New FBT option to save some compliance costs

By Robyn Walker & Sam Hornbrook

When the top personal tax rate was increased to 39% from 1 April 2021, this had the corresponding impact of changing FBT rates – being to change the top FBT rate from 49.25% to 63.93% and to increase the tax pooling rate from 42.86% to 49.25%. Essentially that change has ensured that almost all employers are going to have an increase in FBT costs regardless of whether there are any employees earning over $180,000. We have explained these rate changes in a previous article. For employers who had been satisfied with paying FBT on all fringe benefits at 49.25% because it was simple and approximated the marginal tax rate (33%) of most employees, the 63.93% change was unwelcome as it represented either a significant increase in FBT or a significant increase in compliance costs to attribute benefits to employees. 

The Taxation (Annual Rates for 2021-22, GST and Remedial Matters)Bill included a change to allow taxpayers to pay FBT at a flat rate of 49.25%for employees with an all-inclusive pay of less than $129,681 (equivalent to$180,000 after tax). As we explained in our previousarticle, that was a step in the right direction but ultimately didn’tprovide many compliance costs savings for employers as it was necessary toattribute benefits to employees in order to prove the rate could be used. 

Thanks to a submission to the Finance and Expenditure Committee by Deloitte, there is now another option. Employers now can pay FBT at a flat rate of 49.25% for any employees earning gross “cash pay” of $160,000 or less provided that total attributable fringe benefits are $13,400 or less. It would be very rare for an employee to receive benefits near this $13,400 threshold so it allows employers to make a reasonable assumption about benefit levels in order to access the 49.25% rate for all employees earning $160,000 or less. For many employers this will mean only benefits provided to a few employees need to be determined with accuracy, with FBT paid at 63.93% only in relation to those benefits. There remains the option to pay FBT at 49.25% for employees earning between $160,000 and $180,000 if all-inclusive pay remains below $129,681.

With all its available options, it can be easy to get confused about the best approach to calculating FBT. In the table below we set out the options and some pro’s and con’s of each. We recommend that now is a good time for employers to consider having an external review of FBT, we have a range of cost-effective review options which we would be happy to talk through. Having an external review of taxes, like FBT, is positively viewed by Inland Revenue as it demonstrates tax governance is being taken seriously.