The Fringe Benefit tax (FBT) rules are complex and often misunderstood by employers. FBT seeks to tax all non-cash benefits provided by an employer to an employee or shareholder-employee as a result of their employment, with the obligation to return the tax falling on the employer. One simple error or misunderstanding of the treatment of a particular benefit, overlooked for a number of years can unknowingly lumber the taxpayer with a hefty tax bill with potential penalties and interest to boot.
With such mistakes creating lucrative windfalls and easy wins for the IRD, it is then no surprise that there has been an increase in the number of FBT focused IRD enquiries and Audits.
With this in mind, we have compiled a list of the top 5 common mistakes that arise in relation to the operation of FBT and how you can avoid them. Taxpayers will be glad to know that it is not all bad news - we have also listed the top 5 opportunities that taxpayers may be able to benefit from.
Top 5 - Common Mistakes
- Motor Vehicles
A fringe benefit does not arise if the vehicle can be classed as a “work related vehicle” and is used only by the employee to get to and from work or undertake travel incidental to employment. A vehicle can qualify as a work related vehicle where it is not a passenger car and the employer’s logo or company name is prominently and permanently displayed on the vehicle.
If an employer is claiming that a vehicle is a work related vehicle and the employee, while they store the vehicle at their home, is not entitled to private use of the vehicle on the weekend, a fringe benefit should not arise. This is provided the employer ensures that employees are informed in writing that the vehicle is not available for any private use other than to and from work. In addition, the employer must carry out periodic checks to ensure the employee is not using the vehicle for private use.
There are reports of IRD scanning car parks at beaches and parks on weekends and taking note of the registration of vehicles with prominent company logos and branding which allows them to easily cross check against the taxpayer’s records.
- Shareholder-Employees – Motor Vehicles
In the case of benefits provided to shareholder-employees, additional rules need to be navigated.
For example, employers need to watch the situation where a shareholder-employee who has a controlling interest in the company has access to a motor vehicle. In the absence of adequate documentation to support otherwise, IRD can assume the vehicle is available for private use.
- Shareholder Loans
A fringe benefit can arise on an overdrawn shareholder loan account where the interest charged is less than the prescribed rate of interest for that quarter. This can oftentimes be missed until the annual accounts are prepared.
- FBT or PAYE?
Employers may know that tax has to be paid on a particular benefit provided to employees but may not know if the benefit should be taxed though the PAYE regime or be subject to FBT.
Generally speaking, any monetary remuneration i.e. cash will be subject to PAYE and any non-cash benefits or benefits not able to be converted to cash will be subject to FBT. The exception to that rule is where free accommodation and board are provided – this is dealt with through the PAYE regime.
If FBT is paid on a benefit that should have been processed through the PAYE regime, there is a time delay in the payment of the tax to IRD given that PAYE is paid monthly and FBT is paid quarterly or annually.
If this happens, use of money interest may apply.
FBT is required to be calculated on the GST inclusive amount of the benefit. In addition, the provision of a benefit is a supply for GST purposes and the employer is required to account for GST and disclose this in the FBT return and make payment to the IRD along with the FBT payable. A common error is to claim this GST through the next GST return, but in fact the GST is deemed a personal expense and therefore not claimable.
Top 5 – Potential Opportunities
- Motor Vehicles – Switching to the reducing tax value method of accounting
If a business owns or leases a motor vehicle which is made available to an employee for private use, FBT is calculated based on the original cost of the car. If the business has owned or intends to own the motor vehicle for five years since FBT was first payable on the car then there may be a tax saving available by simply switching to a different method of accounting for FBT.
Take for example a car purchased for $80,000. A business using the cost method would calculate FBT based on a value of $16,000 per annum i.e. 20% of the cost price. However, using the reducing book value after year 5 of owning the vehicle and paying FBT on it, a business may use the tax written down value of the car (subject to a minimum written down value of $8,333) in order to calculate FBT. In this case this represents an annual saving of $3,775 (assuming an annual rate of 49.25% applies to the benefit).
- Tax free allowance to employee where they use their own car for business use
Rather than providing a company car which the employee can use personally it may be more beneficial to reimburse an employee for using their own personal car for business use, potentially tax free. Reimbursement can be based on IRD mileage rates or based on actual costs. IRD mileage rates for the 2015 income year have been reduced to 74 cents (77cents for 2014). The mileage rates can be used up to a maximum of 5,000km of work related travel per year – anything claimed in excess of this needs to have a record of the actual vehicle expense.
- Rate of FBT
Many employers apply the single rate of 49.25% on all benefits provided to employees and employee-shareholders as the alternate rate option requires detailed calculations and a higher level of record keeping. However, if some of your employees earn $70,000 or less than this is effectively overtaxing them and the use of the alternate rate, which ensures benefits are taxed at an individual’s marginal tax rate, may be more beneficial.
- De Minimis Exemption-Unclassified Benefits
Unclassified benefits, such as employment related gifts and prizes and free and subsidized goods, with a value of less than $300 per employee per quarter may be able to be made tax free provided the employers total unclassified benefits in the previous four quarters does not exceed $22,500 (regardless of the number of employees).
Employer’s cash contributions to an employee’s superannuation scheme are not subject to FBT provided the scheme is a registered scheme under the Superannuation Schemes Act 1989 or is a KiwiSaver. A common error is to treat these contributions as subject to FBT.
Employers will still however, be liable to pay employers superannuation contribution tax (ECST) on employer superannuation cash contributions or KiwiSaver contributions that exceed the exemption threshold level. These are taxed at progressive rates equal to the employee’s marginal rate of income tax.
Penalties and Interest
For all non-cash benefits granted to employees, thorough documentation and communication to the FBT or payroll administrator for the business is essential. Following what method or treatment was used last year could prove detrimental as rules, rates and additional benefits may have been granted in any particular year.
Failure to meet your employer responsibilities by incorrect or non-compliance of FBT will potentially result in penalties and use of money interest on top of the actual tax due. An amount of FBT not paid on time attracts an initial penalty of 1% the day after the due date and 4% seven days after the due date with an incremental monthly penalty of 1% on top of the taxes, penalties in addition to any use of money interest due.
In addition, FBT has an impact on other taxes, in particular GST and income tax. If FBT has not been operated correctly, then it is likely your income tax and GST position may also need to be reviewed. In addition any penalties imposed are not deductible for income tax purposes.
Concerned about your tax position – we can help!
So, what can you do if you have discovered that FBT has not been returned on certain non-cash benefits you have provided to your employees or an error was made in applying the rules?
Firstly, don’t panic! There are a number of options available to the taxpayer to allow them to rectify their position depending on the level and class of the mistake.
Secondly, don’t ignore the problem! If you have concerns, talk to your accountant as soon as possible as they will be able to advise the best course of action. Dealing with the issue as soon as it arises may also be looked upon favorably by the IRD in the event a voluntary disclosure is made. The benefit of making a voluntary disclosure is that penalties can potentially be mitigated by 100% provided the disclosure can be regarded as full and true – this is key.
As the old adage goes, prevention is better than cure. RSM New Zealand have extensive experience in preparing voluntary disclosures, carrying out tax health checks and pre-Audit reviews, and advising clients on their best course of action once they are in the Audit space. Don’t be caught out! A health check will not only provide the taxpayer with peace of mind that their tax affairs are in order, but it may also uncover opportunities that the business can exploit to make tax savings.