Dilworth Trust Board Submission- Taxation (Annual Rates, Employee Allowances and Remedial Matters) Bill

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1 The Chair Finance and Expenditure Committee Parliament Buildings Wellington Dear Select Committee Members Dilworth Trust Board Submission- Taxation (Annual Rates, Employee Allowances and Remedial Matters) Bill The Dilworth Trust Board ( the Trust ) welcomes the opportunity to make a submission on the above Tax Bill (the Tax Bill ) in respect of the taxation of employee accommodation where it is provided as a necessity of the job. We would also like to thank Inland Revenue Policy Officials ( Officials ) for meeting with us to discuss the proposals and their impact on Dilworth. These discussions have been constructive in outlining the issues faced by Dilworth and we would appreciate the opportunity to continue to work with Officials on this issue. 1 Overview of the issue The Trust is one of New Zealand's largest charities and provides the funding to support Dilworth School ( Dilworth ). The school provides full scholarships for the free care and education of boys from straitened backgrounds between the ages of 9 and 18 years. As a full boarding school, many Dilworth staff are required to live in accommodation on school premises in order for the school to meet its obligations under the Education Act 1989 and ensure the safety of students at all times. All employees who occupy staff accommodation do so because there is a genuine need to enable them to carry out their employment duties i.e. the roles cannot be carried out while living offsite. Staff housing in Dilworth s Junior and Senior Campuses is located in Epsom and Remuera. Market rental values in these suburbs are some of the highest in New Zealand. Dilworth is to education what the Blind Foundation and CCS Disability Action are to health. We are providing a fundamental and very important service to society in educating boys from disadvantaged backgrounds. It is inconceivable that the accommodation provided to our staff that ensures that we can provide such service should be valued without consideration of the obvious and rigorous restrictions imposed, or the tax premium because of the location of the school. Our concern is that taxation based on the full market value is not commensurate with the benefit (if any) received by employees from employer provided accommodation. In addition, it will be Dilworth Trust Board Private Bag 28904, Remuera, Auckland 1541, New Zealand Ph: +64 (09) Fax: +64 (09)

2 difficult and extremely costly to Dilworth to assess the market value of each property in Dilworth s unique situation and will divert much needed resources. Our employees are required to live in a particular property on Dilworth premises and have obligations imposed on them under both legislation and Dilworth s internal guidelines that prevent employees from unfettered use which standard residential tenancies would provide. Given that the employer provided accommodation only has an incidental benefit in these circumstances which is disproportionate with the compliance costs in accurately measuring the benefit, accommodation provided as a requirement of the job should not be taxable. We therefore strongly recommend a legislative tax exemption for accommodation in these circumstances. If our principal recommendation above is not accepted, other options are also explored in our submission to ensure that the tax burden (if any) in these circumstances is commensurate with the benefit actually received. As well as occupying accommodation that our employees otherwise would not choose to live in, the large tax costs imposed will distort our employees remuneration packages and impact on the ability for our employees to obtain Working for Families and other social assistance obligations (e.g. if our staff have student loans they are repaying). If our employees are taxed on the market rental value, there will be broader ramifications for the school, in that the large tax cost will impact on Dilworth s ability to hire and retain staff and continue to educate underprivileged boys. Our history and purpose is outlined below. 2 Overview of Dilworth School and the accommodation provided to staff Upon his death in 1894 James Dilworth left the bulk of his estate for the establishment of a school to educate and maintain boys from straitened circumstances and provide opportunities for them to become good and useful members of society. Today, Dilworth is one of New Zealand s largest charitable trusts supporting New Zealand s largest boarding school. Dilworth continues to fulfil the requirements of the Will through the provision of free education and care to approximately 629 students (Dilworth has a capacity for 640 students and capacity will be reached in 2015) who come from disadvantaged backgrounds. The school provides full scholarships to all students, covering the cost of all items that a parent would be required to provide their child, including academic and music tuition, boarding, school clothing, food and sport. The average cost of a scholarship across all campuses is approximately $35,000p.a. per student. Dilworth is a full boarding school, in that all students who attend the school also live at the school. As such, staff of the school act in loco parentis, and have responsibility and concern for the health and wellbeing of students 24 hours a day, 7 days a week, including in some cases school holidays. As far as we know, there are very few other schools in the world that operate on a similar basis to Dilworth. Unlike other boarding schools in New Zealand, Dilworth does not receive any school or boarding fees from parents; it funds the scholarship through the Trust, and is the only boarding school in the country which does not take in any day students. The boarding aspect of

