the employee s sight has occurred, and this deterioration is due to use of a VDU, the employer will reimburse the costs of prescription spectacles; and The maximum amount of reimbursement. There has been no public statement in relation to any change in Inland Revenue policy in relation to eye care costs and so the majority of Central Government Agencies have been following Inland Revenue s 2002 advice. Therefore, retrospective application would simply be legislating current practice. Any fiscal impact should be minimal as most Central Government Agencies are currently treating eyecare expenditure as nontaxable (i.e. not subject to FBT or PAYE). This is consistent with the retrospective application of relocation expenditure contained within section CW 17B of the Income Tax Act In addition, a number of tax audits are currently being carried out by Inland Revenue into Central Government Agencies, with the tax treatment of eyecare expenditure being a disputed item. To minimise the time and money being wasted on arguing this point, retrospective application of the provisions would result in the speedy conclusion of a number of open investigations. If Inland Revenue has justified concerns over limiting the fiscal impact of retrospective application, the retrospective application could be limited to taxpayers who have not taken the tax position that the eyecare and eyewear was taxable (similar to the accommodation provisions in the Tax Bill).