FBT enters its 40th year - time for a mid-life crisis?

By Robyn Walker

Fringe benefit tax (FBT) is one of those taxes that businesses love to hate – it is expensive, compliance cost-intensive and, in some cases, confusing or unfair. Fortunately, this tax and its compliance costs, seem to be on the radar of the new Government, with the Minister of Revenue, Hon Simon Watts, indicating that as a consequence of concerns raised with him, he wants to see “clear, surgical changes” made in a tax bill later this year, and more substantive changes in 2025.

While there have been occasional tweaks to the FBT rules over the years (and a rewrite of the Income Tax Act), the substance of the rules remains remarkably similar to how the rules were originally implemented on 1 April 1985, almost 40 years ago. Considering how much society has changed since 1985, it's not surprising that people might complain the tax is no longer fit for purpose. However, some may say it was never fit for purpose, and the regime received considerable criticism in the FBT stewardship review released in 2022.  

A history lesson

Many readers of Tax Alert may be unlikely to have been following tax reform in the 1980s and may be interested in understanding where FBT came from. The idea for the tax was raised by the Task Force on Tax Reform (known as the McCaw Report) in April 1982. In the early 1980’s the top personal tax rate was 60% (which increased to 66% when a 10% surtax was added in 1982) and applied at an income level of $22,000 (equivalent to $103,000 in current day terms). These high personal tax rates and a lack of any taxes on most benefits in kind was leading to widespread fringe benefits, with the McCaw Report noting: 

“The scope for avoidance through fringe benefits is wider than might generally be appreciated. They range from relatively low value items such as payment by the employer of private telephone accounts up to high value items such as motor vehicles available for private use. Many taxpayers can and do receive more than one such benefit. For example, it would be quite possible for an employee to be provided with a company car (perhaps two) and a low interest housing loan, and in addition have school fees, clothing costs, annual holidays, and child care costs all paid for by his employer. Under present tax legislation, none of these disbursements by an employer on behalf of his employee can be taxed as extra income to the employee or be treated as non deductible expenses to the employer.”

The notion in 2024 of employees having a package involving multiple cars, loans, school fees and holidays paid for is inconceivable. The McCaw Report recommended ensuring such benefits were taxed, albeit it was suggested that the tax be levied at the employee level, with the employer responsible only initially while people adjusted to the tax. The McCaw Report also focused on large benefits, with the Report noting small benefits such as subsidised meals at staff cafeterias, free car parking and social or sporting activities did not represent a significant problem either in principle or equity and thus should not be taxed.

As can be commonplace with external reviews, the National Government of the day ignored the fringe benefit tax recommendations, and it was only when a Labour Government was elected in 1984 that the idea of FBT moved forward. In late 1984, the Income Tax Amendment Bill (No. 2) tabled by Finance Minister Hon Roger Douglas proposed to introduce FBT.

Back in the 1980’s the Generic Tax Policy Process (GTPP) did not exist, and it was not commonplace for tax bills to be subject to a select committee process. However, a decision was made have a select committee process and this resulted in 314 written submissions and 84 oral submissions being made. While many submissions were said to agree with the notion that there was inequity with fringe benefits not being taxed, the original proposals were not popular and consequently there were numerous amendments made to the proposals through the select committee process. Submitters viewed the rules as being unworkable, difficult to enforce and having an enormous administration cost. Politicians speaking in Parliament in respect of the Bill noted “[t]he evidence was that little thought had been given to how the provisions would work in practice, and, even after substantial amendment, the remainder of the Bill is still full of inequities.”

The current day issue of double cab utes being popular due to the work related vehicle exemption was predicted with National MP Michael Cox stating: “people will move from cars to vans, because one of the amendments to the Bill was that vans would not be caught by the Bill but station-wagons would”; however, in the Bill’s third reading, second term MP Michael Cullen stated “Finally, I deal with the great question of the shift in the kind of vehicles that will be used. I look forward to the day when we see all the directors of [prominent construction business] driving home in Mitsubishi L300 vans. … We will see [directors names] driving around the country in Mitsubishi L300 vans rather than BMWs. Let us not pull the legs of people as far as that.” It was estimated at the time of the Bill that one-third of all cars in corporation fleets had no business-related use and were supplied absolutely as a “perk”. The current day ratio is not known, but in our experience, pure “perk” cars are not common, but double cab utes are.

At the time of the Income Tax Amendment Bill (No 2), it was estimated that FBT would bring in approximately $120million - $400 million per annum (equivalent to $406m - $1.8b today) and would require an additional 415 Inland Revenue staff to administer it. FBT was to apply at the flat rate of 45% to all taxable benefits.

Compared with current day processes, one of the most shocking aspects of the legislative process for FBT was that the laws were first introduced in December 1984, enacted on 23 March 1985, and took effect from 1 April 1985; meaning businesses had just over one week to prepare to apply these complex new laws. While some tax laws still bypass the full GTPP, it is the exception rather than the norm and wouldn’t ordinarily be used for something as complex as a new tax regime with imminent application. 

FBT pain points

The complaints about FBT in 1985 are likely to still be complaints in 2024, however the context may be slightly different as the way people work and the types of benefits provided have changed considerably, despite the law largely remaining the same. If FBT were to get a mid-life make-over, there are a number of areas that deserve some attention.

