Business Basics: Fringe Benefit Tax

Fringe Benefit Tax

What is Fringe Benefit Tax? Cash benefits that you give to your employees (such as salary or wages) are taxed through income tax, non-cash benefits are not taxed.  

Fringe Benefit Tax (FBT) taxes non-cash benefits (fringe benefits). FBT keeps things fair as both cash and non-cash benefits are taxed equally.

What Are the Types of Fringe Benefits?

Fringe benefits mainly come in four types. If any of these benefits apply to your employees, you may need to pay FBT. 

Four Main Types of Fringe Benefit: 

1. Motor vehicles available for private use.

Employers only pay FBT on motor vehicles if they are available to be used by employees privately. If the vehicle is available to be used privately but is not actually used — you still have to pay FBT. 

The exception is if it can’t be physically used for a full 24-hour period – such as when travelling away from the office on business, or on holiday and not using the vehicle. 

Partners in a partnership or sole traders don't have to pay FBT on business vehicles they use. Income tax and GST adjustments are made for the private use of vehicles.

To ascertain this, they need to keep a logbook of their business use for 90 days every 3 years. 
In small companies with no more than 2 company vehicles for shareholder employees, they now have a new option to treat their company vehicle as partnerships and sole traders do.

For more information on FBT on motor vehicles, check out this easy-to-follow IRD video


2. Free, subsidised or discounted goods and services. 

You need to pay FBT as an employer if your employees pay for goods and services that are provided at less than the lower of:

  • GST inclusive cost to you
  • Lowest GST inclusive price you sell the same goods to other customers (whether that's wholesale or retail), if you're the manufacturer
  • Normal GST inclusive cost to the public

There are exemptions to paying FBT for free, subsidised or discounted goods and services you provide to your employees. As an employer you can provide up to $300 of free or subsidised goods per employee per quarter without paying the tax.

If you file annual returns, you have a yearly exemption of $1,200 for each employee.
Check out this IRD page for some examples for this form of FBT. 
 
3. Low-interest loans. 

If a loan is provided by an employer to an employee that is less than the prescribed rate of interest or market rate, then the employer will need to pay FBT.

If the same loan is available to the general public for less than the prescribed rate of interest or market rate, then FBT does not need to be paid.

4. Employer contributions to funds, insurance and superannuation schemes. 

Employers need to pay FBT on contributions they make to: 

  • sickness, accident or death benefit funds,
  • life, pension, personal accident or sickness insurance policies,
  • superannuation schemes (where employer superannuation contribution tax doesn't apply), 
    funeral trusts,
  • friendly society insurance funds.

FBT is also payable on insurance policies when an employer:

  • takes out the policy for an employee and pays their premium, or
  • offers discounted premiums for agents and their families if they are a life insurance business.

Is a Cash Payment a Fringe Benefit?

A cash payment such as a bonus, is treated as part of the employee's salary or wages and is a normal employee deduction (PAYE).

What is the Fringe Benefit Tax Rate?

There are three Fringe Benefit Tax rates that are applied to the taxable value of the fringe benefit.

1. Single Rate

The single rate is the highest FBT rate and is currently 49.25%.  
This rate is applied to all fringe benefits that are provided. Applying the single rate for all your FBT returns is the easiest option but if any of your employees earn less than $70,000 you'll end up overpaying.

The alternate rate is the solution to this.

2. Short Form Alternate Rate

There are two rates within the short form alternate rate:

  • 49.25% for all attributed benefits (fringe benefits that are assigned to an individual employee that only they use — such as a bus pass etc.) and non-attributed benefits (a benefit that is available to be used by all employees such as a work vehicle that everyone can use) that are provided to shareholder-employees.
  • 42.86% for non-attributed benefits.

This rate is a good option if you have employees that earn less than $70,000 or if you provide a lot of non-attributed benefits.

3. Full Alternate Rate

This rate only applies to attributed benefits and you are required to do a separate calculation for each employee – using this rate the FBT is calculated on each employee’s marginal tax rate, so if most of your employees earn less than $70,000, this is the best option.

To work out your FBT, use the IRD's fringe benefit tax calculator or give us a call on 0800 236 446 or contact us via our website for a little more information.

When Should You Register for FBT?

If you're an employer that provides fringe benefits and you're not currently registered, then you need to let the IRD know. You can do this by calling the IRD on 0800 377 772 or registering online at www.ird.govt.nz

If you're still unsure as to whether or not you need to pay FBT, or if you need a little more clarification, contact Engine Room Chartered Accountants on 0800 236 446 and we can help you with all your FBT questions.

Engine Room Tauranga & Pukekohe Chartered Accountants

If the idea of dealing with FBT is a little overwhelming, let Engine Room Chartered Accountants take care of your financial obligations so you can spend less time dealing with complicated taxes and more time on what matters most to you — growing your business.

At Engine Room we aim to ensure that every client's business runs as efficiently as possible. We are dedicated to helping business owners understand the numbers, grow their profits and provide a roadmap to so they are able to reach their financial goals faster.

Give us a call on 07 579 5011 for our Tauranga office, 09 238 5939 for our Pukekohe office or send us an email to begin the process of taking your business to the next level.

Engine Room Chartered Accountants — great business performance starts here