110289 Topic 8: FBT
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What is FBT
Tax on non-monetary benefits provided from 'er to 'ee as a substitute/in addition to salary, wages in connection to their employment.
Recognised as private benefit, rather than work-related expense
History of FBT in NZ
- Ø A fringe benefit was not liable to tax until April 1985
- Ø In the 1970s and early 1980s, top personal income tax rates in New Zealand were over 60%
Reasons for introducing FBT
- Ø To widen the tax base
- Ø To allow the government to collect more tax, which in turn decreased the top marginal tax rate
- Ø To improve equity
- Ø To improve resource allocation
Reasons for introducing FBT - "Widen the tax base"
Employees and employers obtained an advantage by paying and using benefits instead of salary and wages had the effect of eroding the tax base.
That is, it decreased the amount of money paid as salary and wages (income). This is an important part of the tax base.
Reasons to introduce FBT - "improve equity"
Employees who received benefits had a significant advantage over employees who received only cash. In particular, many people employed by private employers received benefits, but public servants did not. So there was a significant inequity between the two groups of employees.
Reasons to introduce FBT - "Improve resource allocation"
By encouraging employers to provide cash salaries and wages instead of fringe benefits, and by getting them to focus on the total cost of employing a person, the government hoped to get employers to focus on how they allocated resources within their businesses.
FBT - Design
FBT to tax non-cash benefits that are not monetary remuneration
Tax base is “benefits/perks” given by employer to employees in relation to their employment
- Imposed on employers
- • To discourage employers from providing non-cash benefits
- • To reduce administration costs for IRD
Expenditure incurred in providing fringe benefit is tax deductible against employer’s incom
FBT Design - Employee
A person who is in receipt of PAYE income payments
- - shareholder employees who choose to be paid as employees
- - past, current, future employees
- - employee associated persons e.g. relatives connected by marriage, blood relationship
- - payment to working partners
FBT Design - Employer
A person who is liable to pay PAYE income payments
- • Manger or principal officer of an unincorporated body
- • Each partner in a partnership
- • Any person who has the control of a trust, company….
- • The Crown (such as Government Departments and local authorities)
Taxable value - Overall structure
- Value of FB - Employee contribution = Taxable value
- Apply FBT rate to taxable value
FBT - Rates (based on 2014-15 rates)
Single rate option of 49.25%
. Stems from
where t=top marginal tax rate. 0.33/(1-0.33) = 49.25%
Alternate rate option on benefits attributed to employees
- - The alternate rate option is not compliance cost friendly, but may be worthwhile if many low marginal rate employees
- - In each of the first three quarters employers can elect to pay at 49.25%, or 43%
- - In last quarter, must use alternate rate calculation
FBT Rates - The year-end alternate rate calculation:
Step 2: Calculate tax on all inclusive pay for each employee
- Step 1: Calculate “all inclusive pay”
- = Cash pay – tax on cash pay + taxable value of all fringe benefits
- Step 3: Calculate FBT liability
- = tax on all inclusive pay – tax on cash pay – FBT already paid in respect of that employee
FBT - Alternate rate calculation
- Cash Pay
- less Tax on cash pay
- Net Pay
- plus Fringe Benefits
- All-inclusive pay
- Tax on all-inclusive pay
- less Tax on cash pay
- FBT payable
Returns and Payment Days - Quarterly return/Payment date
- Q1 1/4 - 30/6 [20 July]
- Q2 1/7 - 30/9 [20 Oct]
- Q3 1/10 - 31/12 [20 Jan]
- Q4 1/1 - 31/3 [31/5]
Returns and Payment Days - Annual return
For y/e 31 March – due 31 May
Excluded Fringe Benefits examples
- Ø Assessable income (eg salary & wages)
- Ø Benefit provided which is exempt income
- Ø Business tools which cost no more than $5,000
- Ø Distinctive work clothing
- Ø Benefits provided by charitable organisations
- Ø Benefits provided on employer’s premises
- Section YA 1: a motor vehicle is, in relation to s 2(1) of the Land Transport Act 1998
- - Includes: cars, vans, light trucks, motor cycles, gross laden weigh less than 3500 kgs
Fringe benefit arises if vehicle is available to an employee for private use (actual use not required) - incl. home to work travel
Motor Vehicles - Calculation
- Textbook - days X sch 5 amount/90
- Lecture Notes - Value of benefit X (days in quarter - exempt days)/90
- the aggregate of the amounts calculated for the 4 quarters
- INCOME YEAR BASIS
- Textbook - days X sch 5 amount/365
Motor Vehicles - Value of fringe benefit
36% (or 9% if quarterly) of GST incl. adjusted tax value
20% (5% if quarterly) of GST incl. cost
Motor Vehicles - Exempt Days
Sometimes car not available to employee
- • If the vehicle has broken down or is being repaired
- • Parked airport car park if the flight is business-related
- • Stored at employer’s premises
For example, Jane allowed to use work car during week, not allowed to use during weekend = 2 exempt days each week.
