31 May is fast approaching - It’s time to focus on FBT
Tax Alert - May 2016
With the fourth quarter FBT return due on 31 May, now is the ideal time to check that all is well on the FBT front. In this article we highlight a few things for employers to consider this month as they wrap up that part of preparing the last quarter calculation.
Don't miss these benefits
It’s not just about motor vehicles, employment related loans and medical insurance contributions. There is a wide range of benefits which can be caught by the FBT regime (as can be seen by the list of unclassified benefits below).
Putting in place controls to identify and capture all benefits (particularly new benefits) provided to employees is the key to ensuring the return is complete and accurate. A few examples which are often missed include:
- Flowers and Christmas gifts
- Prescription spectacles
- Leaving gifts
- Free or discounted goods and services
- Use of employer's assets off the premises and for private purposes (e.g. use of employer’s boat)
- Child care (not provided on employer’s premises)
- Allocation of "frequent flyer points" if the membership is in the name of the employer
- Home newspapers
- Magazine subscriptions
- Study fees (when the course is unrelated to work)
- Travel (not work related)
- Club memberships (not being work related societies and professional bodies)
Are FBT processes and systems up to scratch?
We commonly rely on what is in front of us. FBT returns are often prepared quarter on quarter relying on a spreadsheet being rolled forward and updated with preparers not critically assessing the mechanics of the calculation. A review of underlying formulas and logic in the spreadsheet is a good step toward ensuring accurate calculations.
If you find yourself in a review, Inland Revenue will generally ask questions about the company’s information collection processes, preparation procedures and its review processes for the preparation of FBT returns. If Inland Revenue came knocking, how would your business fare in answering the following questions?
- Who can explain the processes involved in preparing FBT returns and describe the source documentation that is used to identify fringe benefits?
- What kind of checks are undertaken to ensure that all benefits are considered for inclusion in FBT returns?
- Do you have written procedures for the preparation of FBT returns?
- Are FBT returns reviewed before they are filed?
If there have been changes in staff responsible for preparing FBT returns, this can be an ideal trigger to review these matters.
We know from experience that Inland Revenue generally perceive an organisation to have a lower risk profile if it undergoes a regular and robust “health check” of their compliance processes. Not only does it reduce risk and save on potential penalties where FBT is underpaid, but savings can often be found where FBT is overpaid.
To attribute or not, that is the question
Employers may have chosen in the first three quarters to pay FBT at the single (and highest) rate of 49.25%. This option is the easiest from a compliance point of view but employers are likely to pay more FBT than necessary in the long run under this option. However all is not lost as employers are still able to replace the fourth quarter calculation with a full year attribution calculation subtracting the FBT paid in the first three quarters.
Our experience shows employers can and do save material amounts when going through the full attribution exercise. At the very least, rather than perform the full attribution calculation, employers should consider whether it is possible to “pool” eligible benefits at the lower rate of 42.86%.
Do I deduct PAYE or pay FBT?
A common dilemma is whether something is subject to PAYE or FBT. The general rule is that if the employee is contractually obliged to pay for something but the cost is met by the employer, excepting genuine business expense reimbursements, it is subject to PAYE. Generally where the employer is obliged to pay for the item provided to the employee, then this will be subject to FBT. One exception relates to the taxable provision of accommodation, which is always dealt with under PAYE regardless of any arrangements in place.
Correctly identifying PAYE vs. FBT is important as any amounts which should be subject to PAYE can have wider reaching implications in relation to holiday pay, Kiwisaver, Student loan repayments and child support. Where these amounts are incorrectly attributed to FBT the above ancillary items are impacted.
Is it GST on FBT or FBT on GST?
GST is payable on some fringe benefits as the employer is treated as supplying the benefit to the employee as if it was a normal sale of goods and services by the employer to the employee. The rule to remember in this regard is that what goes on the FBT return stays on the FBT return and so this GST adjustment is made in the FBT return (and not claimed on the GST return). It’s quite common for the GST payable on fringe benefits to be double-counted and incorrectly included in the GST return as a GST expense.
Issues with motor vehicles
The provision of motor vehicles probably accounts for most of the FBT payable in returns. It is also an area where errors easily occur. Issues often arise with what cost basis is used, the tracking of private use and exempt days, what is a work-related vehicle and other such intricacies. It is important to review this periodically to make sure what is recorded stacks up, that appropriate logs are kept, and that work-related vehicles are treated correctly, and particularly whether they are exempt from FBT or not.
For the purpose of measuring the available days, the total number of days in the quarter is reduced by the non-usage days, but the apportionment factor is always applied over a standard 90 days.
Applying the de minimis exemption for unclassified benefits
There is an exemption from FBT for unclassified benefits provided to employees provided a de minimus threshold is not exceeded. The current de minimus threshold is $300 per quarter per employee or $22,500 per employer over the last 4 quarters for all employees. This calculation is a rolling quarterly calculation. In practice we find this opportunity is missed completely or the rolling quarterly calculation of the threshold is not done correctly.
Further, Inland Revenue’s position is that the de minimis threshold applies across all associated entities and not on an entity-by-entity basis, regardless of whether the entities are providing benefits to the employees of another entity or not. This creates a risk that a group company relying on the de minimis exemption may not validly exclude unclassified benefits. This is a particular risk where there is limited or no information sharing between entities.
Did you miss our article on outsourcing payroll overseas?
In last month’s Tax Alert we covered issues arising when FBT returns are prepared by an overseas centralised back office and the fact that this has come under scrutiny from Inland Revenue recently.
Be wary of washing up errors into the next FBT returns
And last but not least, it may be common practice to use the final fourth quarter FBT return to correct or include fringe benefits provided over the previous quarters. This is only technically permissible if the total FBT error is $500 or less. If the FBT error is greater than this, the relevant FBT returns need to be corrected and benefits returned in the correct periods, otherwise there is a risk that shortfall penalties and use of money interest will arise. To read more about this issue, see our article here.
If you require assistance with your final quarter calculations or wish to explore the benefits of an FBT health check further, please contact your usual Deloitte tax advisor.