What is Fringe Benefit Tax (FBT)?
“The best things in life are free, but sooner or later the government will find a way to tax them.”
As it turns out, the taxman already has: Fringe Benefit Tax, or FBT, is a tax on non-cash benefits enjoyed or received by employees (including shareholder employees). These “fringe benefits” are not income, in the traditional sense, so are not subject to income tax, however, FBT recognises that they’re still essentially a payment for services provided so taxes them accordingly.
The four main groups of taxable fringe benefits are:
- Motor vehicles available for private use
- Free, subsidised or discounted goods and services
- Low-interest loans
- Employer contributions to sickness, accident or death benefit funds, superannuation schemes (excluding KiwiSaver) and specified insurance policies.
FBT rules assign an income value to these non-cash benefits, with the FBT payable being the tax calculated on that deemed income.
Who is subject to FBT?
The good news, for employees, is that only employers are responsible for filing and paying FBT. If an employer provides an employee with a company car or a discount on company products, the employee needn’t worry about being required to pay tax on any of that.
Employers, on the other hand, do need to be mindful of FBT. If, for example, an employer provides vehicles to staff members (even just letting them drive them to and from work), or give out vouchers at Christmas time, or do something else that might fall into one of the four categories mentioned above, we suggest having a chat with us to check whether there is an FBT issue to consider. If there is, we can advise you regarding what your responsibilities are as an employer, how and when to file returns, and how much your FBT cost is likely to be.
When do you need to file FBT returns?
FBT returns are filed quarterly, although if certain conditions are met, you may be able to elect to file annually. If you think you are required to file FBT returns, we can advise you on filing dates and as to whether or not you qualify to only file annually. We can also assist with the calculation and filing of your returns.
If a vehicle is made available to employees for private use, you will be liable to pay FBT. It is important to note that the FBT liability arises from the vehicle being available for private use, regardless of whether any private use actually occurs. As a general rule, if an employee is allowed to take a vehicle home, it is considered to be available for private use, however, there is an exemption for work-related vehicles provided specific requirements are met:
- The vehicle must be a motor vehicle, and
- The vehicle must be permanently sign-written (removable, magnetic signage is not enough), and
- The vehicle must be designed to carry goods only, or goods and passengers equally, and
- Employees must be notified in writing that all private use is forbidden, except for travel between home and work, and travel incidental to their business travel.
There is also the option to partially exempt the vehicle: the letter (requirement 4.) can specify set days on which private use is permissible (e.g. weekends). If this is the case, FBT will be limited to only those days on which private use has been permitted.
Other exemptions include:
- Days on which an employee has to attend a work-related emergency call out from their home.
- Days on which an employee is required to be out of town on business for a full 24-hour period.
- Days the vehicle is unavailable for a full 24-hour period due to requiring repairs/maintenance.
If you think the vehicles you provide to your employees might qualify for the “work-related vehicle” exemption, or are about to purchase new vehicles and would like to make sure they qualify, we suggest you get in touch with us to discuss this.
A question we’re commonly asked by business owners is: “should I purchase my new car through my company or in my own name?” Purchasing a vehicle through the company allows the company to claim back the GST included in the purchase price (assuming the company is GST registered), claim an annual depreciation deduction, and claim deductions for the vehicle running costs for both business and private use. However, assuming the new car will be available for the business owner to use privately, this arrangement is subject to FBT.
If a shareholder employee’s vehicle is subject to FBT, there is an option available that avoids the paperwork and hassle involved in filing regular FBT returns. Instead of filing returns and paying the FBT separately, an adjustment can be made in the company’s annual financial statements to record the deemed income value of the private vehicle use. This adjustment increases the company’s taxable profit, with the resulting increase in income tax taking the place of the FBT that would have otherwise been payable.
Another option available to shareholder employees, as long as their company is providing no other fringe benefits, is to apportion vehicle expenses (both purchase and running costs) based on actual business versus private use. This option would require a usage logbook to be kept for a period of three months every three years. Automated GPS tracking options are also available.
