Inland Revenue targeting FBT – Are you ready?
Tax Alert - September 2017
By Sarah Kennedy and Erika Horlor
Inland Revenue has increased its activity in the FBT space and we have seen substantially more FBT risk reviews than in previous years. This highlights Inland Revenue’s focus areas from an FBT perspective. Gone are the days of assuming having a small FBT obligation meant being out of the firing line. In addition to large employers we have also experienced small employers who provide a couple of vehicles and Christmas gifts to employees being targeted by Inland Revenue.
Having your FBT in order before a risk review pays off
We have found that providing more detail than requested by Inland Revenue Investigators upfront meant the risk reviews were cleared quickly.
We had substantially less questions from Inland Revenue where we were able to provide the Investigator with a covering letter outlining an overview of what benefits were being provided and being upfront with any issues we had identified. This meant less time commitment from clients.
Make sure your documentation is up to scratch
In our experience of FBT risk reviews, Inland Revenue requests detailed documentation. For example, in relation to motor vehicles, Inland Revenue wanted to see documentation such as restriction of use policies to substantiate unavailability for private use, log books, and proof of internal checks to ensure the employer was actively monitoring the use of the vehicles provided to employees. It is important to have this documentation in place before Inland Revenue come calling.
Inland Revenue will use external sources of information
Inland Revenue are also using other resources to assist their data collection. For example, vehicles on which FBT was returned were compared against not only client provided fixed asset registers but also NZTA registration records. This demonstrates that reviews of vehicle ownership and a reconciliation to FBT paid is a process that should be undertaken regularly.
Get your calculations right
We have seen Inland Revenue re-calculate day availability, re-compute the fringe benefit value calculations to check the accuracy of the underlying calculations, and then seek to re-assess FBT returns over, in some cases, minimal amounts of tax. Make sure you are giving thought to the calculations and being mindful of the precision of record keeping to support the underlying calculations. Errors in excel spreadsheets are more common than anyone would like to admit. The risk of error is reduced with the use of FBT software, but the output is only as good as the quality of information inputted.
Make sure you get the PAYE / FBT distinction right
We found a number of instances where there was a misunderstanding of whether compensation provided to employees should be taxed through payroll, or should be subject to FBT.
The general rule is that if the employee is contractually obliged to pay for something but the cost is met by the employer (excepting genuine business expense reimbursements), it is subject to PAYE. Generally where the employer is obliged to pay for the item provided to the employee, then this will be subject to FBT.
This is particularly important for employers not returning any tax on the basis that the benefit is excluded from FBT under the FBT de minimis threshold. Examples of this included a provision of health and wellbeing benefit via an expense claim mechanism, and reimbursement of private taxi/Uber expenses. In both of these examples, clients thought these benefits were subject to FBT and under the de minimis threshold, but they should have been subject to PAYE, as the contractual obligation for these expenses was with the employee.
This issue is not limited to situations where tax is going unpaid. We expect increasing focus on tax being paid under the correct tax type as Inland Revenue moves through business transformation and focuses more on the accuracy of payroll information. This means it is important the contractual arrangement of each benefit provided to, or paid on behalf of, employees is understood by the business’s FBT return preparer and payroll preparer respectively.
FBT on motor vehicles is a tricky area
FBT on motor vehicles is difficult to get right. In addition to having the correct documentation, two key points to note were:
- Holidays and availability for private use: The general rule is that where staff go on holiday and park the car at the long-term airport parking, the vehicle is considered to be still available for private use. This is contrasted with the situation where an employee takes a vehicle on a business trip, and the vehicle is not considered to be available for private use during this time.
- Cost base of vehicles: Make sure you check the calculation for the FBT value of vehicles is correct. For example if using the cost option, make sure you use the GST inclusive cost base for the taxable value. Additionally it is worth checking whether there is the opportunity to decrease the amount of FBT payable by switching older vehicles to the tax book value methodology, but make sure you don’t go below the minimum taxable value of $8,333.
The Interpretation Statement seeks to combine a number of Inland Revenue publications on FBT on motor vehicles. There is an emphasis on the concepts of availability for private use, and it also provides a useful case study type illustrative example throughout the document.
If you think your business could be due for an FBT health check or you require assistance with a specific FBT matter, please contact your Deloitte tax advisor.
September 2017 Tax Alert contents
- New Zealand makes BEPS announcements
- Deloitte 2017 BEPS Global Survey
- Election 2017
- Do your contracts comply with the new Transfer Pricing Guidelines
- Inland Revenue targeting FBT – Are you ready?
- Get your GST matters right before settlement
- Survey shows room for improvement in the way New Zealand taxes business
- A snapshot of recent developments