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New FBT exemptions for bikes and public transport explained

Why do we have these new exemptions

The Fringe Benefit Tax (FBT) rules are home to three new exemptions from 1 April 2023:

  1. Employer-subsidised public transport, mainly for the purpose of travelling between home and work (“the public transport exemption”)
  2. The provision of a ‘self-powered or low-powered’ vehicle (i.e. a bike or scooter) mainly for the purpose of travelling between home and work (“the bike exemption”)
  3. Employer contributions toward ‘vehicle-share services’ (i.e. bikes and scooters) used mainly for the purpose of travelling between home and work (“the vehicle-share exemption”)

At its heart, the reason we have a new exemption for public transport is not because of a belief that public transport is better for the environment than cars (even though it is), but because of continued distortions caused by the inability to apply FBT to employer-provided car parks (taxing car parks was proposed and then abandoned due to practical issues and compliance costs in 2013). This was made clear in the regulatory impact assessment accompanying the most recent tax changes, where Inland Revenue officials expressed a preference for another go at taxing car parks over exempting public transport. Despite the reluctance of Inland Revenue, the Government was in favour of introducing this new exemption.

In response to the proposed public transport exemption, over 400 submissions were made on the proposal also pointing out that a logical step would be to exempt bikes from FBT. While the notion was rejected by the Finance and Expenditure Committee and Officials, the Green Party of Aotearoa New Zealand backed the submitters and prepared a Supplementary Order Paper (SOP) proposing to add the extra FBT exemptions. The SOP was adapted and slightly amended by the Labour Party and added into legislation on 14 March 2023.

It’s unlikely that lots of employers are going to rush out and buy bikes and scooters for employees, but the availability of these new FBT exemptions provides employers with more options when they’re considering how to remunerate employees, considering sustainability issues, and also thinking about how to encourage remote employees back into the office.

While taking public transport, cycling or scootering to work will suit some employees, it's not going to be an option that all employees will be able to take up; so, for equity reasons, it’s possible that the higher value new exemptions will form part of a ‘salary sacrifice’ arrangement (i.e. before tax remuneration is reduced by the value of the benefit being provided) rather than being an extra ‘free’ benefit to those who want it.

When it comes to applying the bike exemption, for employees who can’t afford an immediate cash-flow hit of a salary sacrifice options, could exist for employers to purchase the bike upfront and loan these to employees rather immediately transferring ownership, or to purchase the bike and have the cost repaid over time by the employee. Each of these options may come with other complications such as insurance issues or the potential application of FBT to an employment-related loan.

We note that the exemption does not extend to any accessories, such as helmets, locks, lights etc, so if employers are also planning to provide these, then FBT could apply (subject to the application of the FBT de minimis rule).

The key criterion for all three new exemptions is that the benefit needs to be mainly for travel between home and work. The key element is mainly, meaning that a reasonable amount of private use is permitted. For example, a commuting bike could be used for leisure at the weekend or taken to the shops without invalidating the exemption. A high-spec mountain bike that is not suited to commuting would be unlikely to qualify (unless the employees’ workplace was up a mountain). Our expectation is that the application of the FBT exemption will apply at the time the benefit is provided, so if a bike or scooter is provided based on the intention of the employee to use it mainly for commuting and the employee subsequently decides that they don’t prefer that mode of transport the exemption would not be unwound. There should not be an obligation on employers to monitor how the bike/scooter is actually used (however, there is no official guidance on this at present).

In relation to the bike exemption, the new legislation includes a regulation-making power to put a maximum allowable cost on the relevant bike/scooter. This is designed to prevent abuse, and in the words of the Minister of Revenue: “we're not going to be allowing this to be rorted through gold-plated bikes”. To date, no regulations have been issued.

Refer to our box for further details for each exemption.

One of the key matters for employers to be aware of is there is only an exemption from FBT, and there is no equivalent exemption from PAYE. Critically, what this means is that employers need to stop and consider how they are providing any new benefits before assuming there is no tax cost.

The golden rule when it comes to determining that tax applies is to consider who has the legal liability for the cost. If an employer incurs a cost (i.e. the employer purchases a bike, or the employer contracts with a transport business to provide public transport passes), then FBT applies. If an employee incurs a cost and the employer reimburses the cost (or pays an allowance) then PAYE applies and there is no exemption (e.g. an employee goes to their retailer of choice and purchases a bike and claims reimbursement from their employer).

When it comes to providing a benefit like public transport or use of a vehicle-share app, it is administratively intensive to provide this in a way that falls within FBT. We have consistently raised the absurdity of this outcome, and the Minister of Revenue has indicated, at least in relation to the public transport exemption, that he’s prepared to look at this issue when he was questioned about it during the legislative process:

"… These rules do need to be practical. They are designed with a view to minimising avoidance, but you can go too far in your precautions. If I understand the member's point correctly, he could be referring to the situation where an employer, rather than giving someone $10 a week to cover their bus fares, is required to purchase the bus fares on behalf of the employee directly from Auckland Transport, for example. That's an issue that has been raised by others in addition to the member. We are concerned to look at that and make sure that we're not creating another problem by being too loose there, but we will have a look at that issue again, and if it's not working in as practical a way as was hoped, we will address that in a future tax bill—perhaps in the May remedial tax bill.”

So, watch this space, but in the meantime, make sure consideration is given to how any of these new benefits will be offered in order to avoid an unexpected tax cost.

Public Transport Exemption:

A fare that an employer subsidises mainly for the purposes of an employee travelling between their home and place of work is not a fringe benefit if the fare is for 1 or more of the following: bus service, rail vehicle, ferry, cable car.

Bike exemption:

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; an electric scooter; or any other vehicle declared under section 168A of the Land Transport Act 1998 to be a mobility device or not a motor vehicle.

Vehicle-share exemption:

A benefit that an employer provides to an employee in the form of assistance with the payment of the employee’s costs of using a vehicle-share service (meaning a transport service that allows users to hire a vehicle for a point-to-point trip through a mobile telecommunication device) for the main purpose of an employee travelling between their home and place of work is not a fringe benefit if the vehicle-share service provides use of 1 or more of the following vehicles to the employee: a bicycle; an electric bicycle; a scooter; an electric scooter; and any other vehicle declared under section 168A of the Land Transport Act 1998 to be a mobility device or not a motor vehicle.

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