Motor Vehicles - Emergency Call
Emergency call (s CX 34) = Visit employee makes from home
in the course of their employment
at the request of employer
, member of public.
- Service performed essential to:
- • Operation of plant or machinery
- • Maintenance of services by public or local authority
- • Health or safety
: 6pm-6am weekday, any time Sat, Sun or public holiday
Motor Vehicles - Emergency Call example
The maintenance man at the local cool-store is called out at 8pm to deal with a refrigeration unit that has failed during the evening. Man drives the company sedan to the coolstore.
In this instance, the unit is essential to the operation of the plant, the call out has been instigated by the employer, and the call is between 6pm and 6am.
Therefore it meets the exemption as a day not liable for FBT purposes
Motor Vehicles - Business Travel
- Regularly required to be absent from home
- Motor vehicle is used while absent
- Absence at least 24 hours, continuously
- Whole of each day is not private use/enjoyment
Motor Vehicles - Business Travel example
A salesman leaves Christchurch on Monday at 9am to commence his regular sales travel.
He arrives in Invercargill on Monday, Queenstown and Alexandra on Tuesday, Dunedin on Wednesday, Oamaru and Timaru on Thursday and Returns to Christchurch at midday on Friday.
- Provided the employee is regularly required to be absent from home, the exemption would apply to the trip as the salesman was away from home for more than 24 hours.
- (Exemption would apply to all five days)
Motor Vehicles - Work related vehicle
•Not designed principally for carrying passengers
•Examples: utility (utilities), taxis, light trucks, station wagons
affixed to exterior
•Allowable private use/enjoyment in the form of:
- - Home to work
- - Work to home
- - Incidental private use
Application to different entities - Sole trader & FBT
• Fringe benefits provided by the sole traders to themselves not liable
• Fringe benefits provided to ‘arms-length’ employees are liable
Application to different entities - Partnerships and FBT
• Fringe benefits provided by the partnership to partners not liable
• Fringe benefits provided to ‘arms-length’ employees (except working partners: s DC 4) are liable
Application to different entities - Companies and FBT
- Fringe benefits provided to employees are liable to FBT
- • Benefits, provided to shareholders, are treated as dividends liable for income tax
- • Provision of such benefits to shareholder-employees are non-cash dividends, but liable for FBT
- • Where FBT and dividend regimes apply FBT takes precedent
- • Any fringe benefits to non-executive directors who are also shareholders are treated as dividends
- • Close companies can elect to treat unclassified benefits as liable for FBT or income tax (dividends)
GST on Fringe Benefits
- GST Registered person provides employee with fringe benefit – deemed supply
- 3/23 of taxable value of benefit
- Account for in employer’s FBT return
- No GST payable for exempt or zero-rated supplies eg. low-interest loan, overseas travel
- GST on fringe benefits is tax deductible against employer’s assessable income
Entertainment Expense - Deductible Entertainment
Entertainment provides both private and business benefits.
Deductible Entertainment (s DD 2): a 50% deduction allowed
- • Corporate boxes
- • Pleasure craft (e.g. Yacht)
- • Holiday accommodation
- • Entertainment “off” the business premises - E.g. business lunch / cocktail party at restaurant
- • Entertainment (except light refreshments) “on” the business premises for social functions or in area for use by senior staff only (not open to all employees)
Entertainment Expense - Excluded Entertainment (ss DD 2, 4-8):
Fully deductible if the general permission [s DA 1 (1)] is satisfied
- • Business travel expenditure
- • Conference expenditure
- • Expenditure on employees’ meals
- a) Light refreshments, such as morning/afternoon tea
- b) Light meals consumed by employees as part of employment
- c) Promoting businesses
- d) Expenditure on samples for advertising or promotion
- e) Enjoyed or consumed outside New Zealand
Which Regime? – Entertainment or FBT Example:
ToyCo Ltd provides incentives for its sales staff to meet targets during the year. The company provides an overseas holiday for the sales representative who has been successful in growing sales in the financial year.
The sales representative is entitled to take their family on a two week holiday on the Gold Coast. The employee may take the holiday at any time within the next 12 months.
Entertainment expenditure or FBT regime?
The expenditure on holiday accommodation, would seem to be of a type of Deductible Entertainment, which is subject to the 50% deduction rule.
However, the employee does NOT consume the expenditure as part of their employment duties, and can choose when to enjoy the travel. The travel is also undertaken outside of NZ.
Therefore, the expenditure is a benefit, provided in respect of or in relation to the sales representative’s employment, and subject to FBT regime.
The employer will thus be able to deduct the full cost of the expenditure as a cost of employment.
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