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FBT exemption for bikes – where to start

Tax Alert - October 2023

By Robyn Walker & Blake Hawes

Six months have now passed since we saw the introduction of some eco-friendly Fringe Benefit Tax (FBT) exemptions for the provision of bikes, scooters and public transport. While these new rules were introduced with great intentions, as the rules were added into legislation without any public consultation many employers remain uncertain about how to use these initiatives.

In this article, we explain some things to consider when considering an employee bike scheme.

It sounds simple, right?

When an employer provides benefits outside of the usual salary & wages or bonus, those additional benefits are (generally) subject to FBT. From 1 April 2023 a new exemption was introduced to remove FBT when a bike, e-bike, scooter or e-scooter (collectively referred to as ‘bike’ for the purposes of this article) is provided by an employer for the main purpose of an employee travelling between their home and place of work.

Upon first glance at the new rules, they look just like how you’d think; if an employer provides a bike to an employee for the purposes of travelling to and from work the provision of the bike will not be subject to FBT. However, employers have a number of issues to work through. To start with, will the employer own a fleet of bikes that employees can use, rent bikes, or purchase and transfer ownership of the bikes to employees? The issues to consider vary depending on the approach taken. In this article we’ll focus on the last scenario.

Why have an employee bike scheme?

Employer bike purchase schemes achieve multiple outcomes at once. A key one is that they help to overcome the barrier to employees of the high upfront cost of a bike, by spreading the cost over time. They deliver a tangible benefit for employees in facilitating a purchase that in turn enables better employee health and wellbeing outcomes, as well as commuting time and cost savings. These benefits are available across age groups and flow through to the workplace.

As well as the health and productivity of their employees, such schemes also deliver benefits more directly to organisations. Bikes can be used for work-based travel, enabling time and cost savings, as well as reducing carbon dioxide emissions, contributing to corporate sustainability goals. Having a bike purchase scheme could aid in the recruitment of staff and generally improve staff morale.

While employers may wish to consider implementing a scheme, employees may also wish to champion this issue with their employers by proposing a scheme. Waka Kotahi NZ Transport Agency has a wealth of useful resources to help with the development of employer bike purchase schemes; however, a word of warning, these have not yet been updated to incorporate the impact of the new FBT exemptions.

Employee bike purchase schemes

When an employer is providing an employee with a bike, the employer needs to consider whether the bike is gifted outright or whether the employee effectively pays for the bike through a reduction in salary and wages. In most instances we’ve come across, including for employee equity purposes (some employees may already own a bike, be unable to ride, or not have circumstances conducive to riding a bike) it is intended that employees who opt for a bike would need to enter into a salary sacrifice arrangement in order to fund the cost of the bike. That is, remuneration is looked at as a package, a combination of cash and a bike.

Even 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 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 or GST. In some examples we’ve modelled, employees may be able to effectively purchase a bike at a greater than 50% discount through developing a bike purchase scheme.

While this sounds great, as always with tax, the devil is in the detail and when the practical implications of getting a bike to an employee are considered, the ability to make use of this new FBT exemption can be more complex than first thought.

What tax issues need to be considered?

The first and biggest roadblock to encouraging employers to take up this exemption is that unfortunately it only applies to FBT, therefore if an employee were to go out and buy a bike and seek reimbursement from their employer, that would remain subject to tax through PAYE. This means that the employer must be the one paying for the bike and providing it to the employee.

As noted above, an employer may wish to implement a salary sacrifice arrangement to effectively have employees fund the purchase price of the bike. Salary sacrifices however come with their own web of complexity and if a salary sacrifice is not “valid” the tax savings may not actually eventuate. Where an employee agrees for an amount to be deducted from salary and wages, this will not be a valid salary sacrifice, and the deduction will need to be made from after-tax income. To be a valid salary sacrifice an employee must have no rights under their employment contract to receive the relevant part of the salary in money instead of a bike.

If a valid salary sacrifice is not achieved there is a risk that the employer could be considered to have given an employee a loan which the employee slowly pays back through payroll deductions. In this circumstance the employee will remain taxable on their full salary/wages, the payroll deduction will be made from after-tax earnings and a taxable fringe benefit may arise on the interest-free loan provided by the employer. If the employee is paying for a bike that the employer purchased, there is a risk the employer is deemed to have sold the bike to the employee, in which case GST would be likely be payable on the “sale” of this bike.

Even where a salary sacrifice is valid, consideration then would need to be given to the flow on effects it might have to the payments of bonuses, or the impact on employer and employee KiwiSaver contributions, and other social assistance payments.

The new FBT exemption for bikes applies if it has been provided for the main purpose of the employee travelling between their home and place of work. Employers will need to ensure they have complied with this requirement. The “main purpose” test is designed to acknowledge that there can be other use of the bike without the bike being disqualified from the exemption. While the employer is not expected to monitor the use of the bikes, Inland Revenue expects appropriate steps to be taken to ensure the main purpose test is satisfied. In our view, this is a test that employers need to apply at the time the benefit is provided, whether that is a one-off provision of a bike, continuously through access to an employer-owned fleet of bikes, or rental arrangements.

What other issues exist?

While the exemption from tax brings several tax issues, before implementing an employee bike purchase scheme there are other non-tax issues to consider, including:

  • Under a salary sacrifice, the employee will essentially be paying for the bike over an extended period (e.g., twelve months) and employers will need to consider bonding arrangements to recover amounts from employees who leave before the salary sacrifice period has ended.
  • What is the funding cost to the organisation of the upfront purchase of bikes.
  • Who in the organisation will be responsible for running the scheme, including entering into supplier agreements.
  • Minimum wage laws should be considered (an employer should not be allowing an employee to salary sacrifice their wages below the minimum wage).
  • Are there any health and safety obligations? The FBT exemption extends only to bikes and not any accessories. Employers may wish to consider whether they provide a helmet and other must-haves for commuters (lights, a lock, wet weather gear).
  • Insurance and warranties.
  • Ensuring there is sufficient secure storage available at or near the workplace.

What next?

The new FBT exemptions represent an opportunity to realise the wider societal benefits from an increased mode-shift by employees out of cars and onto bikes. While there are a number of complexities to work through, these are not insurmountable. While this article considers a bike purchase scheme, at least one supplier is working on the introduction of an alternative bike rental scheme (which may simplify matters for employers).

From a tax perspective, the key issues for employers are to ensure arrangements are structured to fall within the FBT rather than PAYE regime and to ensure arrangements with employers are worded appropriately to be valid salary sacrifice arrangements.

If you want to talk to someone who is as enthusiastic about bikes as they are tax, please reach out to the authors or your usual Deloitte advisor.

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