Beware of common FBT pitfalls during FBT season
Tax Alert - May 2019
By Stephen Walker & Amreen Ukani
With the fourth quarter fringe benefit tax (FBT) return for the year ended 31 March 2019 due by 31 May 2019, it’s time to get it right. We have provided a handy countdown of the top 10 errors seen by Deloitte when reviewing client FBT returns.
10. Treatment of employee contributions towards fringe benefits
The taxable value of fringe benefits are reduced to the extent contributions are made by the employee towards the benefit.
Even where this results in a reduced FBT liability of nil, employers are still required to file a nil FBT return as fringe benefits have been provided.
9. Employers applying the maximum FBT rate across the board
Even if you have chosen to pay FBT at the standard rate of 49.25% per quarter rather than the multi-rate of 43%, all is not lost as employers are still able to replace the fourth quarter calculation with a full year attribution calculation, based on FBT
rates linked to the total value of cash remuneration and fringe benefits per employee.
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 and tax these at the lower pooling rate of 42.86%.
8. GST Inclusive Employee Benefits
All fringe benefits need to be calculated on a GST inclusive basis. Therefore when calculating FBT, it is important to ensure that the cost base for each benefit is correct. This means not only ensuring that the original cost is correct, but also that the GST component has been accounted for. If you are relying on a general ledger amount to determine the taxable benefit, remember it will be a GST exclusive amount and will need to be grossed up for GST if applicable.
7. FBT vs PAYE vs Entertainment
There is often confusion about whether something is subject to PAYE or FBT, and how the FBT regime interacts with the entertainment rules. If in doubt, seek help from your friendly Deloitte tax advisor.
6. Income protection insurance – not subject to FBT
Employer contributions to income protection insurance premiums are not considered fringe benefits as any policy payments made to employees as a result of a claim will be assessable income to the employee. Contributions are therefore deductible to employers as an employee related cost.
5. Insurance premiums – subject to FBT or PAYE?
Where an insurance policy is taken out by an employee, but the employer pays the premiums on the employee’s behalf, the premiums should be subject to PAYE. FBT will not apply because the policy, and the obligation to make payment under the policy, belongs to the employee. Where the insurance policy is taken out by the employer for the benefit of the employee, premium amounts paid by the employer should be subject to FBT.
4. Annual filing threshold
Small employers have the option of filing FBT returns annually. The threshold for filing an annual return is where an employer’s total gross PAYE and ESCT contributions for the previous year were less than $1,000,000. However in order to file annually an election needs to be made with Inland Revenue. A common error we see is that elections are not made or renewed by the 30 June deadline (or the end of the first quarter of the FBT year in which fringe benefits arise). If an election has not been made by this date, a small employer that has already registered as an employer with Inland Revenue before 30 June 2019 will still be required to prepare quarterly returns for the 2020 FBT year, even if they have not yet registered for FBT.
3. Applying the de-minimis exemption for unclassified benefits
Unclassified benefits are exempt from FBT where the taxable value of the benefit provided to each employee is $300 or less per quarter per employee and the total taxable value of all unclassified benefits provided by the employer over the past 4 quarters is $22,500 or less. This calculation is a rolling quarterly calculation and includes the current quarter. In practice we find this opportunity is missed completely or the rolling quarterly calculation of the threshold is not done correctly.
Further, these threshold figures apply across all associated entities and not just on an entity-by-entity basis (i.e. if together two companies in the group exceed the $22,500 threshold, then both companies are unable to make use of this exemption, even if one of them is under the threshold in isolation). A risk arises where one group company does not review the availability of the de-minimis exemption in the context of the total value of all unclassified benefits provided across the group. This is a particular risk where there is limited or no information sharing between entities.
2. Motor Vehicles – the calculation of exempt days
Recent guidance issued by Inland Revenue concerning the claiming of exempt days means that the days where an employee drives to the airport and returns from the airport are no longer counted as exempt days, nor are days where the employee is away on holiday without the vehicle. Inland Revenue’s view is that the vehicle is still being made available for private use on these days and so an FBT liability arises. We often see clients still treating these days as FBT exempt. In addition, where the calculation of taxable value is being performed manually in excel, we often find errors in the calculation. It pays to get the calculation reviewed by your friendly Deloitte tax advisor to ensure it is correct,or better still, talk to us about potential FBT return software solutions that might be more suitable.
1. Motor Vehicles – Work related vehicle (WRV) exclusion
Not all business vehicles are work-related vehicles for FBT purposes. To qualify, the vehicle will generally have to be a ute, van or a truck that isn’t principally designed to carry passengers. It also needs to be permanently and prominently sign-written with the company logo. The WRV exclusion can only apply when the employee is required to take a WRV home for business reasons and when they do so, private use of the vehicle, other than incidental private use on the journey to and from home, is prohibited. The operation of the exemption is also dependent on checks being undertaken and record-keeping to establish that a vehicle is not being made available for private use. A material shortfall in FBT can arise where WRVs have not been subject to FBT and they fail to meet all of the WRV requirements.
Hopefully the above is useful ‘food for thought’, but if you have any questions or concerns regarding your upcoming FBT return, please don’t hesitate to contact us.