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FBT: Common errors and how to prevent them

Tax Alert - July 2022

By Jess Wheeler, Aaron Mitchell & Jonny Reid

Now that all the 2022 Quarter 4 (March 2022) returns have been filed, it’s time to start thinking about the 2023 Quarter 1 (June 2022) returns which are due on 20 July 2022.

With this being the first quarter of the new FBT year, it is an opportune time to reflect on the common errors and pitfalls we have observed so that employers can avoid them and save themselves a lot of pain (and maybe some cash too) when it comes to preparing their 2023 FBT returns.

As we explained in our March 2021 article the top FBT rate increased to 63.93% (up from 49.25%), in conjunction with the top marginal tax rate increasing to 39%. The pooling rate also increased from 42.86% to 49.25% at the same time. Prior to these changes, many employers used the single rate option to pay FBT on all benefits at the flat rate of 49.25%. This increased rate has prompted many employers to look at calculating FBT at the alternate rate of 49.25% across Q1 – Q3, and then performing an attribution calculation in Q4. Under the short form attribution, employers pay FBT on attributable benefits at the 63.93% rate and pool any other benefits at the 49.25% rate. The full attribution calculation is complicated, but broadly aligns the FBT rate that applies to benefits provided to each employee with the employee’s marginal tax rate.

A common issue we have encountered is employers paying FBT across Q1 – Q3 at the 49.25% rate (not 63.93%), believing that they were still paying at the flat rate, when in fact this was not the case. Where FBT has been paid across Q1 – Q3 at the 63.93% flat rate employers are able to elect to pay again at 63.93% in Q4 or perform an attribution calculation. Where FBT is paid at the 49.25% rate across Q1 – Q3, employers are locked into performing an attribution calculation in Q4, intentionally or not.

Given the change in FBT rates, and with the Q1 returns due on 20 July 2022, employers should be considering now if they want to perform an attribution calculation in Q4. The old rule of thumb used to be that unless you had a high number of employees earning less than $70,000 per annum or a high turn-over of staff, the associated compliance costs of an attribution calculation would likely exceed any potential tax savings. This is no longer the case because of the new top tax rate. Employers can significantly reduce their FBT bills in most cases by doing an attribution calculation in Q4. We have seen an increase in clients approaching us asking for help with their attribution calculations.

It’s also worth noting that there is a new option to perform a concessionary short form attribution in Q4 for employees who are close to the top tax bracket (further information on this can be found in our April 2022 Tax Alert).

Unclassified benefits are benefits provided by employers that aren't specified in legislation. They often include employment-related gifts, prizes, and free, subsidised, or discounted goods. These benefits are exempt from FBT where the taxable value of the benefit provided to each employee is $300 or less per quarter per employee and the total taxable value of all unclassified benefits provided by the employer over the past four quarters is $22,500 or less. This is a rolling calculation which includes the prior three quarters in conjunction with the current quarter.

In addition, associated employers must be grouped to determine if the thresholds are exceeded (i.e. if two companies within a group together exceed the $22,500 threshold, then both companies are unable to make use of this exemption, even if one or both of them are under the threshold in isolation).

Incorrectly tracking this threshold is a common issue we see. Although unclassified benefits provided in the year ending 31 March may not have breached the $22,500 threshold they often breach the threshold when measured on a rolling quarter basis. As such, it is essential that businesses continue to monitor the de minimis exemption on a rolling basis to ensure unclassified benefits are correctly returned. Not doing so could result in a shortfall penalty and/or use of money interest.

A change in business structure during the year will also have FBT implications, a fact which is often overlooked. For example, an amalgamated company must file a final FBT return with Inland Revenue in the quarter in which the amalgamation occurs. If the employer has been paying FBT at the alternate rate of 49.25% then an attribution calculation must be performed as part of the final return. Employers cannot treat the final return as though it is just another Q1-Q3 return and calculate their FBT liability using the alternate rate. Taking this approach is technically incorrect and has the potential to result in unintended FBT consequences.

In addition to this, where there has been a change in business structure employers should also be aware of how the unclassified benefit de minimis threshold across entities is impacted and to what extent employees’ cash pay is carried across. These issues can be quite complex, so if you are considering or have undergone a change in business structure, we recommend reaching out to your Deloitte tax advisor to discuss the FBT implications.

