Major FBT Reforms on the Horizon: What NZ Businesses Need to Know

Understanding the Proposed Changes to FBT in NZ

The Inland Revenue Department (IRD) recently released an Issues Paper outlining potential significant changes to the Fringe Benefit Tax (FBT) regime – the most substantial reform since its introduction 40 years ago. These proposed modifications aim to simplify compliance and better focus on benefits that genuinely substitute for cash remuneration.

For many New Zealand businesses struggling with the quarterly complexity of FBT returns, these changes could bring welcome relief. Let’s explore what these proposals mean for your business and how you can prepare for potential implementation.

The Core Objectives of the proposed NZ FBT changes

The IRD’s proposal centers around two main goals:

1. Refocusing the FBT regime to target benefits that truly substitute for salary and wages
2. Reducing the administrative burden and compliance costs for businesses

While not a complete overhaul, the proposed changes address several key pain points in the current system that businesses have long found frustrating.

Motor Vehicle FBT: A More Practical Approach

Current Challenges with Vehicle FBT

The existing motor vehicle FBT system has several well-known issues:

• It’s based solely on a vehicle’s ‘availability’ for private use, not actual usage
• A vehicle limited to home-to-work commuting attracts the same FBT as a full private use “perk” vehicle
• The work-related vehicle exclusion is frequently misunderstood and misapplied
• Tracking individual days when vehicles are exempt creates significant compliance costs

The New “Remuneration Approach”

The IRD proposes a simplified “set-and-forget” system with three vehicle categories:

Category	Description	FBT Rate*
Category 1	Full private use	100%
Category 2	Limited private use	67%
Category 3	Home to work commuting only	33%

*Percentage of the fringe benefit taxable value that FBT will apply to

This categorization aims to better reflect the actual benefit employees receive:

• Category 1: Any employee with a ‘perk’ vehicle allowing unrestricted private use
• Category 2: Office workers who use vehicles for client visits and commuting with limited private use
• Category 3: Tradespeople commuting directly from home to work sites with no other private use

Revised Taxable Value Formulas

The proposal includes differentiating the annual value rate based on vehicle type:

• Petrol/Diesel vehicles: 26% (up from current 20%)
• Hybrid vehicles: 22.4%
• Electric vehicles: 19.4% (reflecting higher cost but lower running expenses)

The tax book value method would be removed entirely due to limited use and frequent misunderstanding.

Emergency and Pool Vehicles

The proposal would:

• Replace the emergency call exclusion with a blanket exemption for visibly marked emergency vehicles
• Introduce an “incidental use” concept for pool vehicles, exempting occasional private use that is:
  • Unusual or infrequent
  • Of short duration
  • Not a substitute for remuneration
  • For limited purposes

This would eliminate the need to track one-off situations like an employee taking a pool vehicle home before an early morning work trip.

Simplifying Unclassified Benefits

Current Compliance Challenges

Unclassified benefits (those not fitting into specific FBT categories) create disproportionate compliance costs, especially for small-value items. While smaller employers enjoy de minimis thresholds, larger employers providing over $22,500 of unclassified benefits receive no exemption.

Two Proposed Solutions

Option 1: Value and Purpose Test

• Exclude benefits under $200 (GST inclusive)
• Exclude benefits not provided as remuneration substitutes

Examples of benefits likely exempt under this approach:

• Flowers for personal events
• Recognition for exceptional performance
• Christmas gifts
• Employer-branded merchandise
• Casual sports event fees

Benefits likely still taxable:

• Gym memberships
• Non-work-related travel
• Regular performance incentives
• Employee rewards schemes

Key indicators of remuneration substitution would include regularity and any contractual or implied entitlement.

Option 2: Prescribed List

• Create a defined legislative schedule of exempt benefits

Streamlining Entertainment Rules

Current Dual-System Issues

Entertainment currently straddles both income tax and FBT regimes, causing confusion and often resulting in businesses defaulting to a blanket 50% deduction approach.

Integration with FBT

The proposal would:

• Move entertainment entirely into the FBT regime (similar to Australia and UK)
• Simplify the definition by removing prescribed activity lists
• Apply a standard “nexus with income-earning activity” test
• Capture entertainment provided to non-employees within FBT rules

Option 1: Per Employee Exemption

• $200 per employee exemption for non-remunerative entertainment
• Net cost decrease for lower-value entertainment (full income tax deduction)
• Net cost increase for higher-value entertainment (FBT rate applies)

Option 2: Food and Beverage Exemption

• Exempt all food and beverages except those consumed at parties, social occasions, or celebrations

Read more about current entertainment rules here.

Other Significant FBT Changes Proposed

Subsidised Transport

• Use 25% of the average fare for the respective month to determine benefit value
• Significantly reduces compliance costs, especially for airlines with complex pricing

Reimbursements & Open Loop Cards

• Subject reimbursements and open-loop gift cards to FBT instead of PAYE
• Simplifies situations where the same benefit is provided both directly and through reimbursement

Customer Rebates

• Use market value to determine benefit value when customer rebates flow to employees

Data and Reporting Requirements

The IRD has indicated that FBT returns will likely require:

• Breakdown of taxable benefits by category
• Integration between third-party calculation software and return filing

These changes should not significantly increase compliance burdens as most businesses already maintain these details in their calculation workpapers.

What the Proposed FBT Changes Mean for Your Business

These proposed reforms represent a positive step toward making the FBT regime more manageable and focused on its intended purpose. While some aspects may increase costs in certain scenarios, the overall reduction in compliance burden should benefit most businesses.

Next Steps and Timeline

The consultation period for these changes is relatively brief, with submissions closing on Monday, May 5, 2025. The short timeframe suggests IRD aims to incorporate these changes into legislation later this year.

How Business Like NZ Ltd Can Help

Our team can assist you with:

• Evaluating how these changes would impact your specific FBT obligations
• Preparing submissions to IRD on aspects of the proposal that affect your business
• Developing strategies to adapt your benefit offerings to optimize under the new rules
• Implementing systems to ensure compliance when changes take effect

Learn more about FBT here. 

Conclusion: Preparing for Change

While these proposals are not yet law, their comprehensive nature suggests significant changes are coming to the FBT landscape. Forward-thinking businesses should begin considering how these changes might affect their benefit structures and compliance processes.

For personalized guidance on navigating these potential FBT changes, contact our taxation specialists at Business Like NZ Ltd. We’ll help ensure you’re prepared for whatever the final legislation brings.

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This article is based on information available as of April 2025 and represents our current understanding of the proposed changes. As with all tax matters, specific professional advice should be sought for your individual circumstances. Contact your client manager for more information.