FBT-value of brokerage provided by sharebrokers to employees

Income Tax Act 2004-section ND 1K(1)(a)-FBT-value of services

All references are to the Income Tax Act 2004.

We have been asked to consider what is the value for FBT purposes of brokerage services provided by sharebrokers to their employees.  In an item in Public Information Bulletin No 161 ("PIB 161"), the Commissioner accepted that, for FBT purposes, the value of brokerage services provided to employees would be the lowest value of brokerage that would be charged to preferred clients of a sharebroker.  The correctness of this item has now been questioned. 

Valuation rule

Section ND 1K(1)(a) applies to value brokerage provided to employees by a sharebroker (being services of a type normally provided by sharebrokers as part of their business).  Under section ND 1K(1)(a) the value of brokerage is the price charged by the employer for the "same or similar" services to the public in the open market in New Zealand on ordinary trade or professional terms between buyers and sellers independent of each other.

Meaning of "the public"

The expression "the public" means the community as a whole or a member of the community:  Evans v Lee [1964] SASR 219; Jennings v Stephens [1936] Ch 469.  In this context the expression "the public" includes any member of the community who may seek the sharebroking services of a sharebroker. 

Are brokerage services provided to employees similar to services provided to the public?

"Similar" does not mean "exactly the same": see Mays v Roberts [1928] SASR 217; Greenleaf v Goodrick 101 US 278; NZ Central Region etc Local Government Officers' Union v Lower Hutt City Council (1992) 1 ERNZ 558.  Whether the services provided to employees of sharebrokers are similar to the service provided to members of the general public depends on what the essential features of the service provided to the general public are and whether the services provided to employees have those characteristics. 

In order to buy or sell listed securities investors must place orders through a sharebroker.  Sharebrokers may provide additional advisory services to some clients for an increased fee but the essential features of the basic brokerage service provided by sharebrokers are:

• The placement of orders for the sale or purchase of listed securities; and
• The settlement of transactions for the sale and purchase of securities on behalf of their clients through the NZX's electronic trading system or the electronic trading system of another stock exchange.  These services may be accessed either electronically or by telephone. 

Under the NZX Participation Rules, employees of sharebrokers are subject to a number of restrictions such as minimum holding periods for shares, preference being given to client orders, the inability to participate in Initial Public Offers, priority being given to orders given by members of the public and the inability to trade through sharebrokers other than their employers.  However, the Commissioner considers that the restrictions do not alter the essential nature of the brokerage services provided.  These restrictions affect the timing, number and nature of the security transactions that employees may undertake and may limit access to the brokerage services.  It is acknowledged that potentially the restrictions may affect the price at which securities may be bought or sold as employees, but the provision of the service would still result in the employee either obtaining securities or selling securities.  The fact that employees of sharebrokers are not able to trade through a sharebroker other than their employer also does not affect the nature of the service provided.  The brokerage services provided to employees (the purchase and sale of securities on behalf of the employees) are similar to the brokerage services normally provided by sharebrokers to the public.  In each case the service provided is the sale or purchase of securities in accordance with instructions given to the sharebroker. 

What is the value of brokerage provided to employees?

The value of brokerage for FBT purposes is the rate that would be charged by the employer to a member of the general public.  Generally brokerage rates are calculated on a graduating scale based on the size of each trade (that is, the brokerage is a percentage of the order amount) subject to a minimum charge.  Sharebrokers may also apply a "trader rate" to customers who have traded in excess of a specified amount of brokerage.  A lower rate may also be charged for on-line brokerage services.

The value of brokerage provided by sharebrokers to their employees is to be determined on a transaction by transaction basis according to the scale of charges applied by the particular sharebroker.  If a lower rate of brokerage would have been available to an employee even if the employee was not employed by the sharebroker, for example, because of the volume of transactions undertaken by the employee, the lower rate would be the value of the brokerage provided to the employee for FBT purposes.   

In the light of the above, in the Commissioner's view, the item in PIB 161 does not correctly reflect the law.  Accordingly, the item is withdrawn from 31 March 2006 and from that date should not be considered to be an expression of the Commissioner's view of the law.  This statement now represents the Commissioner's view on the value of brokerage services provided by sharebrokers to their employees.