As we noted in an earlier article, from 1 April 2021 the top marginal tax rate for individuals increased to 39% and the top FBT rate was raised to 63.93%. Prior to this change, many employers were using the single rate option to calculate FBT on all benefits provided at a flat rate of 49.25%. Employers that do not have any employees who earn over the $180,000 threshold faced an unwarranted 30% increase in their FBT bill. As a result of this increase more and more employers have been forced to consider using the compliance heavy alternate rate method of calculating FBT to minimise the increase in their FBT liability.

Under the alternate rate method, the employer pays FBT at either 49.25% or 63.93% in the first three FBT returns each year and then performs an attribution calculation for the March quarter, which acts as a wash-up of the annual FBT liability. The full attribution calculation is complicated but broadly aligns the FBT rate that applies to benefits provided to each employee with their marginal tax rate.

The FBT rules recognise that performing this full attribution calculation carries a higher compliance cost so also provides a low compliance cost option. This currently allows employers to calculate the annual FBT liability for the purpose of the washup calculation at the flat rate of 63.93% on the taxable value of the attributed fringe benefits, and this is where the proposed change will take place.

Under the proposal, employers will have the choice to calculate their annual FBT liability using the flat rate of 49.25%, except for attributed benefits provided to employees that have all-inclusive pay of $129,681 or more which must be taxed at 63.93%. (All-inclusive pay is net cash remuneration plus the value of attributed fringe benefits, and $129,681 of all-inclusive pay is equivalent to $180,000 gross income.) Generally, this higher rate will only apply to benefits provided to employees earning close to or more than $180,000 of gross salary and wages.

Where employees are clearly under or over the all-inclusive pay threshold amount, it will be easy for employers to pick the appropriate FBT rate to apply in the wash up calculation. But for employees that are on the cusp of the threshold, employers will still need to calculate the employee’s all-inclusive pay, which involves determining which benefits need to be attributed as if a full attribution calculation is going to be undertaken (i.e. the very process that the proposal seeks to avoid).

As the change only affects the March quarter FBT return, any employers who paid FBT at the higher rate of 63.93% in the June 2021 quarter will need to wait until the March 2022 FBT return is filed to receive a refund of the excess paid. This is just adding an unnecessary layer of complexity for what will largely be smaller employers.

While this is a welcome change, especially for smaller employers, the Supplementary Departmental Disclosure Statement issued with the proposal states that this change has “been assessed as having no or a very minor impact on businesses, individuals, or organisations”. This assessment reflects that the change really just legislates a de facto approach that many employers would have taken in calculating their annual FBT liability in the March 2022 quarter, and the amendment would have been completely unnecessary if Inland Revenue had more fully considered some of the wider implications of introducing the new 39% top tax rate in the first place.

It is also disappointing to note that there has been no change to the FBT rate that applies to benefits that are able to be pooled under the alternate rate calculation methodology. This rate increased from 42.86% to 49.25% from 1 April 2021 and represents another unwarranted tax grab from employers that do not have many or any employees earning over $180,000. This aspect of the original FBT rate change has previously been raised with Inland Revenue officials as (in our view) needing to be addressed to restore a common sense position for employers.

With more calculation options now available, please reach out to your Deloitte adviser if you would like to discuss how to calculate your FBT liability in your next FBT return or to review the benefits you are currently providing to employees to ensure you are not overpaying FBT.