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Time for an FBT (Fringe Benefit Tax) health check!
As we draw closer to the breezy autumn days of another tax year, the Fringe Benefit Tax (FBT) season is inevitably upon us. The recent increase to the personal income tax rate, which applies to income earned by individuals earning over $180,000, has also resulted in an increase to the FBT rates.
Coupled with the Tax Department’s heightened focus on the FBT space in recent years, getting your FBT returns right has never been more important. As an employer, it is a timely reminder to reflect upon the three most common issues to be aware of when preparing FBT returns, minimising the chance of your business overpaying or owing FBT to the Tax Department.
Taxing cash vs non-cash benefits
There are two defined classes of benefits that an employer might provide to employees these days – cash benefits and non-cash benefits.
Cash benefits provided to employees in connection with the employees’ employment, are generally taxed as employment income at the employee’s marginal tax rate and that tax is collected via the PAYE system. The most common types of employment income include salary and wages, allowance, bonus, and directors’ fees.
Non-cashbenefits, however, do not get taxed in the same manner – they are taxed either at a flat rate or attributed to employees and taxed using multi-tier rates under the FBT system.
FBT or PAYE?
It may seem straightforward to determine when to apply FBT or PAYE if an employer remunerates their employees by way of salary and wages only. For example, an $800 general clothing allowance paid to a graduate employee would be treated as employment income subject to PAYE rather than FBT.
In most cases however, it is not as black and white as one would hope for. These days, it is becoming more common for employers to remunerate employees with various kinds of cash benefits/perks to reward and motivate their employees, in a way to retain the top talent.
As a result of this, the distinction between FBT and PAYE tends to become less obvious with all the ‘perks’ emerging. Depending on the company, these benefits may include health insurance, vision care, use of company vehicles for private travel, fitness, childcare, university debt relief and so forth.
- Employer Co1 contributes to the insurance premium on behalf of their employees, who have taken out a medical insurance policy under their personal names.
- Employer Co2 has taken out a medical insurance policy for their senior staff (the staff are the beneficiaries of the policy) and contributes to the insurance premium.
The effect is that the amount of premiums paid for the employees’ medical insurance policies by Employer Co1, would be treated as salary or wages and subject to PAYE. FBT will not apply because the policy belongs to the employees. Employer Co2 however, will have FBT obligations due to the company having the legal obligations to meet the premium payments under their contract with the insurance provider.
There could be wider implications to both the employer and the employees if the amount of cash and non-cash benefits is not being reported correctly for tax purposes. This is particularly the case for employees who are receiving Working for Families or have student loan repayment obligations, as the taxable value of the non-cash benefits are not included when determining the employees’ gross income. Accordingly, inclusion of a non-cash benefit as FBT incorrectly (or vice versa) could understate income (or overstate income) for those purposes.
How to apply the de minimis threshold exemption on unclassified benefits
If you provide free gifts and/or prizes, subsidised or discounted goods and services (other than those that are specifically identified as ‘specific benefits’ under the law as being subject to the FBT system – the ‘unclassified benefits’) FBT is not payable if you meet the requirements of both the general employee exemption and maximum employer exemption.
Quite often we see employers treating non-cash benefits as FBT-exempt by applying the general employee exemption, however, fail to account for the annual maximum employer exemption which requires rolling quarterly calculations.
For employers paying FBT quarterly, no FBT will be payable on an unclassified benefit provided to an employee where:
- The total taxable value of all fringe benefits provided to the employee did not exceed $300 per quarter (or $1,200 per employee for annual return filers).
- The total taxable value of all fringe benefits provided to all employees in the last four quarters, including the current quarter, did not exceed $22,500 (same threshold for annual return filers).
If the value of the fringe benefits for an employee goes over $300 for a quarter, the full value of the benefits is subject to FBT – the exemption is not deducted first. When applying the threshold, benefits provided by entities associated with the employer are also included in the employer’s calculation. Therefore, a periodic review of unclassified benefits provided by all associated entities in the group is necessary to ensure this exemption is being correctly utilised.
Using the single rate option for all quarterly returns… or not?
If you have been calculating FBT using the maximum rate under the single rate option on non-cash benefits provided to employees, you should start revisiting which FBT rate option would better reflect your situation, as most likely you will end up paying even more FBT under the single rate option as the FBT rate moves towards 63.93% from 49.25% effective 1 April 2021.
Rather than calculating FBT at the single flat rate, the full alternative rate option attributes fringe benefits at rates ranging between 11.73% and 63.93% (or between 11.73% and 49.25% prior to 1 April 2021) – reflecting essentially the marginal tax rates of each non-cash benefit recipient employee, based on their annual remuneration, thus likely to achieve some tax savings (compared to the flat rate option).
If you have already used the single flat rate option to calculate FBT for the first three quarters, it is not the end of the world! There is still an opportunity to use the alternate rate option if you wish to ‘wash-up’ any potential overpaid FBT in the fourth quarter return (which is due 31st May each year). However, do watch out if you are correcting minor prior returns discrepancies due to a genuine oversight, as they are subject to a limitation of $1,000 of tax. If you file annually, you can choose and change the FBT rate options each year.
Although the alternate rate option may involve additional costs in doing so, this rate option would nonetheless provide a more equitable result to employers than the single flat rate option. With the significant rise in the single FBT rate to 63.93%, it makes perfect sense to consider using this rate option especially if any of your employees earn less than $180,000 per annum, as you can recoup some FBT savings.
So, are you ready for a FBT health check? We offer a full range of FBT advice and can configure a custom package to suit the specific needs of your business, making sure your business would be FBT compliant and your records could withstand an audit by the IRD. If you have any questions or concerns around FBT, please get in touch to see how we can help.