What is FBT?
Fringe benefit tax was created by the IRD to make sure that employees were not being ‘paid’ via benefits such as the company car, without tax being paid. So for every benefit that an employee gets, and this includes shareholder employees, tax must be calculated and paid over to the IRD. The most common benefit is the company car and has long been a source of irritating compliance for both the shareholders, and their accountants!
What are the Issues?
Up until now, the correct process has been to register for FBT and file returns to account for the Fringe Benefit if a vehicle is ‘available’ for private use. Many business owners have a poor understanding of the meaning of ‘available’ and, as a consequence, we have many clients who should be registered for FBT but aren’t. Available in this context means that it is available for use – even if you don’t use it. So potentially you could have a car standing idle for the weekend, but if you could use it, then tax is payable.
Of those that are registered, some are on quarterly filing and some on Income Year and the calculation can be quite complex. You have to know the available days, the cost price of the car and the appropriate tax rate.
You can be overpaying tax on your benefit
Of those that are not registered, many accountants made a year-end private use adjustment for the Fringe Benefit value of the vehicle. This treatment is accepted by IRD. In most cases, the Fringe Benefit adjustment is higher than the actual private use benefit to the client in real terms. Effectively this adds income to your business on which you must pay tax.
What is the Change?
From 1 April 2017 IRD have made a concession and now allow shareholder-employees to use the logbook method for calculating private use of a company vehicle, which up until now was only available to Sole Traders and Partners. The client keeps a logbook for 3 months every three years to determine the private use percentage and we use this to calculate the private use adjustment at year end.
This has two main advantages to you. It will probably reduce the amount of tax payable overall as it is less onerous than the ‘availability’ test.
We would encourage as many clients as possible to move to this new method as, in the vast majority of cases, it will save you tax and reduce the complexity of the calculation.
Please contact our team at email@example.com if you want to know how to make the change.