Fringe Benefit Tax: What is it and do I have to pay it?
There was a time when employers could offer non-cash benefits to their team members as a way of increasing their remuneration. The team member could avoid paying income tax on those benefits as a result.
Fringe Benefit Tax (FBT) was introduced in the 1980s as a way of taxing ‘perks’ given to employees in lieu of wages or salaries.
As a result of that legislation, most ‘perks’ are now taxable. There are four main groups of fringe benefits:
- motor vehicles
- low-interest loans
- free, subsidised or discounted goods and services
- employer contributions to sick, accident or death benefit funds, superannuation schemes and specified insurance policies.
Employers who pay for their employees’ entertainment or private use of telecommunications may also have to pay Fringe Benefit Tax. New rules on carparks will come into play in time for the 2015 tax year as well.
It is important to note that cash remuneration such as wages, salaries and bonuses are always excluded from fringe benefit tax as PAYE is payable. As such, the IRD is interested in ‘non-cash benefits’ for Fringe Benefit Tax.
The IRD is interested in Fringe Benefits over the following thresholds:
- $300 exemption per employee per quarter (i.e. a maximum exemption of $22,500 per annum for all employees)
- For annual and income year filers the exemption is $1,200.00 per employee per year (i.e. a $22,500 per year for all employees).
The two exemptions look to be the same but relate to whether you file FBT quarterly or annually. Please note that these figures were accurate as at January, 2013.
A Bit More Detail
Let’s have a look at the four main categories in a bit more detail.
1. Motor Vehicles
In general, if you have a motor vehicle that is available for private use by an employee, FBT will apply. The key thing here is that the vehicle is ‘available’ for private use, whether or not the team member uses the vehicle privately. Private use could even relate to an employee taking a vehicle home for the night so they can make an early start the next day.
Motor vehicles can be a nightmare from a tax perspective and you really should get professional advice on this area.
2. Low Interest Loans
If you offer a loan to a team member at less than market rates, this will constitute a fringe benefit. The IRD sets a prescribed interest rate regularly so that everyone knows what the minimum interest rate should be. Our advice? Don’t lend money to staff without talking to your accountant first.
3. Free, Subsidised or Discounted Goods and Services
There is a really simply test here. If you are offering goods and services to your team for less than it costs you, or you would charge your customers, then this is a fringe benefit. There are literally thousands of potential examples here – free transport, reimbursement for education and employee discounts are just three common examples.
Work clothing is often exempt but strict conditions apply. Again, check with your accountant for the latest rules.
4. Employer Contributions to funds, insurance and superannuation schemes
Subsidised health care, sick, accident or death benefit funds, life, pension, personal accident or sickness policies and superannuation schemes may all qualify as Fringe Benefits.
The good news is that Kiwisaver is exempt from FBT. The bad news is that employers pay Employer Superannuation Contribution Tax (ESCT) on contributions to their employees’ Kiwisaver schemes.
Some things to Avoid at All Costs
- Never, ever ‘estimate’ the value of fringe benefits provided to employees. Always ensure that you document how you have calculated the value of the fringe benefits. Accurate record keeping is critical. If you are not certain, get your accountant to do this for you.
- Do not pay your employees ‘in kind’ to avoid tax. It can land you in a lot of hot water and never works. (For the same reason, it is never a good idea to pay employees ‘out of the till’ without paying PAYE).
What if I don’t want to offer any Fringe Benefits to my team members?
There is no doubt that the Fringe Benefit Tax regime is complex and can be costly to administer. Most taxpayers will get their accountant to prepare a FBT return.
The good news is that if you never intend to offer Fringe Benefits, you can opt out entirely. There is a form available on the IRD website which you can complete. The IRD will then stop sending you a Fringe Benefit Tax return. This will save some time and any hassle.
Of course, if your circumstances change, you need to let them know immediately.
So, where to from Here?
If you intend to offer Fringe Benefits or already do so, we strongly suggest that you talk with your accountant and get them to prepare the return. FBT is a very complex area of tax law and you need good advice. Getting it wrong can be very expensive.
Always ensure that you file your FBT return and pay the tax on time to avoid any interest and penalties that the IRD may impose.
Make sure to include all benefits including any discounts offered by one of your suppliers to your staff. There are exemptions here.
If you are ’employed’ by your business, or you extend benefits to an ‘associated’ person such as a spouse, FBT can also apply.
The advice in this article is general and your circumstances will be unique. Every business should consult their accountant for FBT advice. Generate Accounting Group offers specialist tax advice and we are always happy to advise clients about tax matters.