Some common issues and gripes we encounter with FBT include:

1. The rate of FBT. Unless some form of attribution calculation is undertaken, the rate of FBT is 63.93% (this equates to a 39% marginal tax rate and is calculated as tax rate / (1 – tax rate); i.e. 0.39/(1-0.39)). The approach back in 1985 was simpler, with FBT applying at the flat rate of 45%.  The introduction of FBT attribution when the top personal tax rate was moved to 39% in 2020 was arguably a good move as it allowed employers to reduce the cost of benefits provided to employees on lower marginal tax rates, but it bought with it a range of complexities, which employers continue to grapple with each year.
2. FBT was introduced because there was substitution from cash remuneration to benefits in kind. In that way, FBT still remains an important tax to ensure New Zealand doesn’t return to the behaviours seen in the early 80’s. However, a recurrent area of confusion is in relation to which tax applies. The general rule of thumb is you look at who the cost belongs to. If the employer has incurred a cost, FBT should apply, if an employer is reimbursing or otherwise meeting an employee’s cost, then PAYE applies. In many instances employers would prefer to choose which tax to apply to best fit with business processes.
3. FBT applies to vehicles which are available for private use, with FBT calculated with reference to the capital cost of the vehicle. The rationale for this approach in 1985 was that the benefit of a work car was that the employee did not need to incur the expense of purchasing a car to drive (as well as the ongoing running costs). When the notion of public transport was raised, Cullen retorted “Few people in urban areas rely totally on public transport, except, perhaps elderly people.” Back in 1985, it may have been the case that the employee was spared the capital outlay, but in 2024 there are alternative modes of transport and car share services more readily available, meaning that in many urban areas car ownership is not necessarily an accurate counterfactual for estimating the value of the benefit.
4. The work related vehicle definition provides an exclusion from FBT for vehicles which only allow home to work and incidental provide travel, however this definition excludes “cars” and means that any vehicle which is mainly for carrying people cannot easily qualify without having seats removed or permanently bolted down. Accordingly, small cars and electric vehicles are subject to full FBT if they are taken home, whereas vehicles such as double-cab utes escape the tax. These rules remain unchanged since 1985, and at least anecdotally is the reason why so many businesses choose utes, despite Cullen not expecting FBT rules to change vehicle choices. Due to the mismatch in FBT outcomes for utes as compared to electric vehicles, Hon Julie-Anne Genter has had a Members Bill drawn from the Parliamentary Ballot. Given the make up of the current Government its unclear whether the Bill would get past its first reading in Parliament. Nevertheless, the Income Tax (Clean Transport FBT Exclusion) Amendment Bill seeks to implement a five year exemption from FBT for electric vehicles and to exclude double-cab utes from the definition of work related vehicle (by legislatively deeming them to be ‘cars’).
5. The FBT rules capture a wide range of things provided to employees which are not substitutes for remuneration and are unlikely to be viewed as benefits, such as sending flowers to an employee who has suffered a bereavement. For smaller employers there is a de minimis rule which allows certain unclassified benefits to be disregarded provided the total level of benefits provided across all employees in the previous rolling 12 months has not exceeded $22,500, and $300 per employee per quarter. For all but the smallest employers there are material compliance costs to monitor these thresholds. Back in 1985 the de minimis rule was arguably more generous because there was an exemption for the first $50 of unclassified benefits provided to any employee each quarter. While this only equates to $170 per quarter in today’s dollars, every employer was entitled to the exemption, not just those smaller employers with total benefits under $22,500.
6. Where an employer provides goods to an employee, the FBT consequences differ depending on whether the employer purchased the goods (in which case you consider the cost to the employer) or the goods are manufactured or produced by the employer (in which case you look at the market value of the goods). A similar distinction applies to services. These rules remain largely untouched since 1985, when they were also criticised. The Hansard at least reveals that the reason the provisions for staff discounts are so stingy is that the discount rule was designed to “ensure that staff discounts offered on low value items such as groceries, which at the time concerned are sold at a low profit margin, will not be liable for the tax when the normal staff discount brings the price paid by the employer [sic] marginally below cost price.”
7. A number of exemptions from FBT have been added since 1985, including distinctive work clothing, business tools, public transport and bikes. However, many of these have some impracticalities, such as: 

• The unnecessary focus on trying to tax any level of private benefit, for example, the requirement that distinctive work clothing can’t be clothing that an employee “would normally wear for private purposes”; 
• Business tools only being exempt if they are taken to/from the employers’ premises. This creates issues when employers provide computer equipment to use at home, as the exemption only applies if a ‘significant’ part of the employees’ duties are undertaken at home;
• The inability to deal with benefits through reimbursements or allowances. The public transport exemption only applies to FBT and its difficult for small and medium sized employers to arrange direct billing with public transport providers in order for FBT to apply; and
• Difficulty in structuring an equitable benefit. Most employers would want to structure a bike benefit through a salary sacrifice arrangement, but these are prescriptive and cumbersome. 

Where to from here?

With the Minister signalling that there might be some minor surgery this year and a more significant makeover for FBT next year, there is hope for businesses that some compliance costs and inequities may be reduced, potentially in time for FBT’s fortieth birthday. 

In the meantime, the same old rules continue to apply. If you need help understanding your FBT obligations or want to discuss options for the 2024 forth quarter attribution calculation, please contact your usual Deloitte advisor.