Is It Time to Reconsider Fringe Benefit Tax on Medical Insurance and Motor Vehicles?

08 December 2017

It has been thirty-two years since Fringe Benefit Tax was introduced in New Zealand. At the time, it was done for reasons principally related to widening the tax base and increasing equity. The provision of non-cash benefits had increased during the 1970s and into the 1980s because of very high rates of taxation, especially at the top rate.

Successive governments of all persuasions have shown little interest in revisiting the efficacy of this tax, particularly as it is applied to the provision of subsidised medical insurance and motor vehicles. This might simply be explained by the notion that once any government is provided with a source of revenue, it is reluctant to forgo it.

Fast forward to 2015. The Right Honourable Winston Peters introduced the Affordable Healthcare Bill into Parliament, which among other provisions proposed to remove fringe benefit tax from subsidised medical insurance. It failed to pass into legislation, not getting past its first reading. That was an opportunity lost.

We are now in 2017 and have a new coalition government with The Right Honourable Winston Peters as Deputy Prime Minister. In the areas relating to health in the coalition agreement, there appears to be no reference to revisiting it.

Counter arguments to the notions of fairness and equity that rightly underpin taxes such as fringe benefit tax include the “social good” that comes from having more of the population with some level of private medical cover, reducing the burden on the bottomless pit called the public health system.

Likewise, with motor vehicles, with companies able to provide them to employees (within sensible boundaries), the average age of our motor vehicle stocks must surely improve, leading to a stock of safer vehicles on our roads. This too, can be viewed as a societal good.

Private Medical Insurance for the Public Good

Back to medical insurance. Anyone who has reached and gone past the age of 50 knows what happens to medical insurance premiums. It is not a pretty picture. And understandably, it only gets worse as we move into retirement.

With the move to Total Remuneration Packages, the incidence of the provision of medical insurance to employees has fallen away significantly, particularly in regard to group schemes. According to the then Chief Executive of Southern Cross Health Society in 2015, employers often argued that it is too costly.

Quoting again from the same article, a paltry $40 million per annum in tax revenue would be lost to the government with the removal of fringe benefit tax on medical insurance, and, if it were removed, 56 percent of businesses surveyed in a Wellness in the Workplace Survey would consider offering medical insurance and 34 per cent would look to subsidise it further.

The argument is very simple. Health insurers need more people in the early stages of their lives to have medical insurance to ease the obvious strain on all insurers placed on them by the rapidly aging population and advances in medical technology. Employer-provided or subsidised schemes could play a massive role in mitigating these issues, and at least rein in the premium increases that are now driving people to downgrade their level of cover before dropping it completely.

Employers should also be able to treat the cost of the provision of medical insurance as a legitimate business expense. Surely what the government loses in tax revenue forgone would be more than compensated for through less demand on the public health system, not to mention the benefits to be had from enhanced workplace productivity through people returning to work faster.

With the change of government, perhaps now is the time to dust off the Affordable Healthcare Bill of 2015 and re-introduce it into parliament.

Bringing Back the Company Car

Onto motor vehicles. In 2015, the average age of the private motor vehicle fleet in New Zealand passed 14 years. This is not desirable. According to an Environmental Health Indicators New Zealand factsheet, the average age of a country’s vehicle fleet is an indicator of the efficiency of the vehicles on the road, and older vehicles tend to be less efficient and have more emissions. It is also, according to the article, often related to vehicle safety, with newer cars having better safety features.

One way to set about reversing this trend of our vehicle fleet getting increasingly older could be to remove fringe benefit tax on the provision of motor vehicles to employees. Companies typically purchase (or lease) New Zealand new vehicles, which have good maintenance records and are fed into the second-hand market after, say, three years.

Over time this must surely improve the quality of the stock of vehicles on our roads, build a safer fleet, and contribute to reducing harmful emissions, both of which are of keen interest to our new coalition government.

Earlier on I made reference to setting sensible parameters. One such limit would be to cap the cost of any vehicle provided to an employee at $40,000 (full published retail price) to avoid a return to the old days of luxury vehicles being part of some executive remuneration packages.

In Closing

The rationale for the introduction of Fringe Benefit Tax has a type of impregnability to it based on fairness and equity. One could also argue that in the grand scheme of things, it is a rather petty tax. The removal of it from the two items covered here could have significant social and societal benefits for New Zealand.

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