FBT and the bike exemption – frequently asked questions

By Robyn Walker

It’s been over a year since an exemption from fringe benefit tax (FBT) for employer-provided bikes, e-bikes, scooters and e-scooters used for commuting to work was added to tax legislation. Based on the frequency of questions received, this is a benefit that many employees are in favour of and are contemplating, particularly as part of sustainability policies. However, many seem uncertain about how the exemption works.

In this article, we work through some of the frequently asked questions on this topic.

We also provide a reminder on the FBT exemption for public transport.

What is the bike exemption?

The exemption was added to legislation without public consultation, so there is little background information to the legislation. The legislation states that a vehicle that an employer provides to an employee for the main purpose of the employee travelling between their home and place of work is not a fringe benefit if the vehicle is a bicycle, an electric bicycle, a scooter or an electric scooter (for the purposes of this article, they’ll be collectively referred to as bikes). The legislation provides the ability for the Governor-General to set a maximum bike value, but to date, this has not been used.

The FBT exemption applies only to the value of the bike and does not apply to accessories, such as safety equipment (helmets, lights) or waterproof bags and clothing.

Can an employer just give an employee a bike?

Provided the employee is intending to use the bike mainly for commuting to and from work, then an employer can provide a bike with no FBT cost. The employer should seek some sort of confirmation/assurance from the employee that the bike will be put to the intended purpose. Inland Revenue has released additional guidance that suggests that such a benefit should only be provided periodically (e.g., once every five years, being the estimated useful life of a bike). This is to mitigate the risk of inappropriate behaviour, such as employees receiving and then on-selling bikes.

Why would an employer give an employee a bike?

In many instances, an employer wouldn’t actually just provide employees with bikes, instead, they would enter into a salary sacrifice arrangement, whereby employees who want a bike agree to a reduction in salary equal to the cost of the bike. This approach is favoured because it allows for equality between employees, as some employees may already own bikes, some employees may live too far away to contemplate commuting by bike, some employees’ circumstances may mean that commuting by bike may be unsuitable, and some people may just not want a bike. A salary sacrifice arrangement means that employees who do want a bike are not better off than other employees.

Having a salary sacrifice option may allow some employees who couldn’t otherwise afford the upfront cost of purchasing a bike to now be able to consider owning a bike.

What is a salary sacrifice?

While salary sacrifices are common in other countries, they’re not particularly common in New Zealand. Conceptually a salary sacrifice is where an employee agrees with their employer to reduce their pre-tax salary or wages in return for benefits, which may be subject to different tax obligations. The relevant tax obligations of the benefit would depend on the scenario and the nature of the agreement between the employer and the employee.

There are no specific New Zealand tax laws in relation to what constitutes a ‘valid salary sacrifice’, however, there are tax rules that exist to ensure there are no tax benefits from salary sacrifices in certain circumstances. For example, tax exemptions for certain work-related meals or employee accommodation will not apply when the employee would be entitled to a greater amount of employment income, should the employee choose, or have chosen, not to receive the benefit of the expenditure. There are no such restrictions on the use of the FBT exemption for bikes.

Determining whether a salary sacrifice is ‘valid’ turns on ascertaining the nature of the agreement between the employee and the employer, this is an objective analysis.

The validity of salary sacrifices is governed by case law, the leading case being Heaton v Bell, a House of Lords decision where the employee was able to use a car provided the employee accepted “an amended wage base.” In Heaton v Bell, the majority found that the arrangement was not a salary sacrifice after determining that the true nature of the arrangement was a deduction from the employee’s net wage rather than an actual reduction of the employee’s gross wage.

The court said the reason the case became so difficult was because of the employer’s failure to make plain the nature of the agreement with the employee, there was a lack of documentation and contradicting documentation existing, namely a pay slip showing a deduction from the employee’s gross wage in the employee’s payslip for the use of the car. The payslip suggested the deduction was a payment for the use of the car each week by the employee rather than a reduction to the gross wage of the employee.

The majority In Heaton v Bell also considered the employee’s ability to receive the “sacrificed” part of their salary as money suggested there had not been a genuine reduction in the employee’s salary. It follows that for a salary sacrifice to be valid, the agreement with the employee must not allow the employee to revert to the non-reduced salary within the period covered by the agreement.

There are a number of other cases on the topic, with the key takeaways from the case law for a salary sacrifice to be valid:

• The employee must agree contractually to reduce their gross salary or wages.

• The salary sacrifice must be articulated as a reduction to the gross salary or wage of an employee. If there is a deduction from an employee’s gross wage it will not be a salary sacrifice.

• The employee must have no right under the agreement to receive the relevant part of their salary in money instead of the benefit.

• The employee’s salary should not depend on the use of the benefit.

• The form of the documentation is important, the nature of the agreement as a salary sacrifice where the employee is agreeing to a reduced wage must be made clear.

