Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill Submission of the New Zealand Police Association

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1 Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill Submission of the New Zealand Police Association Submitted to the Finance and Expenditure Committee 5 February 2014

2 Taxation (Annual Rates, Employee Allowances and Remedial Matters) Bill Submission of the New Zealand Police Association 5 February 2014 BACKGROUND 1. The Association is a voluntary service organisation representing nearly 8,700 constabulary police members across all ranks of the New Zealand Police (Police). The Association also represents around 2,500 Police employees, who carry out invaluable support functions across the full policing spectrum. 2. The Association provides industrial and employment representation, advocacy, advice and support to its members. 3. Members actively engage in debate and discussion within the Association on matters relevant to policing. The high engagement level of the membership enables the Association to speak and act credibly on behalf of members. SCOPE 4. This submission is concerned with the employee allowances aspect of the Bill. 5. The Association is generally supportive of the proposals, and it particularly welcomes the proposal that should exempt their plain clothes allowance. However, it does have concerns in relation to the specifics of the plain clothes allowance proposal and the valuation aspect of the accommodation allowance proposal at it affects police officers. 6. We also raise an allowance issue (for eye tests) that is not covered by the Bill but which is of some importance to our non-sworn members. We ask that the Committee recommend that the Bill be amended to cover that issue. SUBMISSIONS Plain clothes allowance exemption 7. As noted above, the Association welcomes the decision to exempt their plain clothes allowance. However, as currently drafted, the proposed section CW 17CC it will not necessarily achieve that objective. 8. From discussions with officials, we understand that the reference in subparagraph (c)(ii) to a part of the allowance is premised on the employee receiving a plain clothes allowance that comprises a taxable component and an exempt component. Officials specifically stated that it does not cover an allowance that is treated as exempt only. Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill NZPA Submission Page 2

3 9. This approach has been taken on the basis that police officers were previously paid such an allowance, with the taxable part subsequently being folded into salary and the exempt amount being explicitly identified and treated as an allowance. 10. It is correct that police officers were previously paid an allowance that had taxable and exempt components. This changed in 1998, with the taxable allowance (being 50% of the total allowance amount) being folded into salary at that time. However, it was only officers then in receipt of the allowance who received the increased salary; officers who became eligible for the allowance subsequently only received the exempt amount. 11. Thus the allowance paid to officers subsequent to that change cannot qualify for the tax exemption as the general terms and conditions of employment or service as at 1 July 2013 did not treat any part of it as being taxable. That is obviously not the intended result. 12. On a more fundamental level, the Association is concerned that an amount that has been folded into salary can be called an allowance - if it is a salary amount it cannot also be an allowance, so the part taxable/part exempt criterion may not be satisfied in relation to officers with the allowance folded into salary either. 13. Subparagraph (3)(d), which requires that the taxable and exempt portions of the allowance must maintain a constant ratio, is also problematic. This is also a criterion for operation of the provision so none of the allowance will be exempt if the ratio changes, even if the exempt ratio falls because the salary increases (so the folded in portion of the allowance increases) but the allowance amount is frozen. 14. Accepting for the sake of argument that the amount folded into the salary as discussed above can be part of the allowance, the ratio will alter if the salary and the allowance do not increase by the same percentage each pay round. That is a distinct possibility. 15. There is also the real possibility that one group (e.g., constables) will receive a different percentage salary increase than another group (e.g., sergeants) in the same negotiation round but the allowances increase will be the same for both of them in that case one group or other must fail the fixed ratio test and so lose the exemption. 16. The Association therefore submits that the ratio test should be replaced with a test that allows the legislative intent behind the proposed CW 17CC to be achieved. Options include a reasonable amount test or by providing that increases to the allowance amount cannot outstrip those of a nominated index (CPI or a clothing-specific index, for example). 17. This is something that we are having ongoing discussions on with officials. Accommodation -valuation 18. The current general rule, which catches the provision of housing by Police to officers, is that an employee is subject to income tax if and to the extent that the amount they pay for employer-provided accommodation is less than the market value of that accommodation. 19. Proposed section CE 1B restates that rule. It also provides that value is to be adjusted being adjusted (downwards) in three specified circumstances but that does not appear to add anything new as those circumstances would be taken into account in determining the market value of the accommodation under current practice anyway. Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill NZPA Submission Page 3

