Gearing up for FBT season…
Tax Alert - May 2017
By Mike Williams and Matthew Ensor
With the fourth quarter Fringe Benefit Tax return for the year ended 31 March 2017 due by 31 May 2017 now is the time to get up to speed with legislative changes and consider the areas that Inland Revenue are focussed on.
Keep it clean, get it right
Inland Revenue continues to place a strong focus on employment taxes, and we know that Inland Revenue officers are specifically looking at common FBT errors and FBT “risks” in the SME population (real or perceived). Additionally, there have been a number of changes in legislation that may affect how you prepare your FBT return.
To help you get it right we have outlined below relevant changes, common errors and areas of Inland Revenue focus:
Earlier in the year there was major Inland Revenue focus on employers who take out group life insurance, disablement and trauma insurance policies. A number of employers were contacted and asked to explain their approach to the FBT treatment of such policies. Whilst there are some technical arguments as to why certain life insurance policies are not held for the benefit of the employee and therefore not subject to FBT, Inland Revenue holds a clear view that any policies are subject to FBT where the employee (or the employee’s family) will receive directly or indirectly any claim proceeds. In many cases this led to increased FBT liabilities in settling with Inland Revenue (or the prospect of a costly technical and legal argument if the position was to be pursued).
In a further change which applies from 1 April 2017, the FBT treatment of life insurance premiums has been standardised to ensure that all life insurance premiums are treated as specified insurance premiums. Certain life insurance policies previously did not meet the definition of a specified insurance premium and were therefore considered an unclassified benefit such that the de-minimis exemption might apply. This means that going forward the de-minimis exemption will not apply to life insurance policies.
Landing on free parking
Inland Revenue released a public ruling in December 2015 clarifying and updating its operational position for the on premise exemption for carparks. Following this there is the potential to reduce FBT liabilities if the right to use employer provided carparks is “in fact or effect substantially exclusive”. As a minimum the carparks must be reserved, specific car spaces. Now is a good time to consider your car parking contracts to determine whether the new position will apply to you even if your agreement is stated as a license arrangement. From our experience there is the potential to claim back significant FBT from prior years and real savings to be had going forward by looking more closely at the substance of a car parking agreement rather than just the words used.
Inland Revenue are increasingly focussing on the FBT implications for motor vehicles provided to employees. Motor vehicles often make up the largest portion of an employer’s FBT liability and are also one of the main areas where we come across issues. Inland Revenue has issued a draft Interpretation Statement regarding the FBT treatment of motor vehicles, aiming to clarify and consolidate the Inland Revenue’s operational positions in a number of areas. With this in mind, we would recommend the below issues are considered leading up to the 31 May deadline:
- Work-related Vehicles – We have seen an increased attention by Inland Revenue on work-related vehicles. They have been the subject of recent Inland Revenue activity with the focus on the type of vehicle, availability for private use and the subsequent policing of any non-usage policy. A work-related vehicle will generally not be subject to FBT. However in order to fall under this definition the vehicle must not be designed principally to carry people and cannot in fact be used for private purposes. It must also be permanently sign written with the employer’s logo.
- Travel between home and work – In the first instance any travel between home and work is considered to be private use of a motor vehicle. Should an employer deem that an exemption to this general principal exists and that there is no private benefit to the travel, the onus of proof will be on the employer to demonstrate and document this position. Some examples of this may be that an employee’s home may also be a specified workplace and therefore no FBT attributable where there are sound business reasons for the work to be performed at home (and therefore the need for the travel to home with the vehicle). Alternatively, there may be valid reasons (i.e. security) for a vehicle to be stored at an employee’s home.
- Documentation – As alluded to above it is important that sufficient documentation and policies are regularly maintained and followed. Specifically, where vehicles are prohibited from being used by employees for private use, this should be clearly documented as the onus of proof will fall on the employer. Suitable documentation could be a provision in the employee’s contract or a letter to the employee. If in practice a prohibition on private use is not followed and the employer is aware of the private use, the employer is liable to pay FBT. It is important to review this periodically to make sure what is recorded stacks up, and that appropriate documentation and logs are maintained to support the tax position taken.
- Motor Vehicle FBT value – There are a couple of nuances to look out for when calculating the fringe benefit value and the most common error we see is when apportioning the benefit value for the number of days the vehicle is unavailable for private use. If FBT is paid quarterly, the apportionment factor should always be applied over a standard 90 days.
- Calculation of available days – Where a vehicle is made available to an employee for their private use, the vehicle is considered available and subject to FBT irrespective of whether the vehicle is actually used. For example, if an employee travels overseas for a holiday, although the vehicle cannot be used by the employee, the vehicle will still be considered available as there are no employment restrictions preventing use. There are some specific exclusions for non-usage days such as the vehicle being used for business travel away from home for a period exceeding 24 hours, emergency call outs, or the employee going overseas for business for more than 24 hours (where no member of the family can use the vehicle in their absence). These can reduce the number of days a vehicle is available for personal use.
Applying the de-minimis exemption for unclassified benefits
There is an exemption from FBT for unclassified benefits provided to employees provided a de-minimis threshold is not exceeded. The current de-minimis threshold is $300 per quarter per employee or $22,500 per employer over the last 4 quarters for all employees. This calculation is a rolling quarterly calculation. In practice we find this opportunity is missed completely or the rolling quarterly calculation of the threshold is not done correctly.
Further, the de-minimis threshold applies across all associated entities and not on an entity-by-entity basis, regardless of whether or not the entities are providing benefits to the employees of another entity. 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.
Washing up errors in Q4
We are aware of the temptation to correct prior quarter errors in a “wash-up” calculation in the final quarter FBT return. Technically correction of prior quarter errors can only be done in a later quarter where the total adjustment to FBT does not exceed $500 (a recent law change means for quarters beginning after 1 April 2017 this threshold has increased to $1,000).
There is evidence that Inland Revenue is beginning to clamp down on this “wash-up” practice. Therefore when preparing your final quarter returns ahead of 31 May 2017 it is important to ensure that if any errors are corrected that they fall below this threshold. Anything above the relevant threshold should be corrected through a voluntary disclosure.
Annual filing threshold
Small employers have the option of filing FBT returns annually. For the 2017 income year 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 $500,000. 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 that fringe benefits arise). If an election has not been made, a small employer will still be required to prepare quarterly returns. From 1 April 2017 the annual filing threshold will increase to employers whose gross PAYE and ESCT contributions do not exceed $1,000,000.
To attribute or not, that is the question
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 employer.
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 at the lower rate of 42.86%.
Now is the perfect opportunity to consider the use of “off the shelf” FBT software. These simple solutions can streamline the FBT process, help reduce errors and ultimately save valuable time and money.
If you require assistance with your final quarter/yearly calculations or wish to explore the benefits of an FBT health check further, please contact your usual Deloitte tax advisor.
May 2017 Tax Alert contents