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FBT on work related vehicles… a refresher

July 2024 - Tax Alert

By Robyn Walker, Sam Hornbrook & Viola Trnski

Utes have long been part of the tax debate, most recently with National delivering on its election promise to scrap the previous Government’s Clean Car Discount scheme (also dubbed the “Ute Tax” as it charged a levy on high-emitting vehicles, including utes).

Before this – and perhaps still today – there was a perception that utes receive a tax break. The kernel of truth behind this belief is the work-related vehicle fringe benefit tax (FBT) exemption. This exemption specifically excludes “cars” and is primarily the domain of work vans and utes.

Despite the uptake of EV’s, as a country our heart still lies with utes, which have continued to top car sales charts year after year. The question remains whether there is a tax exemption incentivising the growing number of double-cab utes on New Zealand streets.

In this article, we explain the difference between a car, a ute and a work-related vehicle, as well as how the tax exemption applies.

What is subject to FBT?

A motor vehicle fringe benefit arises when an employer makes a motor vehicle available to an employee for their private use, in connection with the employment relationship. It is irrelevant whether a vehicle is actually used (unless a specific exemption applies).

The exemptions are:

  • Work-related vehicle (WRV) exemption
  • Emergency call exemption
  • Business travel exceeding 24 hours exemption
  • Here we are focusing on the WRV exemption.

What is a work-related vehicle?

The WRV definition has several layers to it, which can confuse.

A vehicle is only exempt from FBT on days that it satisfies all of the WRV criteria; FBT will apply on any days the criteria are not satisfied, most notably the prohibition on private use.

A WRV is a motor vehicle that:

  1. Prominently and permanently displays on its exterior the employer’s identification (e.g. it is branded/features logos, and the branding is permanent, i.e. they cannot be magnets); and
  2. Is not a “car”; and
  3. Is not available for the employee’s private use, except for private use that is:
    • Travel to and from their home that is necessary in, and a condition of, their employment; or
    • Other travel in the course of their employment during which the travel arises incidentally to the business use.

A “car” means a motor vehicle designed exclusively or mainly to carry people; it includes a motor vehicle that has rear doors or collapsible rear seats. Most motor vehicles will be cars, however, if a car has had its rear seats removed or permanently bolted down (meaning it is not used mainly to carry people), then the vehicle will not be a car for the purposes of the WRV exemption.

Inland Revenue’s view in relation to double-cab utes is: “This vehicle is designed equally for carrying people and for carrying goods. The front half of the ute comprises the cab which has two rows of seats for carrying people. The back half of the vehicle is the tray, which is used for carrying goods. This vehicle is not a car.”

So, is a sign-written double cab ute automatically exempt from FBT?

No. There is a common misconception that all utes are exempt from FBT. However, a sign-written ute can qualify for the WRV exemption, if private use is restricted to home-to-work travel and any incidental private use which occurs while the vehicle is being used for business purposes (for example stopping at the supermarket on the way home).

To qualify for the WRV exemption an employer should have a private use restriction in place, ideally a letter issued to the employee or a specific clause in an employment agreement.

Compliance with the private use restrictions should be regularly checked by the employer; Inland Revenue recommends checks are done every quarter and could include checking petrol purchases and logbooks.

As the WRV exemption applies on a daily basis an employer can allow private use at certain times and pay FBT on those private use days. For example, an employer may restrict private use Monday to Friday and allow private use on Saturday and Sunday; in this case the employer would pay FBT for 2 days each week (regardless of whether the vehicle is actually used by the employee on the weekends).

Can any ute use qualify?

One of the WRV criteria mentioned above is that the travel between home and work must be “necessary”. What does this mean? Essentially, this is looking at why the vehicle is provided. Inland Revenue’s interpretation statement on FBT on motor vehicles sets out the Commissioner’s view:

“The definition of “necessary” suggests there must be a direct or needed relationship between the employee’s travel to and from home and their employment. This may not necessarily be “essential”, but must certainly be “required or needed” in their employment …. If the travel is not necessary in the employee’s employment, then the travel will be subject to FBT. For example, if a receptionist is given a vehicle to travel between home and work, the employer would not be entitled to the benefit of the private use exclusion in s CX 38(3)(a), because the travel to and from home is not necessary to the receptionist’s role.”

Whether something is “necessary” will depend on the facts and circumstances of a particular situation. While conceptionally it may be reasonable to say that a receptionist has no need to be provided with a ute, the receptionist may have a requirement to regularly pick up work supplies on the way to or from work, or there may be a requirement for a vehicle to be taken home due to a lack of secure parking at the workplace.

What if you’ve been doing it wrong?

Tax rules are usually very specific, and if you’re not clear on the details it can be easy to get it wrong. It’s quite common to hear things like “my accountant said we should get a ute for the business because there is no tax” with no knowledge of the additional criteria. As outlined above, it’s not as simple as just buying a ute: all the WRV criteria need to be satisfied on every day of the year in order for the ute to fall outside of the FBT net. If your ute isn’t permanently and prominently sign-written, the ute isn’t “necessary”, or you don’t have a private use restriction in place, then the ute is subject to FBT.

If FBT hasn’t been paid in the past, the first step is to get your FBT positions correct going forward. The next step is to make a voluntary disclosure to Inland Revenue in relation to the past error. If a voluntary disclosure is made prior to Inland Revenue auditing a business any shortfall penalties will generally be remitted in full.

If you’re uncertain about how FBT applies to your vehicles, please get in touch with your usual Deloitte advisor.

If your business has paid FBT at the flat rate of 63.93% on all fringe benefits for the 2023/24 FBT year, its not too late to consider whether there are any FBT savings available from undertaking an FBT attribution – which can lower your FBT cost to rates which match the tax rates applying to your employees. A Notice of Proposed Adjustment (NOPA) can be filed to amend a previously filed tax return within four months of filing. Talk to your usual Deloitte advisor if you want to learn more about this process.

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