If the salary sacrifice is phrased as a deduction rather than a reduction, further issues will arise. If it is a deduction, the arrangement may be treated as a loan which the employee is paying back through deductions and, while the FBT exemption will still apply to the provision of the bike, the employee’s ‘payment’ for the bike will come out of after-tax income and result in no tax benefit. FBT could also be applied to the ‘loan’ from the employer and the employee.

Deloitte can assist with the development of a ‘valid salary sacrifice’ arrangement. It pays to get advice to ensure that everything is documented appropriately to avoid a Heaton v Bell outcome.

How does a salary sacrifice work?

If an employee is required to effectively pay for the bike through a salary sacrifice, the existence of the FBT exemption means that an employee may effectively obtain a bike at a significant discount. To put this into an example, consider an employee earning $60,000 who wants to purchase a bike costing $5,000:

In this example, the effective cost of the $5,000 bike to the employee is only $3,500 and the employee is $1,500/30% better off compared to if they purchased the bike themselves. This example does not consider whether the employer is able to negotiate a bulk purchase discount. In some examples we’ve modelled, employees may be able to effectively purchase a bike at a 50% discount.

Can employees be reimbursed for the cost of their bike?

There is not perfect symmetry between FBT and PAYE rules, so if an employee receives a reimbursement there is no tax exemption available. It’s important to ensure that bikes are provided through the FBT rules, which means that the employer should be the party that is legally purchasing the bike at the outset.

Can the employer own the bike?

Absolutely, an employer could choose to own a fleet of vehicles which are made available to employees for commuting. However, this also means the employer will remain liable for insurance, and any ongoing maintenance costs and will need to consider whether there are any health and safety obligations etc. Employers will also need to monitor the use of the bikes to ensure they are mainly used for commuting.

Where to start?

There seem to be many employers who are considering implementing bike purchase schemes. However, it can also seem like a lot of work to get one off the ground and it's not clear how to get started in developing an efficient scheme.

For some employers, it may be an employee-led initiative, driven by employees who have heard of the tax exemption and who are ready to make the move to commuting by bike. In other cases, the employer may initiate the process.

While there is no right or wrong way to go about it (other than in relation to tax), it’s worth considering:

1. Developing a proposal: prepare a document explaining why the employer should implement a bike purchase scheme. NZTA Waka Kotahi has some great resources here (note this pre-dates the existence of the new FBT exemption).
2. Surveying employees: how much uptake is expected, and, consequently, what is the expected cost of the scheme? Generally, a salary sacrifice will be over a 12-month period, so the employer faces an upfront funding cost but has this repaid through lower salary costs over the same period.
3. Choose a supplier(s): there is an intermediary service which reduces the administration (WorkRide has received product rulings from Inland Revenue), but employers can also work directly with bike stores to purchase bikes. This could take the form of a supply agreement with negotiated discounts based on a bulk purchase, or purchases on a case-by-case basis (ensuring that the employer is purchasing the bike to fall within the FBT regime). Have a chat to a bike store about what types of bikes they currently or can offer to suit the different needs of employees. An employer who operates in multiple locations may want to choose a preferred supplier in each location.
4. Develop policies and processes to implement the plan: for example, consider safeguards such as an upper bike cost, limits on who can participate, restrictions on salary being sacrificed below minimum wage, and bonding policies. Decide whether the employer will contribute anything towards the upfront cost of accessories (as the tax exemption only applies to the bike itself and not associated safety equipment).
5. Pay attention to details: the case law around salary sacrifices show that tax benefits can be lost if arrangements are not implemented properly or there is poor documentation in place. Ensure appropriate employment clauses are put in place and everyone understands what is being agreed to. Deloitte can assist with this.

What is the public transport exemption?

The FBT rules also provide an exemption for employer provided public transport which is mainly for commuting between the home and workplace. This exemption exists to encourage more sustainable commuting options and put public transport on an even footing with on-premises car parks (which are also exempt from FBT).

The issues associated with this FBT exemption are similar to those canvassed above in relation to bikes, with one of the biggest issues being how to have the benefit provided by the employer (and subject to FBT, but exempt) rather than a reimbursement or allowance (subject to PAYE, and not exempt from tax). The provision of public transport to employees has the potential to be a logistical problem, however solutions are emerging, such as Auckland Transport’s Fareshare which allows employers to easily subsidise 25%, 50% or 75% of an employees public transport fare.

What next?

The FBT exemptions represents an opportunity to realise the wider societal benefits of an increased mode-shift by employees out of cars and onto bikes (or into public transport). While there are a number of complexities to work through, these are not insurmountable.

If you want to understand how Deloitte can help with the implementation of a bike purchase scheme please reach out to your usual Deloitte advisor.

*Deloitte is not affiliated with WorkRide or Auckland Transport Fareshare.