Lower FBT rates mean added complexity
With the passing of 31 March, many employers will now be turning their focus towards preparing the final FBT return for the year, which is due on 31 May 2011. In this article we consider some of complexities arising from the 1 October 2010 tax rate changes, as well as a reminder of some of the more common FBT mistakes.
Employers should by now be aware of the legislative changes that impact the calculation of FBT for the year to 31 March 2011. However, as a guide, we have detailed below the critical themes.
Employers paying FBT at the single rate should now be paying FBT at 49.25% (from 1 October 2010) instead of 61%. For Quarter 4, employers may continue to pay FBT at 49.25%. Alternatively, an attribution calculation can be performed to determine the actual FBT due based on the all-inclusive pay provided to their employees.
For employers who have paid FBT using the alternate rate option, an attribution calculation will be required in this final quarter.
Employers may pool any relevant benefits under both options above, see below for further information.
For the year to 31 March 2011 the alternate rates for attribution purposes will be “composite rates” taken from the headline FBT rates in use pre and post the 1 October rate changes. These rates are detailed below:
|Total income including benefits||FBT rate|
|$0 - $12,390||12.99%|
|$12,391 - $39,845||23.84%|
|$39,391 - $54,915||45.99%|
The rate for pooled benefits for the year will be 45.99%, being the composite of the pre and post 1 October pooled benefit rates.
And if this isn’t complex enough, please do remember that the GST rate applicable to fringe benefits paid after 1 October 2010 will be 15%, which is calculated by applying a factor of 3/23rds of the value of the relevant benefit(s).
Application of the top FBT rate across the board
We commonly see employers paying FBT at the single rate, believing that the attribution rules are too complicated to apply and that any savings achieved by undertaking an attribution calculation would be outweighed by the compliance costs. Our experience shows that many employers can and do save material amounts of FBT when going through the attribution exercise.
An alternative approach for employers who want to avoid a full attribution calculation is to calculate FBT using a combination of the single rate and pooling rate. Using this approach, employers would continue to pay FBT at 49.25% on those benefits that cannot be pooled, but FBT will only be payable at 45.99% on the other benefits that are able to be pooled (reducing to 42.86% from the 2012 income year). Additionally, application of the de minimis threshold for unclassified benefits should be considered, such that there may be no FBT due at all where unclassified benefits provided do not exceed $300 per person, per quarter and $22,500 in total over four quarters.
Payroll systems and employer reporting obligations for many New Zealand entities are managed in Australia where the New Zealand entity has a parent or related entity in Australia. It is a common misconception that the New Zealand FBT regime is broadly similar to its Australian counterpart. There are in fact some marked differences, which can prove expensive if overlooked.
It is crucial that those responsible for New Zealand employer reporting have a good understanding of New Zealand FBT. However, we have seen many instances where New Zealand FBT reporting is largely dealt with by reference to the Australian FBT rules, which will invariably produce an incorrect result, particularly if certain benefits are exempt from FBT in Australia but are not given a similar treatment in New Zealand!
Additionally, we have seen instances where benefits provided are overlooked for FBT reporting as information is not communicated across departments. For example, team leaders in a sales division may be providing gifts or rewards to staff, but the finance team responsible for FBT returns may not be aware of such benefits and will therefore not report these for FBT.
FBT obligations for foreign assignees
Where employees are assigned or seconded to New Zealand from an overseas entity and the home employer continues to provide benefits to that employee (such as employer contributions to a foreign superannuation scheme, life insurance etc), FBT obligations are likely to arise for the New Zealand entity. This is because the FBT rules contain specific provisions that catch arrangements entered into with third parties for the provision of benefits to an employee. Payments by a home country employer to a host country assignee would be deemed to be provided by the host country employer under an arrangement with the home country employer.
Often the New Zealand entity may not have visibility over many of the remuneration items that are being paid by the home country entity and therefore mistakenly fail to satisfy their New Zealand FBT obligations.
PAYE or FBT?
We commonly see confusion over the treatment of benefits and whether these are subject to FBT or PAYE. The general rule is that if there is a contractual obligation for an employee to pay for something but the cost is met by the employer, then that cost will effectively be subject to PAYE (assuming it is not an exempt reimbursement). However, if it is the employer’s contractual obligation to pay for the item that is provided to the employee then this will be subject to FBT. The one exception to this rule relates to the provision of accommodation, which is always dealt with under the PAYE rules regardless of the arrangements in place.
Too many employers do not accurately track nonusage days for motor vehicles which are unavailable for private use due to out of town business trips. This is generally attributed to the “hassle factor” of asking employees to submit regular details of non-usage days. But why not take advantage of the ability to reduce your FBT costs simply by completion of a quarterly log? Do remember that, to qualify as a non-usage day, the business trip has to be for at least 24 hours but where that criterion is satisfied, the part-days at the start and end of the 24 hour period also qualify.
And finally on the subject of motor vehicles, note that for the purpose of measuring the available days, you reduce the total number of days in the quarter by the non-usage days, but the apportionment factor is always applied over a standard 90 days. For example, if you have three non-usage days in a 92 day quarter your calculation will be 89 (92 less 3) divided by 90. If you only have 1 non-usage day in a 92 day quarter your apportionment factor will essentially be 90 divided by 90 because, although there are 92 days in the quarter, vehicle usage always assumes a standard 90 day quarter.
GST on fringe benefits
The GST Act 1985 deems the provision of fringe benefits to an employee to be a taxable supply for GST purposes. As such, output GST is required to be calculated and included as a liability in an employer’s FBT return. As the GST rate increased from 1 October 2010, GST on benefits provided after that date will attract GST at a ratio of 3/23rds. However, some fringe benefits will be zero-rated or GST-exempt and will therefore attract no GST liability. Employers should make sure they are only including the correct benefits when calculating GST.
And remember, what goes on the FBT return stays on the FBT return...and that includes GST on fringe benefits. There is no longer any interaction between GST reported on fringe benefits and a company’s GST return, they are completely separate!
Inland Revenue’s compliance focus and FBT reviews
While not included in the Inland Revenue’s latest compliance focus document, we anticipate FBT will remain an area of scrutiny for it. It is a relatively simple concept but it has a complex set of rules. Furthermore, the impact of the rate changes for personal income tax and GST heavily impact on FBT compliance.
FBT reviews can be a worthwhile investment in terms of reducing risk and increasing savings. In particular, with Quarter 4 reporting not too far away this is a timely opportunity to review FBT compliance within your organisation. You may just find those much desired cash savings you were looking for.
Canterbury Earthquake – Emergency Measures
Finally, the Government recently announced some measures aimed at dealing with a number of taxation issues arising from the aftermath of the Canterbury earthquake, some of which will have FBT (and PAYE) implications. For more details on this, please see this article.