Understanding fringe benefit tax

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In its simplest terms, fringe benefit tax (FBT) is a tax that employers must pay on those extra non-cash perks that you give your employees over and above their salary or wage. Salary and wages are taxed through income tax but the non-cash benefits are not, so the IRD aims to keep things fair and equal by taxing the non-cash benefits through FBT. So when do you need to pay it and are there any exemptions? Here are the most common examples.

 

Vehicles available for private use

The key word in this sentence is “available”. If the vehicle is strictly for business and remains on company premises at all other times then it is exempt. But this is rare and even if it isn’t used for privately by employees, if that is an option then you will likely need to pay FBT on it. Getting professional advice on this one is recommended.

Free, subsidised or discounted goods and services

FBT applies to goods and services you provide to employees when:

  • You purchased the goods/services and are providing them to employees at less than the GST inclusive cost you paid
  • You are the manufacturer and are providing the goods/services at less than the lowest GST inclusive price you sell identical goods to other customers
  • Less than the normal GST inclusive cost to the public.

Private telecommunications

If you pay for any form of an employee's home telecommunications you need to pay FBT on their private use if the account is in your name as the employer, and you pay the whole account.

It does not apply when the account is in the employee's name. In this case, regardless of whether you reimburse some or all of the full cost, this amount should be added to their wages so income tax is taken off.

Subsidised transport

FBT on subsidised transport applies if you’re subsidising transport for less than 25% of the highest public fare or you’re in the business of supplying transport to the public.

Exemptions to the above

You can provide up to $300 worth of free, subsidised or discounted goods and services per employee per quarter. However, as soon as the value goes over this you will have to pay FBT on the total amount, not just the value over the $300 exemption.

If you file your return annually your yearly exemption is $1,200 per employee.

The maximum exemption you can claim is $22,500 per year. Again, if you go over this you’ll need to pay FBT on the total value.

Common items exempt from FBT include:

  • Distinctive work clothing, eg. uniforms
  • Car parks on your premises or that you have the exclusive right to occupy
  • Frequent flyer and membership reward schemes when the employee joins for their own use. However, if you, the employer, enters into an arrangement with the promoter of the scheme you may have to pay.
  • Charitable organisations are generally exempt from paying FBT on benefits provided to employees.

Low-interest loans

FBT applies when you provide a loan to an employee at less than the prescribed rate of interest or market rate of interest. If it’s available to the general public for less than the prescribed rate of interest or market rate of interest then you don’t need to pay FBT. You can work it out the prescribed rate of interest on the IRD website.

Loans that either don’t incur FBT or have different rules include:

  • wage advances
  • employee share loans
  • share purchase scheme loans
  • shareholder employee current account debit balances
  • company expense accounts
  • loans to life insurance policy holders

For more info download the IRD’s FBT guide.

Employer contributions to funds, insurance and superannuation schemes

You need to pay FBT on contributions you make to:

  • sickness, accident or death benefit funds
  • friendly society insurance funds
  • life, pension, personal accident or sickness insurance policies
  • superannuation schemes where employer superannuation contribution tax (ESCT) doesn't apply
  • funeral trusts.
  • insurance policies you take out for an employee and pay their premiums on, or you are a life insurance provider and offer your employees discounted premiums.

Exemptions to the above

If the employee takes out the policy themselves and you pay the premiums you do not need to pay FBT. As with telecommunications above, this should be reimbursed to them in their salary/wages for income tax to be deducted.

You also don’t have to pay FBT if you are the beneficiary of the policy you have taken out and pay for because there is no benefit to the employee.

Entertainment expenses

FBT can sometimes apply to business-related entertainment expenses when the benefits are enjoyed by employees. If it has a significant private element and therefore only 50% deductible FBT doesn’t not apply unless the employee gets to choose when and where to enjoy it, or it’s enjoyed outside of New Zealand, and is not a normal or necessary part of their job. You can learn more about FBT in relation to entertainment expenses by downloading the IRD’s guide.
 

Cash benefits

FBT does not apply to cash payments made to an employee as these should be treated as part of their salary or wage and make normal PAYE deducted.

The above information is correct as of June 2017 but the rules can change quickly. One thing we recommend is keeping accurate records of fringe benefits and never ‘estimate’ their value. We’d be happy to guide you through what you need to know about FBT. Get in touch any time; you can rely on our decades’ worth of real world business experience.

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