Charitable change to the FBT rules? Depends on your facts
Tax Alert - December 2016
By Robyn Walker
One of the perks of being a charitable organisation is the exemption from Fringe Benefit Tax (FBT) for many benefits provided to employees. This can represent a significant tax saving, depending on how employees are remunerated.
However, a tax exemption is seldom straight forward and there are of course in’s and out’s to the rules which need to be worked through. Most significantly, the tax exemption only applies to the extent an employee is working for the benevolent, charitable, cultural or philanthropic purposes of the organisation. What this means is that if a charity also runs a business, then that business is subject to the FBT rules just like every other business; they should not get a competitive advantage, even if the business applies its profits for the good of the charity.
This has not always been the case, as Inland Revenue have just released a draft public ruling (PUB00229) which will, once finalised, replace an existing public ruling on the application of FBT to charitable and other donee organisations (BR Pub 09/03). BR Pub 09/03 took a pragmatic interpretation of the legislation, whereas PUB00229 applies a more technically correct view of the legislation which may give rise to a few more compliance costs for charities. PUB00229 is now on Inland Revenue’s website.
The relevant legislation is section CX 25(1) of the Income Tax Act 2007 which states (emphasis added):
A charitable organisation that provides a benefit to an employee does not provide a fringe benefit except to the extent to which—
(a) the employee receives the benefit mainly in connection with their employment; and
(b) the employment consists of the carrying on by the organisation of a business whose activity is outside its benevolent, charitable, cultural, or philanthropic purposes.
It is worth noting that the FBT exclusion in section CX 25 applies to a wider category of organisations than simply organisations that are registered under the Charities Act 2005, it also includes donee organisations but specifically excludes local authorities, public authorities and universities.
What has changed?
Under BR Pub 09/03, Inland Revenue placed more emphasis on the use of the word “mainly” rather than the words “to the extent” in section CX 25. What this meant was that Inland Revenue considered that the FBT exemption would not apply if an employee spent more than 50 percent of their time working in a business outside of the organisation’s charitable purpose. If an employee was mainly working in a business, FBT needed to be paid in full on any benefit provided to that employee, with no apportionment being undertaken to reflect the employees work in charitable / non-charitable areas.
In PUB00229, Inland Revenue has revised its interpretation and determined that the inclusion of the words “to the extent” in section CX 25 does mean that an apportionment needs to be undertaken when employees are working across both charitable and non-charitable purposes.
The difference is best illustrated with the following example:
A charitable organisation runs a food bank to relieve poverty but also runs a shop which sells good to the public. The profits from the shop are used to purchase food for the food bank. Peter works for organisation three days per week in the shop and two days in the food bank. Peter receives fringe benefits with a taxable value of $1,000.
BR Pub 09/03 interpretation
The shop is a business which operates outside of the charitable purpose of the organisation. Because Peter works mainly in the shop, FBT is payable on the full $1,000 worth of fringe benefits provided to him.
Peter works 60 percent of his time in the shop and 40 percent in the charitable activity of running the food bank. FBT is payable to the extent of his work in the shop. Therefore FBT is payable on $600 worth of fringe benefits.
This seems like a great outcome as less FBT is payable. However, if instead Peter had been working two days per week in the shop and three days in the food bank, under the BR Pub 09/03 interpretation no FBT would be payable as Peter was not mainly working in the shop, under the PUB00229 interpretation an FBT liability will now arise.
Action to take
Inland Revenue’s position is still in draft form and, because the interpretation is in the form of a Public Ruling, there are transitional rules meaning that the old interpretation can apply for a further three years once the new position is finalised.
Charitable organisations that also operate businesses should seek to retest how the FBT exemption applies to them, including undertaking an assessment of what employees work across both charitable and non-charitable areas (particularly management who may be more likely to work across both).
It would also be timely for charitable organisations to ensure they are clear about what does and does not constitute a business which is outside of its benevolent, charitable, cultural, or philanthropic purposes.
Charities will need to develop processes to be able to apportion fringe benefits. PUB00229 does not specify how an apportionment should be undertaken, but states that it needs to be reasonable and reflect the reality
The Inland Revenue is taking submissions on PUB00229 until 23 January 2017. For more information contact your usual Deloitte advisor.
December 2016 Tax Alert contents
- Timely revised guidance on deductibility of certain earthquake related costs
- Closely held companies bill reported back with significant changes
- Charitable change to the FBT rules? Depends on your facts
- Business tax simplification measures are a step closer
- Calculating “market rental value” on employee accommodation – guidance finally released
- R&D tax credits – our experience to date
- IR’s Operational Guidelines: Pre-Litigation Settlements
- What’s on the Tax Policy Agenda?
- A snapshot of recent developments