Wondering if is FBT fair? Well, it depends! Is it fair to the employee, other employees, the employer, other taxpayers, or all parties? We explain the reasons, the financial impact, and simple example below, without getting too technical.

In real life, companies could have many employees receiving all types of benefits, which result in complex calculations. We won’t get into details here, but Inland Revenue has! Its 50-page guide can be found here (or you can ask your accountant).

Fringe Benefit Tax (FBT)

A fringe benefit is where an employee receives a non-cash perk as part of their job. The most common are:

• Use of a company vehicle for personal purposes
• The company paying health and other insurances
• The company paying for gym membership
• Low-interest (or interest-free) loans

FBT only applies to companies, not sole-traders, trusts or partnerships.

The questions arise – why are these benefits taxed? And, who pays it?

Example

Let’s compare two employees receiving the same remuneration value, but in different forms.

Jane

Jane receives a gross salary of $105,000. Before it gets into her hands, the employer has deducted $25,570 PAYE and pays it directly to Inland Revenue. Jane receives the net amount of $79,430, and the employer claims the expense of $105,000.

I think we’re all OK with this.

John

What if John receives a salary of $65,000 and has the use of a company vehicle valued at $40,000? He can take it home, drive to and from work, and take personal trips.

• Under the PAYE system, John pays $12,520 tax, receiving a net salary of $52,480. 
• The company can claim expenses for his $65,000 wages plus costs associated with owning the vehicle – including fuel, insurance, tyres, depreciation, WOFs, and repairs.

Fair? Debatable, and it depends on who you ask. 

The purpose of FBT is to level the playing field with employee remuneration.

Who pays?

The company. Every quarter or every year, the company calculates the value of the non-cash benefit (for example, the use of the vehicle). The FBT return is filed with Inland Revenue and the company pays tax at 49.25% or 63.93% depending on the situation. For a vehicle that cost $46k (including GST), the company pays a minimum of $4,531 to Inland Revenue.

The company records as a business expense and can claim for GST.

Employee

Wages are subject to PAYE which the employer deducts on employee’s behalf. 

In the previous example, Jane pays $25,570 and John pays $12,520.

John does not pay any tax on his use of the company vehicle.

Shareholder-employee

The situation for shareholder-employees can be slightly different. Even if they’re an employee of the company, the FBT rate is 63.93%, not 49.25%. Yikes! 

Also, it may not be necessary to include the shareholder-employee benefits in the FBT return – more on this below.

Employer 

The employer pays Fringe Benefit Tax to Inland Revenue at (usually) 63.93% per annum and adjusting for the days the vehicle wasn’t available for him to use (perhaps while in the workshop), and any contributions John makes.

This link will take you to the IRD calculators to get an indication of FBT companies would need to pay under differing circumstances.

When is FBT payable?

The company must pay usually in the month following the filing date.

FBT on motor vehicles for shareholder-employees

This is often called a “motor vehicle reimbursement”.

If a company vehicle is available for a shareholder-employee, it’s also a non-cash benefit. With this perk, the shareholder-employee doesn’t need to purchase their own vehicle or pay fuel, insurance, services, etc. 

Instead of filing FBT returns and paying Inland Revenue, your accountant can make an adjustment during the year. It’s a non-cash transaction.

Unlike filing an FBT return and paying Inland Revenue, your accountant can make an adjustment during the year. It’s a non-cash transaction and reflects the amount the shareholder-employee pays the company. The company must include this as taxable income.

The shareholder cannot claim this as an expense in the personal tax return.

As mentioned above, the FBT calculation is 63.93%, so the total of the motor vehicle reimbursement is $5,881, including GST. 

What about allowances?

Employee allowances are usually a fixed amount and can be used to cover the employee’s accommodation, meals, internet, phones, clothing, and fuel. These are paid and taxed through the payroll system and aren’t subject to FBT.

And reimbursements?

Reimbursements are where the employee pays a bill on behalf of the company. The most common are accommodation and fuel.

The employee provides a receipt to the employer and receives the money back. The company records this as a tax-deductible expense.

Reimbursements aren’t included within the FBT regime.

Vouchers and gifts

Provided these are less than $300 (excluding GST) per quarter, per employee, these costs are exempt from the FBT regime.

The nature of the expense will impact tax deductibility for the company, and the amount of GST claimed.

Other options

With the increase of the FBT rate from 1 April 2021, many employers are now wondering if the paperwork and tax payments are worth it.

To avoid falling into the FBT-tax regime, the company could consider the following options:

• Sell the company vehicle to the employee and use the reimbursement or allowance options
• Increase wages to allow employees to pay for gym memberships (for example) themselves
• Provide a gift or voucher which costs less than $300 per quarter, per employee.