Recapping Deloitte’s FBT and employment taxes webinar – key things you need to know under the 39% rate
Tax Alert - April 2021
By Stephen Walker
We recently held our annual Fringe Benefit Tax (FBT) and employment taxes webinar and were fortunate enough to be joined during the event by two of Inland Revenue’s technical specialists on FBT. We had over 700 attendees join us for the webinar, which goes to show just how important employment tax issues are to businesses in New Zealand, and also perhaps highlights how hard it is for taxpayers to get to grips with the tricky compliance beast that is FBT.
Unfortunately, we ran out of time during the session to properly tackle the numerous questions that were raised, and so we thought it might be helpful to address some of the more common queries received.
This also means those of you that were unable to attend are able to get a feel for the issues that are out there, and provides an opportunity for you to reach out directly to us with your FBT and employment tax related queries.
FBT rate changes, attribution and software solutions
Without doubt, the key theme and issue on everyone’s mind was the new FBT rate changes, which came into effect from 1 April 2021.
For those of you that don’t know, the single rate has moved from 49.25% to 63.93% and the alternate rate has increased from 43% to 49.25%. In addition, the pooling rate moved from 42.86% to 49.25%. We know from Inland Revenue data that around 90% of taxpayers currently use the single rate to calculate their FBT (and our poll conducted during the webinar indicated that 51% of our audience uses the single rate).
We saw during the session that if those same taxpayers adopt the same approach next year, they will see an eye-watering 30% increase in their FBT costs. We covered during the session how important it will be for taxpayers to use attribution from the 2021-22 FBT year in order to keep FBT cost increases to a minimum. This is especially the case where there are a large number of employees earning under the $180,000 p.a. top tax rate threshold.
With the increased need to attribute benefits to employees, where possible FBT calculation software should be used to make FBT compliance easier. Here at Deloitte we are able to demonstrate TaxLab’s FBT software product to clients, so please do not hesitate to reach out to us if you are interested in seeing how this software works, and how it can help you and your business with FBT returns going forward.
The FBT consequences of the new top personal tax rate were also explained in our March 2021 Tax Alert.
With these new rate changes, it’s never been a better time to make sure you are getting your FBT returns correct. This was emphasized by Inland Revenue in the webinar, in identifying some of the common errors they see when reviewing and auditing taxpayers. Indeed, from our own experience, we’ve not conducted an FBT review yet where we haven’t found an error or a missed opportunity to save on FBT costs. With FBT rates going up, it’s going to be more important than ever to ensure both that opportunities to save FBT costs are maximised, and that you are compliant with the rules, as the cost of getting it wrong is also going to go up. Undertaking regular reviews of taxes like FBT also demonstrates to the Inland Revenue that you have good governance processes in place.
Common questions and errors identified
FBT vs PAYE vs Entertainment
For those of you who attended the webinar, you may recall we discussed this common error, together with some examples to bring the issues to life. Interestingly, the poll results also indicated that a number of audience members struggle to get this area right, and this was again highlighted in comments made by Inland Revenue.
The general rule when determining if something is subject to PAYE or FBT is to follow the contract. If the employee is contractually obliged to pay for something but the cost is met by the employer, excepting genuine business expense reimbursements, it will be subject to the PAYE regime. Generally, where the employer is contractually obliged to pay for the item provided to the employee, it will be subject to the FBT regime. The exception to the general rule is accommodation, which when taxable will always be subject to PAYE. Once you’ve determined whether you’re in the PAYE or FBT regime, then you need to look at the separate exclusions / exemptions that apply to each regime.
Sitting alongside the PAYE and FBT regimes is the entertainment regime, which adds another layer of complexity around the provision of food and drink to employees. The entertainment regime limits income tax deductions to 50% where the expense is classified as entertainment expenditure. The policy rationale behind this is that expenditure on private benefits received from business entertainment should not be fully deductible. Common examples include entertainment off premises (e.g. Christmas party), entertainment on premises where food and drink (other than a light refreshment) are provided, and corporate boxes. These entertainment rules generally override the FBT rules (so you’re only caught under one regime). However, FBT will apply instead of the entertainment regime if:
- The employee did not receive benefit in course of performing their employment duties; and
- They did not receive it or use it as a necessary consequence of their employment; and,
- The employee can choose when to use the benefit.
A number of questions were submitted on determining the benefit value of motor vehicles.
It’s worth remembering that, unlike other fringe benefits, motor vehicles are subject to FBT when they are made available by the employer to the employee for their private use (noting that the commute to work will generally be considered private use). It doesn’t matter whether the employee then chooses or not to use the vehicle privately, and so in this sense actual private use is irrelevant. What is key is the motor vehicle’s availability to be used privately.
In terms of the calculation itself, there are two options to choose from: the cost method or the tax written down value (“TWDV”) method.
If the vehicle is leased, you should ask your leasing company to provide you with the GST inclusive cost value and/or TWDV to be used for FBT purposes. Most lease contracts will state these values already.
When using cost, ignoring any exempt days, the taxable value is computed at 20% annually (5% quarterly) of the GST inclusive cost price. When using TWDV, again ignoring any exempt days, the taxable value is computed at 36% annually (9% quarterly) of the GST-inclusive TWDV.
That said, when using the TWDV method, the minimum GST inclusive value that can be used is $8,333, so the minimum annual taxable value for a vehicle that is fully available for private use using the TWDV method is just under $3,000. The choice as to which method to use is made in the first FBT return for which the vehicle is provided to an employee. Once a method has been chosen for a particular vehicle, the same method must be used for that vehicle until the earlier of the date it is disposed of, the date it ceases to be leased, or five years have passed since the start of the period of the vehicles first FBT return.
Application of de-minimis exemption
Finally, a number of questions were also submitted on the practical application of the de-minimis FBT exemption.
The so called “de-minimis exemption” only applies to unclassified benefits provided to an employee where:
- The total taxable value of all unclassified benefits provided to the employee in the quarter did not exceed $300 ($1,200 for the year if filing annually); and
- The total taxable value of all unclassified benefits provided to all employees in the last four quarters (including the current one) has not exceeded $22,500.
It is worth noting that for the second test, the threshold is assessed across all associated members of the employer’s group.
If the first threshold is exceeded for a particular employee, but the second is not, then FBT will only apply to the benefits provided to that particular employee. However, if the second threshold is exceeded by the group at any point during the assessment period, then FBT will be due on all unclassified benefits (including the first $22,500 of benefits), irrespective of whether the first threshold was met.
If you have any questions at all about how the FBT rules should apply to your business, or you would like to know more about how the new FBT rate changes could impact your FBT costs going forward and the practical steps you can take to minimise this, please reach out me, or your usual Deloitte advisor.
April Tax Alert contents
- Changes to the property tax landscape
- Latest tax legislation solves some problems you didn’t know you had
- Feasibility issues no more?
- OMG my tax return is wrong
- Is tax pooling still relevant for managing your tax payments?
- Recapping Deloitte’s FBT and employment taxes webinar – key things you need to know under the 39% rate
- Snapshot of recent developments