In reality, companies could have many employees receiving all types of benefits, which result in multiple (and complex) calculations. We won’t get into that, but Inland Revenue has! Its 43-page guide can be found here.
▶ Fringe Benefit Tax
▶ Who pays?
▶ When is FBT payable?
▶ FBT on motor vehicles for shareholder-employees
▶ What about allowances?
▶ And reimbursements?
▶ Staff shouts, vouchers, gifts
▶ Other options
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:
- Private use of a company vehicle
- 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.
The questions arise – are these benefits taxed, and who pays?
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 $18,970 PAYE and pays it directly to Inland Revenue.
- Jane receives the net amount of $66,030, and the employer claims the expense of $85,000.
I think we’re all OK with this.
What if John receives a salary of only $65,000 and has the use of a company vehicle valued at $20,000?
- Under the PAYE system, John pays $12,520 tax, receiving a net salary of $52,480. He also has the use of the vehicle.
- The company can claim expenses for his $65,000 wages and costs associated with owning the vehicle – including fuel, insurance, loan and interest payments, maintenance, WOFs and repairs.
Fair? We think not, and more importantly, Inland Revenue thinks not.
Fringe Benefit Tax aims to square things up
Wages are subject to PAYE which the employer deducts on employee’s behalf; so the employee pays tax on wages, based on his or her level of income.
In the previous example, Jane pays $18,970 and John pays $12,520.
The employer pays Fringe Benefit Tax to Inland Revenue at a rate of 63.93% per annum from 1 April 2021* plus any necessary adjustment to account for John’s top tax rate, the days the vehicle wasn’t available for him to use (perhaps while travelling or in the workshop), and any contributions he makes.
This link will take you to the IRD calculators (yes, there are three!), to get an indication of
* Prior to 1 April 2021, the rate was 49.25%. The increase arises because FBT needs to take into account the new highest tax tier of 39% (previously 33%).
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.
With the FBT rate increased to 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:
- Sell the company vehicle to the employee and go down the reimbursement or allowance route
- Increase wages to allow employees to pay for gym memberships (etc) themselves
- Provide a gift or vouchers