Employers are required to pay FBT on non-cash benefits provided to staff. However, like most taxes, there are exemptions. It is important to be aware of the exemptions to ensure FBT is not overpaid. One such exemption provides that benefits (other than travel, accommodation or clothing) provided and used on the employer’s premises will not be subject to FBT. The provision of carparks fits within this exemption category.
Historically, what qualifies as “premises of the employer” has been uncertain. For example, if an employer is located next door to a carpark building and arranges and pays for six employees to have access to carparks in the building, do these carparks qualify as being provided on the employer’s premises?
The IRD has recently finalised two Public Rulings that include a change to its position on what qualifies as “premises of the employer” in this situation. Previously, the legal form of the car parking arrangement was the determining factor. For instance, carparks were required to be owned or leased by the employer to qualify for the exemption. Licence agreements did not satisfy the exemption requirements, even if the substance of the agreement was more akin to a lease.
In its Ruling, the IRD has softened its view and allowed a ‘substance over form’ approach. This will increase the number of situations that fall within the exemption by allowing license agreements to be regarded as being “on premises”, provided that the employer has a “substantially exclusive” right to use the carpark.
IRD has defined the phrase “substantially exclusive right” to mean that no one, including the carpark operator or any other third party, can use or control the carpark in a manner inconsistent with the employer’s substantially exclusive right.
The IRD provide a list of practical considerations which help to determine whether the employer has a ‘substantially exclusive right’. Although not definitive, the FBT exclusion is likely to apply if the employer has unrestricted access to the car park, the carpark remains vacant when the employer is not using it, the employer may permit others to use the car parking space, if an unauthorised person parks in the space the employer has the right to tow the unauthorised vehicle and, the employer can decide how the car parking space is used.
What this effectively means is that the nature of the agreement, rather than the label on the document will determine whether the exclusion applies. In recognition of the change in position, IRD are allowing employers to request refunds of previously paid FBT where employers have relied on the old approach.