There are various factors that should be taken into account in selecting which option to use. Next time you are considering purchasing a new vehicle, we suggest you have a chat with us first; we can then recommend the option best suited to your specific situation and let you know what the FBT cost of that arrangement will be (if any).
Free, Subsidised or Discounted Goods and Services
If you are giving goods to staff for free, or for a subsidised price, this may be subject to FBT. To avoid FBT, staff must pay the lower of at least either 95% of what the goods cost the company or 95% of the selling cost to the public.
If goods are provided to staff mainly for business purposes (e.g. tools or a laptop), private use will be exempt from FBT provided the cost of each item was less than $5,000. If items costing more than $5,000 are made available for private use (i.e. staff are permitted to take them home), FBT will need to be calculated on this benefit.
Much like free or subsidised goods, free or subsidised services are also subject to FBT. Examples include subsidised gym memberships or accompanying travel for an employee’s spouse or family.
There are exemptions available: there’s a $300 exemption per employee per quarter. It’s important to note though, that if the exempt amount is exceeded, FBT is payable on the full value of the benefit; the exemption isn’t deducted first. The other limitation of this exemption is that the combined benefits provided to all staff in a year cannot exceed $22,500.
There is also an exemption for goods and services provided relating to hazard management: e.g. the cost of providing an annual flu shot or protective clothing does not create an FBT liability.
Carparks provided to employees aren’t subject to FBT, as long as the carpark is on your premises. This exemption includes carparks leased for employees, as long as you have an exclusive right to occupy the property.
If an employer lends money to an employee on a low-interest rate or charges no interest at all, the difference between the actual interest charged and interest calculated using the prescribed interest rate is deemed to be a fringe benefit. The prescribed interest rate is reviewed quarterly and is available on the IRD’s website (www.ird.govt.nz).
The prescribed interest rate also applies to shareholder employees where a shareholder withdraws more from their company than they’ve either previously contributed or has been allocated to them by way of a salary or dividend. In this case, interest is required to be charged, by the company, at the prescribed interest rate. This interest increases taxable profit to the company, therefore increasing income tax payable. We suggest you let us know if you’re considering increasing regular drawings or withdrawing a large lump sum, and we can advise you as to your available options.
Employer contributions to funds, insurance, and superannuation schemes
If an employer makes a contribution to a fund or scheme for the benefit of their employees, this is likely subject to FBT.
If an employer takes out insurance for a staff member, but the employer benefits from the policy (e.g. key person insurance), no FBT is payable. A fringe benefit only arises where the insurance, fund or scheme benefits the employee.
No FBT liability arises where an employer makes a specified superannuation contribution (e.g. Kiwisaver); instead, they are required to deduct ESCT. The ESCT deduction is accounted for in the employer’s payday employment information filing.
If you are considering providing medical insurance for your staff, or you are thinking about making contributions towards another type of insurance, fund or scheme on behalf of your employees, we can advise you as to what your FBT liability will be.
How often should FBT be paid?
Fringe Benefit Tax is payable quarterly (however some employers may be able to elect payments filing on an annual basis).
What are the different types of FBT Rates?
There are three types of FBT rates from which you can choose; single rate, short-form alternate rate, and full alternate rate. If you file an annual return, you can choose any of the three FBT rates and change rates from year-to-year. If you file quarterly, you can swap between FBT rates during the year. However, if you elect and pay FBT using the alternate rate in any of the first three quarters, you must complete the alternate rate calculation process in the fourth and final quarter.
FBT – Fringe Benefit Tax Single Rate
The single rate is 49.25%, applied to all fringe benefits provided. This is the highest FBT rate.
FBT – Fringe Benefit Tax Short Form Alternate Rate
The short form alternate rate is 49.25% for all attributed benefits and non-attributed benefits provided to major shareholder employees and 42.86% for non-attributed benefits.
Full Alternate Rate
The full alternate rate is between 11.73% and 49.25% and applies to attributed benefits only. A separate calculation must be done for each employee. The rates are based on an employee’s fringe benefit inclusive cash remuneration (FBICR).
Refer to the IRD website for more information on how fringe benefit tax is applied and calculated.
If you would like further information on whether FBT is payable in your situation, how this is calculated and which rate you should use, just give us a call.