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The danger of washing up FBT in the final quarter

December 2015 Tax Alert

By Mike Williams and Conor Gates

With Christmas coming and some leave periods extending late into January it is a timely reminder to consider your fringe benefit tax return for the quarter ending 31 December 2015 (due by 20 January 2016) to make sure someone is around to prepare the return accurately and correctly.

We also have a cautionary tale to tell relating to the preparation of FBT returns, and the accuracy of the benefits declared.  Many taxpayers make adjustments in later returns or rely on the final return of the year to wash up any discrepancies arising in previous quarters.  It is important to bear in mind that Inland Revenue’s view is that each FBT return should be correct in its own right and that the final quarter attribution calculation is only a means to determine the appropriate rate of FBT for each employee based on their level of earnings and benefits received throughout the year. Whilst it is acceptable to use the final FBT return of the year to pick up any earlier discrepancies, such revisions are only allowable up to a level of $500.

When the final quarter calculation is used to recoup tax on benefits over-declared in previous quarters or to report benefits under-declared (or omitted entirely) from previous quarters there is an exposure to shortfall penalties that can have implications extending further than the year in question.

A shortfall in tax arises where benefits are initially omitted and subsequently included in the final quarter wash up, as tax was underpaid in the quarter the benefits were omitted from.  Similarly a shortfall arises in the final quarter where benefits are backed out in the wash up calculation as tax is underpaid in the final quarter (despite having effectively been pre-paid when initially over-declared).  Penalties equal to 20% of the tax shortfall can be imposed on the basis that reasonable care was not taken in preparing and submitting the FBT returns if Inland Revenue identifies a shortfall - even if the shortfall is disclosed by the taxpayer as part of a voluntary disclosure.

It should be noted that penalties can be reduced by 50% for a taxpayer’s previous good behaviour or entirely if a voluntary disclosure is made before notification of any audit.

Inland Revenue’s view is that if a taxpayer identifies any errors in previous returns, that they should be amended by issuing a Notice of Proposed Adjustment (NOPA) which can be filed up to 4 months from the date that the quarter is assessed.  Where a NOPA is not issued in time, the taxpayer is potentially exposed to shortfall penalties.

While 20% is not necessarily a significant penalty (which may be fully remitted where a voluntary disclosure is filed), if Inland Revenue identifies and imposes such penalties, a black mark is put against the taxpayer’s record for the next two years.  If the taxpayer is then found to have not taken reasonable care again and has a shortfall on the same tax type, the ability to reduce future penalties is significantly impacted (though voluntary pre-notification disclosures can still be made). 

We understand that Inland Revenue has a budget and a mandate to look more closely at FBT compliance and we are increasingly seeing more and more questions relating to FBT and other employment taxes in Inland Revenue’s investigations or audits.

The best way to avoid running into problems with Inland Revenue is to develop robust processes around collecting and reporting details of fringe benefits provided to employees – prevention is better than cure!

If you have any questions or concerns regarding FBT or other employment taxes we recommend you contact one of the authors or your usual Deloitte tax advisor.

Tax Alert December 2015 Contents

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