3 the school is a major reason for the considerable academic and social success of Dilworth. Maori and Pasifika (comprising the majority of students) success is well ahead of national averages for boys in all schools regardless of decile ratings. 2.1 Staff accommodation It is crucial for the successful operation of the school that a number of our employees be permanently located on the school premises. Of the approximately 220 staff employed by Dilworth, 77 employees are required to live in Dilworth provided accommodation at various campuses. 60 of these employees live on Dilworth s Remuera and Epsom Junior and Senior Campuses, with the remainder at Dilworth s Rural Campus in Mangatawhiri. It is essential for staff who occupy Dilworth accommodation to live in these properties so that they can execute their employment duties and ensure the school meets its obligations as caregivers of children. 2.2 Health and wellbeing of students Dilworth requires staff in particular roles to be located on school premises to enable them to execute their employment duties. Staff who live in school premises are on call 24 hours a day and are responsible to the Trust for the health and welfare of students. All of the staff that are required to live on school premises are teachers and other staff who are directly responsible for the 24 by 7 care of boys from the ages of 9 to 18 years of age. As the boys come from seriously disadvantaged and sometimes dysfunctional backgrounds, there is an ongoing need for boarding staff to provide support, supervision and assistance to students at all times of the day and night. Dilworth operates from a premise of pastoral care, ensuring that the academic, social, economic, emotional, physical and spiritual wellbeing of each student is met. The school community understands that boys will learn best when they feel safe and secure in their environment, and have close connections with their teachers and other staff who care for them. To promote and protect the safety of students, the school also imposes strict restrictions on these staff in terms of the activities that may be conducted within staff accommodation. Restrictions imposed under Dilworth s internal rules include: Restrictions on alcohol consumption within the properties A good example must be set for the students at all times (no parties, etc) Police checks for all employees Visitors are required to be supervised at all times. There is no ability for boarders or guests to occupy the properties Restricted access to the properties (the school is locked down for health and safety purposes)

4 Given the extremely stringent requirements imposed on the school in respect of the welfare and monitoring of students, the school could never rent accommodation on school premises to third party tenants, even if it were able to (which it is not). The Ministry of Education has issued Regulations and Guidelines which must also be adhered to by all boarding schools, including Dilworth, for the safety of students that board at hostels and ensure that students are provided with safe physical and emotional environments. These Regulations and Guidelines, along with Dilworth s own internal rules, restrict the behaviours permitted in the employer provided accommodation by the employees and their families. The difference compared to a normal residential tenancy is stark. The school is also accountable to the Education Review Office, which conducts reviews to ensure that the health and safety requirements, and student wellbeing obligations, among others, are being met. As a consequence of meeting its obligations, a boarding licence to operate is issued under the Education (Hostels) Regulations These Regulations also restrict employees having visitors to the properties, and require all visitors to be supervised. This severely restricts the ability for quiet enjoyment that normal residential tenancies would provide. Then there is a burden imposed on staff in being on call and responsible for students at all hours of the day and night, for which they are fully compensated by way of taxable cash salary. There is no salary sacrifice situation in these circumstances and we strongly believe that any private benefit from the accommodation provided will be incidental due to the associated restrictions on the use and enjoyment of their accommodation. Furthermore, the school, including the staff housing, is zoned as a special purpose site. In the proposed Auckland Unitary Plan, the housing will be zoned as school which imposes restrictions on the Trust s ability to sell the land (including the school houses) i.e. it can only be sold for use as a school and this would significantly reduce the price that could be obtained for otherwise very valuable land. This is further enforced by James Dilworth s Will, which identifies school land as the essence of the trust and states that the land cannot be sold without obtaining Court consent. These factors illustrate that there is no alternate use for the school properties other than for staff housing. As a practical matter, the fact that there is no alternate use for the properties makes it very difficult to assess a reasonable market value in Dilworth s case. 3 Submission The Tax Bill proposes taxing the market rental value of employer provided accommodation. We understand that from a policy perspective, this approach is designed to proxy the benefit received by an employee. However, in the case of accommodation provided by Dilworth to its employees as a requirement of the job, taxing the full market value is not commensurate with the benefit received by employees.

5 We have discussed with Officials a range of options regarding the taxation of employer provided accommodation in circumstances such as Dilworth s. We consider that accommodation provided as a necessity of the job should be formally recognised in legislation to minimise compliance costs and provide certainty to employers and their employees. Our submissions, in order of preference, are outlined below. 4 Submission One Exemption for needs of the job The commentary on the Tax Bill states that the proposals apply the principle that the private benefit should be ignored when low in value, hard to measure, and not provided as a substitute for salary or wages. These principles are met in the case of accommodation provided by Dilworth as part of the needs of the job, and justify an exemption. As noted earlier, specific restrictions attached to the use of accommodation by Dilworth staff must be considered in assessing the benefit received. The health and safety laws impose significant restraints on the freedom and enjoyment in the accommodation provided, that would not be imposed in a normal residential tenancy. In addition, staff live in a particular property as required by Dilworth. Any private benefit received by the individual is incidental to Dilworth s needs. Professional valuers will need to be employed by Dilworth to take into account restrictions along with the impact of noise and privacy limitations, amongst others, for each property. This will result in significant cost to Dilworth on a regular basis. This compliance cost will be disproportionate to the private benefit which the new rules are seeking to tax. In light of the cost/benefit trade-off and the minimal revenue at stake, we recommend an exemption from tax on employer provided accommodation where the following criteria are met: The employee is required to live in particular employer provided accommodation in order to perform their employment duties; and There are health and safety rules and regulations imposed on an employer in conducting its business which require the employee to live in employer provided accommodation (in Dilworth s case, its internal guidelines and statutory requirements) ; and The employee has significant restrictions imposed which restricts their freedom and enjoyment in occupying the employer provided accommodation (see bullet point above); and There is no salary sacrifice arrangement. By referring to fetters to freedom imposed by regulation and statute, we believe the exemption can be appropriately targeted to accommodation provided as part of a genuine need of the job.

