The tax cost of your fringe benefits is about to increase

By Nick Cooke, Angie Leung
 

From 1 April 2021, the new personal income tax rate of 39% will apply to income earned by individuals over $180,000. As a result of this new personal income tax rate, the Fringe Benefit Tax (“FBT”) rates are also increasing. It is important to note that all employers will need to consider how they apply the new FBT rates, even if the employer has no employees earning over $180,000. There has never been a better time to undertake an FBT review to look at your FBT controls, processes and use of FBT software. This is something that we can help with to ensure FBT compliance risks are managed and to ensure any FBT exemptions are fully utilised. If you would like to know more, please contact us.

What are the new FBT rates which apply from 1 April 2021?

It is important for employers to understand they have options when it comes to FBT. Fringe benefits can be attributed to individual employees and taxed at a rate appropriate to the marginal tax rate of the employee, or else FBT can be paid at a flat rate. The flat rate of FBT is increasing from 49.25% to 63.93% from 1 April 2021.
 

Do I need to consider these FBT rate changes, even if no employees within my organisation earn over $180,000?

Yes - according to Inland Revenue statistics, approximately 90% of employers are currently paying FBT at the current flat rate of 49.25% rather than undertaking a full FBT attribution process. As a result, the vast majority of employers are likely to see an increase in FBT costs from 1 April 2021.

Why? Because the single rate of FBT is increasing to an eye-watering 63.93%, and the FBT pooling and alternate rates are increasing to 49.25%. To put it another way, if you currently use the single rate of FBT and will continue to do so from 1 April 2021, all other things being equal, your organisation’s FBT cost will increase by 30%.

That said, employers can minimise the increase in FBT by performing an FBT attribution calculation in the final FBT quarter (1 January to 31 March each year). This means fringe benefits over the course of the year are taxed at applicable marginal rates based on each employee’s income level, determined after taking into account the value of the benefits received and their employment income, rather than using the single rate or short form attribution options.

In the past you may have determined that full attribution was not worth performing for your organisation, as the costs of doing so outweighed any FBT savings. The old rule of thumb used to be that unless you had a high number of employees earning less than $70,000 per annum or you had a high turn-over of staff, it wasn’t worth doing as the compliance costs could exceed any tax savings. However, because the new top tax rate band is so much higher than the old one, this rule of thumb no longer applies from 1 April 2021, and it is likely that the majority of employers should consider performing an attribution calculation in order to minimise their FBT cost increases.
 

Why is the new FBT rate so high?

New Zealand’s FBT rules are designed to ensure that benefits in kind are effectively taxed at the same rate as cash salary & wages. For this reason, FBT marginal rates are the gross-up of the income tax marginal rates. To help illustrate how this works, let’s look at the following example:

Ernie earns $200,000 a year and is therefore subject to the current top marginal tax rate of 33%. If his employer wanted to provide Ernie with a take-home allowance of $100, they would have to make a gross payment to Ernie of $149.25. If instead his employer wanted to provide Ernie with a voucher of $100, this would be subject to FBT at 49.25% payable by the employer.
 

In both instances, Inland Revenue would receive tax of $49.25, Ernie receives $100 in the hand, and the employer has a cost of $149.25. Everything’s equal.

Under the new income tax and FBT rates from 1 April 2021, in order to keep things equal, the example above will change to look like this:

However, had Ernie been earning only $100,000 per annum, if the single rate of FBT is used from 1 April 2021 then the cost for the employer is different depending whether the benefit is provided in cash or kind:
 

But I don’t have to do anything until this time next year, right?

Wrong. In order to be able to perform your attribution calculation in the final quarter of next year, you need to ensure you have the right data available from 1 April 2021. This includes knowing which employees have received which benefits, and the respective benefit values. This may be something you can do already, but if not, you need to think now about the changes you need to make to your FBT data collection methods to ensure you are collecting this level of detail from 1 April 2021.

The moral of the story

If you disregarded FBT attribution in the past, now’s the time to revisit this. When the new rates apply, it is likely that performing an attribution calculation will result in FBT savings that outweigh the compliance costs of doing so. You also need to plan now, to ensure you collect the right data from 1 April 2021.

Software is available to help with the attribution calculation. Deloitte is also able to perform these calculations for you, providing the right data is available. As discussed above, we are also able to help with FBT reviews, to ensure FBT compliance risks are managed and to ensure any FBT exemptions are fully utilised. If you would like to know more, please contact us.

March 2021 Tax Alert contents
 

• What are the tax obligations which come with claiming COVID-19 Government support?
• The tax cost of your fringe benefits is about to increase

• The new 39% tax rate puts tax structuring back into the spotlight – why it may be time to talk about tax avoidance

• Are you ready for the new Trust Disclosure Rules?

• Good news for businesses with new shareholders

• GST and agency, are you doing it right or is there a hidden cost?

• Counting down to the new year
• Snapshot of recent developments