Do employee health insurance premium payments go through FBT or PAYE
Tax Alert - July 2018
We have recently completed a number of fourth quarter Fringe Benefit Tax (FBT) return reviews and found a common issue with the incorrect treatment of health insurance premiums paid for by the employer. The decision of whether these premium payments should go through FBT or Payroll is often based on prior treatment or on what is easier from the employer’s perspective, rather than the legislation. There is also a common misconception that ultimately it does not matter which treatment is used because they are net tax neutral.
However, it is important that premium payments are treated correctly, as there are wider implications depending on the tax treatment. For example, if the premium payment goes through payroll then this will affect Kiwisaver, student loan repayments, Working for Families Tax Credits and even potentially holiday pay, depending on the employee's contract.
The general tax rules laid out for insurance premium payments in the QWBAs are:
- Where an insurance policy is taken out by an employee with the employer paying for the premiums on the employee’s behalf, the premiums are subject to PAYE. FBT will not apply because 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 are subject to FBT.
We have detailed Inland Revenue’s reasoning for this treatment below. This article does not consider income protection insurance, which has its own set of rules.
Tax treatment of health insurance taken out by an employee
An employee’s income includes “expenditure on account” of that employee. Expenditure on account of an employee means a payment that is made by an employer in relation to expenditure incurred, or to be incurred, by an employee. Where an employer pays the health insurance premiums on a policy that has been taken out by an employee, the employee has a legal obligation to the insurance company to pay the insurance premiums. This would meet the definition of “expenditure on account” of that employee.
Expenditure on account of an employee is included as part of the employee’s “salary or wages”. A payment of salary or wages is a “PAYE income payment” meaning that the PAYE rules apply and the amounts are subject to PAYE. The amount of the premiums needs to be grossed up before PAYE is calculated.
The FBT rules will not apply as the payment of the premium is assessable income to the employee.
Wider implications of premium payments being included in payroll
As was stated earlier, there are wider implications of the premiums being included in an employee’s salary or wages. Essentially, anything that uses gross salary or wages for their calculation could be affected (Kiwisaver, student loan repayments, Working for Families Tax Credits and even potentially holiday pay).
An additional potential issue could be that an employee may no longer be eligible for Working for Families Tax Credits if the premium amount pushes them over the eligibility threshold.
An employee’s salary is increased by treating a premium payment as salary, which could also result in an historic underpayment of holiday pay. An employer who has underpaid an employee’s holiday pay is liable to each employee/former employee for the underpayment amount going back 6 years from the date that the cause of action arose. The employer can also be liable for a penalty starting at $20,000 under the Holidays Act 2003.
Tax treatment of health insurance taken out by an employer
As opposed to the situation described above, in this instance the employer has the legal obligation to pay the premium (as they have contracted with the insurance company to take out the policy or pay the premium). The payment of the premium is not expenditure on account of an employee and is therefore subject to FBT.
A fringe benefit is a benefit provided by an employer to an employee in connection with their employment and comes within the specified benefits section.
The Commissioner’s view (set out in QB 18/05) is that where an employee is a beneficiary of an accident or sickness insurance policy this is a benefit to the employee, as they are receiving a benefit (policy coverage) that they would otherwise not be entitled to. So long as the insurance is provided in connection with their employment this would meet the required definition of a fringe benefit as contributions to life or health insurance are a specified benefit.
It is important that these premium payments are treated correctly. We suggest that if you have concerns about the way you have been treating your insurance premiums that you get in contact with your usual Deloitte advisor.
July 2018 Tax Alert contents
- New Zealand companies may be Australian resident under ATO ruling
- Stop press – June Tax Bill introduced