What is fringe benefit tax (FBT)?

As a business owner, providing extra perks to your employees like a company car, entertainment, or even discounted goods can be a great way to attract talent. However, these perks can come with additional tax obligations, specifically Fringe Benefits Tax (FBT).​

FBT is separate from income tax and can be complex if you're not familiar with the rules. In this guide, we’ll break down the essentials of FBT including what it is, when it applies, and how to stay compliant while offering benefits to your team.​

A fringe benefit is where an employee receives a non-cash benefit in their role as an employee. The most common non-cash benefits are:​

These benefits are subject to fringe benefits tax (FBT) which is separate to income tax and calculated on the taxable value of the fringe benefit.​

FBT exists to prevent employers reducing the tax liability of employees by providing benefits not recognised as income.​

Here’s a simple example showing the difference between two employees receiving the same remuneration value, but in different forms.​

Jane receives a gross salary of $85,000. Before it gets into her hands, the employer has deducted $17,927.50 income tax (as part of PAYE) and pays it directly to Inland Revenue.​

John receives a salary of only $65,000 and has the use of a company vehicle valued at $20,000. The employer has deducted $11,200.50 income tax (as part of PAYE) and paid it to IRD.​

Inland Revenue think it's not, so Fringe Benefit Tax aims to square things up.​

Wages are subject to PAYE which the employer deducts on the employee’s behalf, so the employee pays tax (and ACC earner's levy) on wages, based on their level of income.​

In the previous example, Jane pays income tax of $17,297.50 and John pays $11,200.50.​

The employer pays Fringe Benefit Tax to Inland Revenue at a rate of 63.93% per annum, plus any necessary adjustment to account for John's tax rate, the days the vehicle wasn't available to him to use (perhaps while travelling or at the mechanics), and any contribution he makes.​

View IRD's FBT calculators (yes there are three!)​

The employer files the FBT return either quarterly or yearly. ​

The return requires details of the employee, the benefit provided and its value, and whether or not the employee has contributed anything for the benefit.​

This is often called a “motor vehicle reimbursement”.​

If a company vehicle is available for a shareholder-employee, it’s still a non-cash benefit. However, instead of filing FBT returns and paying Inland Revenue, your accountant will make an adjustment at year-end. No physical money needs to change hands.​

In short, the shareholder-employee pays the company for this benefit, which the company must include within its taxable income.​

You can read more about companies, shareholders, and vehicles in our blog What motor vehicle expenses can I claim for my business?​

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 already taxed through the PAYE system and aren’t subject to FBT.​

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 reimbursement. The company records this as a tax-deductible expense.​

Reimbursements aren’t included within the FBT regime.​

Provided these are less than $300 (excluding GST) per quarter, per employee, these costs are exempt from FBT. (The maximum across the company for all employees is $22,500).​

The nature of the expense will impact whether or not it’s tax-deductible to the company. Check out our short-and-sweet blog here.​

With the FBT rate at 63.93%, many employers are wondering if the paperwork and tax payments are worth it.​

The 63.93% applies to all employees, even those whose highest tax rate is 17.5% – it’s cheaper for the employer to increase wages, rather than pay FBT.​

Consider the following options:​

At Beany, we handle everything accounting-related such as annual compliance, bookkeeping, financial insights and strategy.​

We prepare and file FBT returns as an add-on service to clients who need to report fringe benefits to the IRD.​

If you're looking for an accountant to partner with your business, book a call or get in touch to discuss how we can help.​