What is Fringe Benefit Tax (FBT)?

Fringe Benefit Tax (FBT) is a tax on benefits that employees receive as a result of their employment, excluding salary, wages, bonuses, and employee allowances. Unlike income tax, which is paid by employees, FBT is payable by employers. The primary goal of FBT is to ensure that all forms of employee remuneration, not just cash salaries, are subject to tax. This creates a fairer tax system by capturing the value of non-cash benefits, such as company cars, low-interest loans, and other perks. By taxing these fringe benefits, the government aims to prevent tax avoidance and ensure a more equitable distribution of the tax burden.

Why was FBT introduced?

Fringe Benefit Tax was introduced in New Zealand in the mid-1980s to ensure that all forms of employee remuneration, not just cash salaries, were subject to tax. This was aimed at creating a fairer tax system by capturing the value of non-cash benefits. Such examples included providing company cars, low-interest loans, and other perks, including motor vehicles, provided to employees. By taxing these benefits, the government aimed to prevent tax avoidance and ensure a more equitable distribution of the tax burden.

Types of Fringe Benefits

Fringe benefits can encompass a wide range of non-monetary perks provided to employees. Some common examples include:

• Cars and Other Vehicles: This includes company cars and work-related vehicles that employees can use for personal purposes.

• Travel and Accommodation: Benefits such as paid travel expenses and accommodation provided by the employer.

• Property and Services: This can include the use of company property or services, such as a holiday home or gym membership.

• Other Benefits: These might include low-interest loans, health insurance, and other perks that enhance the employee’s compensation package.

All these benefits are subject to FBT, and employers must report them on their tax return using the FBT return. Understanding the types of fringe benefits helps employers ensure compliance with tax rules and avoid unexpected liabilities.

FBT and work related vehicles

Fringe Benefit Tax (FBT) is most commonly payable on vehicles in New Zealand because company cars are a popular perk provided to employees. Vehicles are often used for both business and personal purposes, making them a significant fringe benefit.

Even if you’re the business owner using the vehicle for personal purposes, Fringe Benefit Tax still applies. The only exemption is when the vehicle is exclusively used for business purposes, and you have a separate vehicle for personal use.

Vehicles and FBT Misconceptions

In New Zealand, there are several common misconceptions among business owners regarding Fringe Benefit Tax (FBT) on ute and van vehicles. one in particular is the “work-related vehicle” exemption. One misconception is that simply signwriting a vehicle with the business’s name or logo automatically exempts it from FBT. However, the exemption only applies if the vehicle is not available for private use, except for travel between home and work that is necessary for employment or other incidental private benefits.

Another misconception is that FBT is only applicable when an employee actually uses the vehicle for private purposes. In reality, employers must pay FBT when a vehicle is made available for private use. Whether it is used privately or not is irrelevant, availability is the important consideration. To qualify as a “work-related vehicle” under section CX 38 of the Income Tax Act 2007, the vehicle must not be a passenger vehicle, must have the employer’s name or logo permanently displayed, and must not be available for private use beyond the specified exemptions. Business owners should ensure they meet all these criteria to avoid unexpected FBT liabilities.

FBT, Vehicles and Small NZ Businesses

We mostly deal with companies that are owned by a small number of related shareholders, often referred to as shareholder employees. In this situation, the most likely fringe benefit is providing a vehicle to a shareholder employee. In this situation, we can put through an entry in your accounting system and not have to go through the administration of registering as a FBT payer with Inland Revenue.

When it comes to business vehicles, the FBT on private use will show up as “other income” in your financial statements. This is recorded as a reimbursement from you, the business owner, to your company. However, this doesn’t mean immediate cash outflow. The FBT offsets the expenses you’ve already claimed, such as fuel, maintenance, insurance, and depreciation. The only immediate cash impact is the GST portion, which will be included in your next GST return after your accountant prepares your year-end accounts.

How FBT Offsets Your Shareholder Current Account

Every accounting transaction has two sides—debits and credits. The FBT income recorded is the credit, while the debit is treated as a drawing, representing the personal use of your vehicle. Essentially, this process ensures that you don’t have to make a direct cash payment for the tax. Us accountants handle this through manual accounting entries through your accounting software like Xero or your financial statements. 

If you would like to know more about how Xero, check out our article: Is Xero Right for My Business?

FBT Beyond Business Vehicles

Fringe Benefit Tax doesn’t just apply to vehicles. If you offer other non-cash benefits to employees, these may also be subject to FBT. Here are some examples:

• Free, subsidized, or discounted goods and services

• Employer contributions to insurance (e.g., health, accident, or death benefits) and superannuation schemes (excluding Kiwisaver)

• Low-interest loans

For example, if you offer an employee a company car, FBT is calculated on the car’s value reflecting its availability for the employee’s private use.

FBT for Benefits Provided to Employees

If you provide fringe benefits, such as a company car or other perks, to your employees, these are also subject to Fringe Benefit Tax. In this case, you must register with IRD an FBT return must be filed with them. Furthermore, the tax must be paid in cash. FBT does not apply to salary, wages, bonuses, or employee allowances, as these are already taxed through payroll. The tax is based on the cost of the non-cash benefits provided. For example, if you offer an employee a company car, FBT is calculated on the car’s value reflecting its availability for personal use.

FBT Exemptions and Concessions

There are several exemptions and concessions available to employers that can help reduce their FBT obligations:

• Work-Related Vehicle Exemption: If a vehicle is used solely for business purposes and the employer has a separate vehicle for personal use, FBT does not apply. This exemption is crucial for businesses that provide vehicles strictly for work-related activities.

• Business Use Exemption: FBT does not apply to an employee’s business use of a car, including use for work-related purposes. This means that if the vehicle is used exclusively for business purposes, it is exempt from FBT.

• Private Use Exemption: If an employee’s private use of a car is restricted to home-to-work travel and incidental private use, FBT may not apply. This exemption is designed to cover situations where the vehicle is not used extensively for personal activities.

• Concessions for Small Businesses: Small businesses may be eligible for concessions on FBT, such as the ability to use a simplified method for calculating FBT. This can make compliance easier and reduce the administrative burden.

Employers must keep detailed records of the benefits provided to employees, including the date and value of the benefit, to support their FBT obligations. Proper documentation ensures that employers can substantiate their claims for exemptions and concessions, thereby minimizing their FBT cost.

Current FBT Rates and Compliance

As of July 2024, the FBT rate is 63.93% of the taxable value of the fringe benefit. This means the tax on fringe benefits can add up!

Summary

FBT is one of the more complicated NZ small businesses have to comply with. If you’re unsure about how to calculate FBT or whether a benefit is taxable, seek professional advice from Business Like NZ. Our Auckland Accountants can help you navigate the complexities of FBT and other taxes.

If you would like to know more about other NZ taxes, have a look at our following articles:

The Ins and Outs of Provisional Tax in NZ

What Is Withholding Tax?

Business Like NZ has been providing professional yet affordable tax and accounting advice to the Auckland region for years! If you would like to discuss your business with us, please contact us.