Fringe Benefit Tax season is coming – helpful tips and tricks to surviving Quarter Four FBT returns
Tax Alert - March 2022
By Andrea Scatchard & Aaron Mitchell
In the current COVID-19 economic environment, most businesses are considering ways to reduce costs. One area that is often overlooked is fringe benefit tax (FBT), with many employers unaware of the number of different calculation options and potential exemptions that may be available to them. With the recent increase in FBT rates and the March 2022 fourth quarter (Q4) FBT returns due by 31 May 2022, now is an opportune time for employers to look at their FBT arrangements. Read on for a brief overview of tips and tricks as well as common pitfalls employers should be aware of when preparing Q4 FBT returns.
We would also like to invite you to our free webinar on FBT and employment taxes, presented by a team of FBT and payroll experts from across our Deloitte New Zealand offices, on Tuesday 5 April 2022 at 10.00am . Please register for this event here .
1. Consider whether to perform a fourth-quarter attribution calculation
As noted in our earlier article, from 1 April 2021 the top FBT rate was raised to 63.93% (in conjunction with the top marginal tax rate increasing to 39%) with the pooling rate increasing to 49.25% (previously 42.86%). Prior to this change, a large number of employers were using the single rate option to pay FBT on all benefits provided at a flat rate of 49.25%. However, the increase in FBT rates has prompted many employers to look at using the various alternate rate options that are available for use in the March FBT quarter. The full attribution calculation is complicated but broadly aligns the FBT rate that applies to benefits provided to each employee with the employee’s marginal tax rate. There are lower compliance cost options also available although these generally will not generate the same level of FBT saving.
Our experience shows employers can and do save material amounts when going through the full attribution exercise and now more than ever it is something employers should consider. 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 49.25% rather than paying FBT on all benefits at the flat rate of 63.93%.
2. Motor vehicles – calculation of exempt days
Employers should ensure that the correct number of motor vehicle exempt days are being used when calculating FBT each quarter.
A common error we see is FBT being returned based on 90 private use days every quarter and not taking account of any days where the motor vehicle was not available for private use. At the other end of the scale, it is also common for exempt days to be claimed without the necessary support for the exemption being held. Employers should ensure that all available exempt days for motor vehicles provided are claimed and should review their motor vehicle policies regularly to determine whether there is an option to reduce the availability for private use.
Given that there have been several lockdowns during the last year, employers should also consider the impact of these on their FBT liability. Inland Revenue has confirmed that the normal FBT treatment of motor vehicles will apply during Level 4 lockdown periods, i.e. vehicles are typically still available for private use even though opportunities for the employee to privately use the vehicle are restricted under Level 4 settings. For employers, this means that unless you have a specific arrangement with your employees to make the vehicles unavailable for private use during the Level 4 lockdown period (i.e. employers have issued letters restricting private use of motor vehicles during the period, or employers have required company cars to be left on site for lockdown), FBT will continue to be calculated on the motor vehicles as normal. A similar position applies during the COVID-19 protection framework ‘red’ settings.
3. Motor Vehicles – Work-related vehicle (WRV) exclusion
Not all business vehicles are work-related vehicles for FBT purposes. To qualify, the vehicle must not be principally designed to carry passengers, it needs to be permanently and prominently sign-written with the company logo, the employee is required to take the WRV home for business reasons and is prohibited from any private use other than travel to and from work.
The operation of the exclusion is also dependent on regular checks being undertaken to establish that the private use restriction is adhered to. A material shortfall in FBT can arise where vehicles have been treated as not subject to FBT, but they fail to meet all of the WRV requirements and so the exclusion does not apply.
4. 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 exemption is either missed completely or the rolling quarterly calculation of the threshold is not done correctly.
Further, associated employers must be grouped to determine whether the thresholds are exceeded (i.e. if together two companies in a group exceed the $22,500 threshold, then both companies are unable to make use of this exemption, even if one or both of them are under the threshold in isolation). This is a particular risk where there is limited or no information sharing between entities in the group.
5. Annual filing threshold
Small employers (those where total gross PAYE and ESCT contributions for the previous year were less than $1,000,000) have the option of filing FBT returns annually. 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 2021 will still be required to prepare quarterly returns for the 2022 FBT year, even if they have not yet registered for FBT.
6. Insurance premiums – subject to FBT or PAYE?
Determining whether insurance premiums are subject to the FBT or PAYE regime is a common issue we see, and while the core tax should be roughly the same under either option, PAYE will be more costly once associated deductions such as KiwiSaver, student loans etc are taken into account.
As a general rule, where an insurance policy is taken out by an employee, but the employer pays the premiums on the employee’s behalf or reimburses them, the premiums should be subject to PAYE. On the other hand, 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.
For further information on this, please refer to our July 2018 article on this topic.
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. Our December 2021 article highlighted these issues in relation to Christmas gifts and parties.
It is important to get the treatment correct as there can be different outcomes under the different regimes, for example, there may be a possible exemption in the FBT regime which is not replicated for PAYE purposes.
8. GST-inclusive Employee Benefits
All fringe benefits need to be calculated on a GST-inclusive basis. If you are relying on a general ledger amount to determine the taxable benefit, remember it will usually be a GST-exclusive amount and so will need to be grossed up for GST, if GST was charged and claimed on the cost.
Employers should also ensure they identify fringe benefits which do not give rise to the additional GST liability in the FBT returns, such as life insurance and low-interest loans.
9. 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, so it is important to identify these and include them in your FBT calculation. This can include employees personally paying for fuel or other expenses for the company car in which case you need a process to gather this information.
10. Treatment of electric vehicles/chargers
The Government’s focus on increasing the number of electric vehicles (EVs) in use has led to many employers now incorporating EVs into their vehicle fleet. Some employers allow personal use of onsite EV chargers, and others are installing EV chargers at employees’ homes to allow fast charging at home.
With the EV revolution in its early stages, it can be easy to overlook the tax considerations that an EV strategy may have and which should be factored into any decision-making process. For example, is the cost of employer power used to charge an employee’s personal vehicle taxable? Or can the employer reimburse tax-free the cost of an employee’s power used to charge a company car at home? If you need help answering these or similar questions, we recommend you seek help from your friendly Deloitte tax advisor.
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.
March 2022 Tax Alerts
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- A glance over the Tasman Sea for future GST compliance activity in NZ
- COVID-19 Support Payments Explained
- A New Zealand Income Insurance Scheme – What does this mean
- Going digital
- Fringe Benefit Tax season is coming – helpful tips and tricks to surviving Quarter Four FBT returns
- Draft COVID-19 guidance provides a refresher on tax deduction rules
- 10 Tax System Insights
- Snapshot of recent developments