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Technical tax area: Revenue Alerts

Revenue Alert RA 13/01
Salary Packaging - reducing income from employment by replacing part of salary or wages with vouchers

Explanation: Status of Release

A Revenue Alert is issued by the Commissioner of Inland Revenue, and provides information about a significant and/or emerging tax planning issue that is of concern to Inland Revenue. At the time an Alert is issued risk assessments will already be underway to determine the level of risk and to consider appropriate responses.

A Revenue Alert will identify:

  • the issue (which may be a scheme, arrangement, or particular transaction) which the Commissioner believes may be contrary to the law or is inconsistent with policy
  • the common features of the issue
  • our current view, and
  • our current approach.

An Alert should not be interpreted as being Inland Revenue's final position. Rather, an Alert outlines the Commissioner's current view on how the law should be applied. For any Alert we issue it is likely that some investigatory work has already been carried out.

If people have entered into an arrangement similar to the one described or are thinking about it, they should talk to their tax advisor and/or to Inland Revenue for advice about tax implications.

ISSUE: Salary Packaging - reducing income from employment by replacing part of salary or wages with vouchers

New Zealand tax law requires a New Zealand tax resident to return and pay tax on their worldwide income.

Inland Revenue is aware of arrangements being entered into by some employers where an employee selects an amount of salary or wage that is substituted for vouchers (for example, supermarket and petrol vouchers) which are very similar to the cash equivalent of the salary or wage. A "voucher" in this context may take many forms but includes paper vouchers and electronic vouchers on stored value cards.

Under the arrangements in question an employee can elect to substitute part of the salary or wages they are entitled to receive in cash with vouchers to the same value.

The employer provides the vouchers to the employee who typically redeems them on private expenditure, such as motor vehicle expenses, groceries and other common household expenses, which would previously have been paid using their tax-paid income. The amount of the vouchers will be equivalent to the salary substituted by the employee.

Under this "repackaging" the vouchers are not being treated as income of the employee and no PAYE is deducted by the employer. The employee's income is treated as being reduced by the amount of the salary substituted with vouchers. As well as paying less income tax, employees who seek to reduce their income in this way pay less child support; decrease their student loan repayment obligation; reduce their KiwiSaver contributions and may claim a larger entitlement to Working for Families Tax Credit (WfFTC) than they should. In addition, repackaging in this way has the effect of reducing the contribution that their employer is required to make to the employee's KiwiSaver scheme.

Usually, the employer also does not treat the provision of the vouchers as a fringe benefit subject to FBT. For instance, many of the employers offering this arrangement are charities who treat the provision of the vouchers as being exempt for FBT purposes under section CX 25 of the Income Tax Act 2007 (the ITA 2007).

In addition, some employers are claiming GST input tax credits on the purchase of the vouchers that they provide to employees, but are not returning output tax when the vouchers are provided to the employees.

In some cases, the salary packaging scheme is administered by a third party provider who runs the scheme and provides the vouchers and administration services such as invoicing, in return for a fee.

Current view

Income tax

It is Inland Revenue's view that in some of the arrangements we have seen, the vouchers issued by the employer to the employees in substitution for salary or wages is income in the hands of the employee. This is because the overall level of salary does not change, it is merely partially paid in a different form. As such, PAYE should be withheld by the employer on the full amount of the salary/wages including the value of the vouchers.

Inland Revenue considers that the commercial reality of these arrangements is that employees elect to receive part of their salary by way of vouchers. The vouchers are often in the form of a stored value card that is loaded with the amount equivalent to the salary or wages the employee has elected to substitute. The employee can use the card to purchase goods and services from certain retail outlets. The amount of the vouchers or the amount added to such a stored value card, does not have PAYE deducted. This means that the employee has greater spending power as part of their total remuneration (salary or wages) is not taxed. The employee is effectively being paid more for undertaking the same job, but the increase is only possible due to the tax effects rather than an increase in their salary or wages.

Inland Revenue considers that the nature of the goods that can be purchased by the employees, and the fact that the vouchers are essentially a substitute for salary and wages, means that in reality these arrangements are salary substitution arrangements which the parties have entered into for the purpose of avoiding tax.

Inland Revenue considers that the arrangements may be tax avoidance arrangements in terms of section BG 1 and potentially section GB 44 of the ITA 2007.

Where neither PAYE nor FBT have been paid in relation to the provision of vouchers in these circumstances, Inland Revenue is likely to seek further information, potentially leading to audit activity.

GST

There is a view that output tax does not need to be paid when the vouchers are given to the employee. Inland Revenue's view is that the provision of the vouchers to the employee is a supply which is subject to GST under section 8 of the GST Act 1985 (the GST Act). Therefore, output tax should be returned by the employer on that supply.

Examples

The following are examples based on some of the arrangements that have been identified so far. There may be other arrangements which involve salary packaging and vouchers.

Example 1  

An employer offers their employees the opportunity to replace some of their salary with supermarket vouchers. The employee receives vouchers from their employer to the face value of the amount of salary they have elected to substitute and they subsequently redeem the vouchers at the local supermarket. For example, an employee elects to receive $800 of vouchers per month loaded on to a stored value card in return for electing to substitute $800 per month of their gross salary.

The $800 per month on the stored value card is not treated as income and no PAYE is deducted. Also, the employer does not pay any FBT.

The employer claims GST input tax credits on the purchase of the vouchers but does not return any output tax on the provision of the vouchers to the employees.

It is considered that the provision of the vouchers is income from which PAYE should be deducted.

It is also considered that the provision of the vouchers to the employee by the employer is a supply that is subject to GST.

Inland Revenue considers that the arrangement is a tax avoidance arrangement under sections BG 1 (and potentially section GB 44) of the ITA 2007.

 

Example 2  

Inland Revenue is also seeing examples of salary or wages substitution where the arrangement is administered by a third party provider who runs the scheme. In such a case the third party sells the vouchers to the employer who in turn provides the vouchers to the employee who has elected to substitute an amount of gross salary or wages with the vouchers. The vouchers are stored on an electronic card provided by the third party which is then able to be used for purchases at particular retail outlets, for example supermarkets and petrol stations.

In this example it is the third party provider who pays the retail outlets for the goods purchased with the vouchers.

Inland Revenue considers that the provision of the vouchers to the employee in this example is income from which PAYE should be deducted.

It is also considered that the provision of the vouchers to the employee by the employer is a supply which is subject to GST.

Finally, Inland Revenue considers that the arrangement is a tax avoidance arrangement under sections BG 1 (and potentially section GB 44) of the ITA 2007.

Current status

Inland Revenue has commenced investigations into a number of taxpayers who have entered into salary packaging schemes like those described above.

If an employer or an employee has taken a position which is incorrect, either for tax (including GST) or social assistance purposes, that position will be corrected.

Late payment penalties and use of money interest may be applied to taxpayers entering into the types of arrangement described in this Revenue Alert.

Shortfall penalties may also apply, although these may be reduced where a voluntary disclosure is made.

If you consider that our concerns may apply to your situation, we recommend you discuss the matter with your tax advisor or with us, and consider making a voluntary disclosure

Guidelines for making a voluntary disclosure are contained in our booklet Putting your tax returns right (IR280) and Standard Practice Statement 09/02 Voluntary disclosures (May 2009).

 

Legislative references Sections CE 1, CX 25, BG 1, and GB 44 of the ITA 2007;Sections 5 and 8 of the GST Act 1985
Date issued: 21 February 2013
Authorised by Graham Tubb
Group Tax Counsel
Assurance
Contact (via email) revenue-alerts@ird.govt.nz
Media queries: david.miller@ird.govt.nz
(04) 890 1698