For a small tax, collecting only around $600 million per annum, fringe benefit tax (or FBT) punches above its weight in terms of the amount of angst caused to employers.
We are currently in the final FBT quarter of the year and if you are an employer that provides fringe benefits you will be feeling the increased cost of the higher FBT rates that kicked in on 1 April 2021.
Even if you have no employees earning over $180,000, your FBT bill in the first three quarters will have increased by at least 15 percent.
And if you do not perform the complex alternate rate calculation in this final quarter for the year, you will have to pay FBT at the top rate of 63.93 percent on all fringe benefits provided for the year.
All things being equal this is a 30 percent increase in FBT cost compared to the prior year.
Our key advice is to review the benefits you are paying FBT on and ensure that a) you are calculating these correctly (for motor vehicles in particular we see a lot of calculation errors) and b) you are applying all of the available exemptions correctly.
Responding to criticism of the additional costs imposed on employers, the government has proposed a late change (which has not yet been passed in to law) to allow employers to use a modified alternate rate calculation.
Broadly this will allow employers to apply the lower flat rate of 49.25 percent to fringe benefits provided to employees who earn under the $180,000 threshold, and only apply the higher rate of 63.93 percent to those that earn over this level.
While this sounds like a sensible approach on the face of it, it does require employers to largely perform the alternate rate calculation in the first place to determine whether they qualify for this “simplified” approach.
So while it will reduce the FBT cost for affected employers, it does not really ease the compliance costs associated with calculating the FBT liability.
With this increase in the FBT rates in mind it is important to ensure that you pay no more FBT than is necessary.
Our key advice is to review the benefits you are paying FBT on and ensure that a) you are calculating these correctly (for motor vehicles in particular we see a lot of calculation errors) and b) you are applying all of the available exemptions correctly.
You will also need to think about how you approach the March quarter FBT return and the alternate rate calculation – can you do this yourself, do you need to invest in some specific software or should you outsource the process?
It is encouraging that Inland Revenue has commenced a stewardship review of the FBT regime, which is an assessment of the health of the FBT system to determine whether it remains fit for purpose.
FBT was implemented in the 1980s to ensure tax was paid on non-cash remuneration provided to employees that was not otherwise able to be taxed through the PAYE system at the time.
Inland Revenue is looking at whether it still achieves this purpose, how remuneration practices have changed over time and are these changes are appropriately dealt with under the existing rules, or could non-cash employee remuneration be taxed differently?
We are (at the time of writing) awaiting publication of the recommendations from this review.
I am hopeful that some of the real pain points in the FBT rules will be addressed, such as the compliance costs associated with the alternate rate calculation and the interaction between the FBT, PAYE and entertainment tax rules.
It would also be great to see the introduction of concessions to encourage the provision of environmentally friendly benefits such as electric vehicles and bikes. Watch this space for developments.
Related: New changes in top tax rates