4 20. There are two exceptions to the general rule, being proposed sections CE 1C (overseas accommodation) and CE 1D (accommodation provided by Defence Force). There are also several proposed new sections that will treat some or all of an accommodation benefit as being exempt (not taxable) income of the employee. 21. The proposed section CE 1D affords a concessionary treatment to Defence Force personnel and the Association is of the view that there is no good reason why that treatment should not extend to officers in Police housing. 22. The two material differences between the general valuation rule and the Defence Force valuation rule are that: - The general rule is applied to each property whereas the Defence Force valuation rule uses benchmark properties; and - The market values of the Defence Force benchmark properties are discounted. 23. The use of benchmark properties in itself may provide a benefit for employees, depending upon how they are chosen. The only guidance given in the Bill is that they are to be determined by the Commissioner of Inland Revenue and the Chief of the Defence Force, in consultation with a registered valuer. 24. The Association is of the view that the use of benchmark properties would be of benefit to Police by significantly reducing the compliance costs (particularly valuation costs) associated with the provision of police houses. That would indirectly benefit officers with savings being used more productively in other areas. 25. The discount provides a monetary benefit for applicable Defence Force employees. The immediate value is the discount in dollar terms x the marginal tax rate of the employee. There will also be flow-on benefits if and to the extent that the reduced income amount increases benefits (such as working for families entitlements) or reduces liabilities (such as child support) that are calculated with reference to taxable income. 26. A justification given for treating Defence Force personnel more generously is that Defence Force properties are largely clustered around military camps. But that is not a valid distinction; it simply goes to the market value issue (the less desirable the area, the lower the market value of the accommodation). 27. The Association understands that residing in a Defence Force house can be a compulsory condition of employment. That is also the case in respect of tied Police housing, which is the norm for one, two, or three person stations. Furthermore, a police officer has no control over the type of accommodation provided so the allocated accommodation could be quite unsuitable for an officer, but s/he will still be taxed on the market value of that property under the proposed rules. For example, an officer who lives alone could be required to live in a Police owned three bedroom house on a particular street near a station, and be taxed on the market of that house, even though a smaller (and less expensive) dwelling within commuting distance would better suit the officer s needs. 28. The Association s view is that there is no good reason why Police should be treated differently from Defence Force personnel in this regard. They are both public servants in the broader sense, with the former providing internal security and the latter providing external security. They provide vital services and risk injury and death in doing so. Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill NZPA Submission Page 4

5 29. As above, there does not appear to be any good reason why police officers should be treated any differently from Defence force personnel. It could even be argued that police deserve a more favourable treatment to compensate for the stigma/perils of living in a Police house; they tend to be located in areas that are difficult to staff, with that difficulty in no small part being attributable to the anti-police attitudes of some groups within those communities. The following incidents are but a brief sample of recent attacks on police houses: 205 Waiomatatini Road, Ruatoria: house burgled and large amount of property stolen. 69 Clyde Road, Tamatea: child showered with glass when rock was thrown through bedroom window, twice burgled, officer s wife abused and threatened at the house while officer on duty. 7 Gray Street Wairoa: house burgled, fire-arms stolen (including the firearms safe itself, some police items vandalised and others stolen, fence graffitied. 30. These are just the tip of the iceberg and many more examples can be produced. This kind of attention obviously affects the spouse and children as well as the officer. 31. The Association therefore submits that police housing benefits should be covered by the proposed section CE 1D. Eye tests 32. The collective agreement for police employees (non-sworn staff) provides for eye tests at Police expense: "9.3.1 Eye Tests Employees who are engaged on VDU duties for at least 50 percent of their normal working time shall be entitled to an eye test at Police expense. Prior notice must be given to the employee's Controlling Officer before any appointment is made. If the test discloses that prescription spectacles are required for the normal viewing distance of a VDU, or that an eyesight problem has been created or worsened by VDU then the cost of single vision spectacles will be met by the Police up to a maximum of $ ($317.76) ($320.93); or, in the case of bi-multifocal spectacles, up to a maximum of $ ($414.98) ($419.13)." It is important to note that the reimbursement payments are only made to employees who spend at least half of their working day on VDU duties, so there is a clear and definite employment nexus. 33. The position with eye tests is anomalous. A reimbursement payment is taxable as income to the employee and an off-work premises test paid for by the employer is subject to fringe benefit tax. But there are no income tax or fringe benefit tax implications if the test is conducted on Police premises and are paid for directly by the employer. 34. So eye tests can be provided with no adverse tax implications if they are undertaken on Police premises and are paid for directly by Police. 35. The direct payment criterion is not a problem. But there are logistical issues with having the tests conducted away from the optometrist s premises (the equipment needed cannot easily be transported to and set-up in a police station) and the staff are spread around the country so it is not possible to centralise the process. 36. The Association therefore submits that the reimbursement payments for eye tests for employees who spend at least half of their working day on VDU duties should be made exempt from income tax. Doing so simply removes an anomaly as there are no adverse tax implications if the employer can instead arrange for the test to be conducted on work Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill NZPA Submission Page 5

6 premises and the employer pays for the test directly. REQUEST TO APPEAR 37. The Police Association requests the opportunity to appear before the Committee to speak in support of this submission. Greg O Connor PRESIDENT Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill NZPA Submission Page 6