Employers often try to wash errors in prior FBT returns through the final quarter FBT return using section 113A of the Tax Administration Act 1994. These errors can stem from a variety of different sources, and some that we have seen which resulted in employers over or under returning FBT include incorrect motor vehicle day counts, incorrect tracking of the de minimis threshold, incorrectly including prezzy cards when calculating GST on the value of taxable benefits provided, and having incorrect health insurance premium data for employees.

When correcting errors in prior quarters, it is crucial employers ensure the total FBT value of the adjustments do not exceed the lower of either $10,000 or 2% of annual gross income. We note that this applies on an assessment-by-assessment basis, and so long as the period-by-period impact is less than the relevant threshold, the correction can be made in the next FBT return.

Inland Revenue have been clamping down on this practice in recent years and therefore when preparing FBT returns it is important to ensure that the FBT value of any errors corrected are below this threshold. Anything above the relevant threshold should be corrected through a voluntary disclosure.

Another common error we have seen is where employers carry out a full attribution calculation but apply the individual marginal tax rates rather than the specific FBT marginal tax rates. It is essential the correct rates are used when calculating an employee’s tax on cash pay and their tax on all-inclusive pay. At a high level, under a full attribution calculation an employee’s tax on cash pay is compared with the tax on their all-inclusive pay and the difference is the employer’s FBT liability for the individual employee. Cash pay includes salary & wages, dividends, and interest paid either by an employer or a related employer but excludes employee share scheme income. All-inclusive pay is an employee’s cash pay, less the tax on cash pay, plus the taxable value of all fringes benefits that the employee receives. As noted above, the Q4 attribution calculation is complicated but broadly aligns the FBT rate that applies to benefits provided to each employee with the employee’s marginal tax rate.

Tax on all inclusive pay also has its own separate rates under the FBT rules. It is important to note that these apply on a marginal basis. We have seen instances where employers have taken the rate which relates to the employee’s cash pay or all-inclusive pay band and then applied it as a flat rate. Although simple, this approach is not technically correct and can result in large discrepancies, particularly where employees are close to the thresholds for another bracket.

We regularly see employers returning FBT based on 90 private use days every quarter without considering whether there were any days during the quarter where the motor vehicle was not available for private use. We also see employers claiming exempt days without the necessary support for the exemption being held.

Employers should ensure that all available exempt days for motor vehicles provided are claimed and that there is sufficient supporting documentation to support any exempt days claimed. Motor vehicle policies should be reviewed regularly to determine whether there is an option to reduce the availability for private use, for example by changing the FBT day or issuing letters restricting private use.

Employers often gift or provide employees with goods or services they manufacture. It is important that the provision of these goods or services are treated as unclassified benefits for FBT purposes. Often many employers believe these are simply business expenses and that the FBT regime doesn’t apply. This is not the case.

Where an employer gifts either goods or services that it manufactures, produces, or processes to an employee, the fringe benefit is valued at the market value (including GST). Market value is the lowest price for which identical goods were sold by the same person to an arm’s length buyer, whether wholesaler, retailer, or the public in the New Zealand open market in a sale freely offered and made on ordinary trade terms.

We have also noticed many employers use Excel workbooks to prepare their Q4 full attribution calculations. Although this offers greater flexibility, we find that some of these workbooks are not fit for purpose and in some cases use old or incorrect FBT rates, thresholds, and formulas which do not work or link correctly.

Now is the perfect opportunity for employers to consider the use of “off the shelf” FBT software. Software solutions can streamline the FBT process, reduce errors, and ultimately save valuable time. Please get in touch with your Deloitte tax advisor you would like to know more about how these can benefit your business.

With Inland Revenue’s Tax Governance campaign now in full swing, it is a good time to consider undertaking an external review of FBT compliance. Having an external review of indirect taxes, like FBT, is viewed positively by Inland Revenue and demonstrates good tax governance.

When engaging with Inland Revenue on behalf of clients in a risk review or audit situation, we find that where we have completed an FBT review and can provide a copy of our report it has given Inland Revenue a level of comfort around a taxpayer’s level of compliance, especially where issues identified in the report have been amended and rectified. If you are concerned about your FBT compliance, or are looking to improve your FBT governance, you may wish to consider undertaking a review of FBT. We can offer a range of cost-effective review options which we would be more than happy to talk through.

If you have any questions about any of the issues listed above, please get in touch with your usual Deloitte tax advisor to find out more.

July 2022 - Tax Alerts

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