6 5 Submission Two Cap the taxable benefit If our principle submission is not accepted, the taxable element of the accommodation provided should be capped at 10 percent of the employee s salary where strict conditions are met to minimise compliance costs. This approach is consistent with the proposed treatment for the taxation of accommodation provided to Ministers of Religion in the Tax Bill. In capping the taxable element, it recognises that an employee is only receiving an incidental private benefit given the significant restrictions imposed that do not allow the property to be occupied unfettered. As per our principle submission, the scope of such a cap on the taxable benefit should be limited, and apply only in the following circumstances: Where an employee is required to live in particular employer provided accommodation in order to perform their employment duties; and Where there are health and safety rules and regulations imposed on an employer in conducting its business which require the employee to live in employer provided accommodation; and The employee does not receive quiet enjoyment (due to constraints on their behaviour, ability to receive visitors and otherwise use the premises as they see fit) in occupying the employer provided accommodation; and There is no salary sacrifice arrangement. We consider that if the cap was only applied in these circumstances, it would be appropriately targeted to organisations which operate in the health and education sphere, such as long-term care and boarding schools, where there are genuine needs of the job. This legislative solution will provide certainty to taxpayers and ensure that the benefit is more commensurate with the incidental private benefit received by the employee in these unique circumstances. 6 Submission Three Discount to the market value An alternative to the cap on the taxable element is to provide a discount to the market value to reflect the restrictions imposed on use of the premises. This could be imposed where the conditions outlined under Submission One and Two are met. This approach is consistent with Inland Revenue s previous approach to the taxation of employer provided accommodation in boarding schools, whereby tax rulings were provided to allow a discount to the full market value based on a range of factors. In addition, to the factors listed above, the discount should reflect considerations including: a) The privacy of employees and their family is limited

7 They operate in a role which requires them to be available to the students 24 hours a day 7 days a week b) There are specific health and safety rules and regulations that restrict the behaviours within the property, such as the Education Act 1989 and Smoke-free Environments Amendment Act While a discount would reflect the reduced private benefit to employees, organisations will still need to calculate a market value which will impose compliance costs. Depending on the location of the school (or other affected organisations), a different discount may be appropriate. This may make this option difficult to administer, hence our suggestion for a clear rule (exemption or taxable cap). 7 Submission Four IRD Determination If our previous submissions are not accepted, there needs to be a legislative mechanism to enable the Commissioner to issue binding market value determinations or approve the taxpayer s determination of the taxable benefit. The scope for a Determination could be limited to circumstances such as those listed above to minimise the number of applications. This would provide certainty to employers (and employees) that their market valuations will not be subsequently challenged by Inland Revenue, with the risk of penalties and interest. 8 Submission Five Guidelines on assessing the market value At a minimum, Inland Revenue needs to issue guidelines to assist employers in determining the market value of employer provided accommodation. Currently, there is no guidance in the draft legislation or the Tax Bill commentary on what factors will be relevant in determining the market value of accommodation in situations such as the needs of the job. We have outlined earlier what we believe the list of relevant factors to be. If Inland Revenue has other considerations, this should be made clear. In addition to factors to be considered in determining market valuations, consideration should be given to how the conditions attached to the accommodation provided as a need of the job can practically be taken into account by valuers. While guidelines will assist taxpayers in assessing the market value, we consider that given the subjective nature of determining market values, guidelines will not provide the certainty required where accommodation is provided as a need of the job. Employers, such as Dilworth, will be forced to take a position which will be open to challenge by Inland Revenue. However, as such challenges may be many years after the fact, Dilworth and its staff could face retrospective tax liabilities (and where staff have social policy entitlements and obligations, extra amounts to pay or pay back). This is inequitable, particularly

8 in the context of Dilworth which provides a fundamental service to disadvantaged New Zealanders. Therefore, we consider that the legislation specifically needs to cater for accommodation provided as a requirement of the job. 9 Further information Please do not hesitate to contact me on if you require any further information on, or would like to discuss our submission. Yours faithfully Derek Firth Chairman Dilworth Board of Trustees