2017 marked the first year the Inland Revenue had a dedicated audit team which focused on Fringe Benefit Tax (FBT).
While FBT makes up less than 5% of the Government’s tax take, the reviews proved that FBT has now become a staple part of the Inland Revenue audit process and taxpayers need to give the appropriate attention to compliance and the tax positions taken.
So, when are you liable for FBT?
An employer is liable to pay FBT on fringe benefits (meaning non- cash benefits) the employer provides to its employees. A list of common non- cash benefits that can be subject to FBT are:
- Insurance premiums
- Motor vehicles
- Subsidised transport
- Staff vouchers
- Offsite carparks
- In some instances, third party benefits
Out of the above list, the big-ticket fringe benefit an employer could provide to an employee is making a motor vehicle available for the employee’s private use. Put simply:
- If an employer makes a motor vehicle available to an employee for their private use, the employer is likely to have to pay FBT in relation to that motor vehicle even if there is no actual private use. It is making the vehicle available for private use that triggers the tax liability, not the actual private use.
- Generally, travel between an employee’s home and work is private use. So simply restricting an employee to taking the vehicle home each night and using it to return to work the next day could still trigger an FBT liability.
So, none of this is new, right? In a sense, nothing is new, but what came out of the 2017 FBT Compliance Audits is the Inland Revenue are more focused on the substance of your business model and what this means for employees, followed by documentation to support the position.
While in most cases taxpayers had the substance part, the lack of documentation weakened the FBT position taken and in some cases resulted in negotiated settlements with the Inland Revenue. This is a costly exercise as the Inland Revenue can reassess 4 years of FBT returns going back and if you have not filed returns penalties may apply. Remember, penalties will increase the amount owed to Inland Revenue over and above the core FBT owed.
If you provide a company owned / company leased motor vehicle to an employee the Inland Revenue want to review:
- The employees job description
- The employees employment contract
- The company policy on motor vehicles
- Any private use restriction letter in place signed by the Directors of the company and the respective employee.
- Support showing regular checks on the motor vehicle to ensure no private use is arising.
- Employees performance review notes to see comments on adherence to company policies.
- For shareholder- employees it has been suggested a higher standard should apply to the documentation.
So, what can you do?
While some advisors will go straight to the black letter of the law, including what restrictive letters are in place, what is likely needed is a fresh pair of eyes. In order to truly understand your specific FBT position, your advisor needs to understand your business model and then what duties you require your employees to undertake. Naturally what documentation you have in place will be important in making an assessment, including:
- Have you elected for a different 24-hour period? For example, if an employee takes a vehicle home at 6 pm and returns to work the next day at 8 am, the vehicle is available for private use on two days (due to midnight being the ending of one day and the start of the next). If the employee taking the vehicle home is not a regular occurrence, the employer may wish to elect to measure their “days” from midday to midday which would result in only one day on which the vehicle was available for private use.
- If an employer places restrictions on the private use of motor vehicles, the employer should document that restriction, make sure there is evidence that the restriction has been notified to employees, and actively undertake checks to ensure employees are complying with the restriction. Inland Revenue expects these checks to be undertaken at least quarterly.
Are there any exemptions to FBT?
There are exemptions from paying FBT on motor vehicles for work-related business trips, use of the vehicle for emergency calls, and for vehicles that qualify as work-related vehicles.
It has become clear that the work-related vehicle exemption is commonly misunderstood. If your vehicle is sign written with the employer’s name and/or logo this does not make the vehicle a work-related motor vehicle. While having the vehicle sign written is a requirement for a work-related vehicle, there are a number of other requirements to be satisfied before this exemption applies. To be a work-related vehicle the vehicle must be:
- Sign written; and
- Must not be a vehicle designed principally to carry passengers; and
- For which private use is limited to travel between home and work as a requirement of the employee’s work or is otherwise incidental to the performance of employment duties.
So where to from here?
FBT is here to stay and it cannot be ignored. What last year has shown even more clearly is that FBT is very case-specific, and the key is to sit down with your tax advisor and talk about the benefits you provide, your usage and then get a fact-specific opinion. Something as small as the wording of the insurance policy can change the tax treatment!
It is important to seek a written tax opinion as then you have discharged your duty by “taking reasonable care”. This means that if the Inland Revenue disagrees with what your company has filed, then they can’t impose penalties.
At Bellingham Wallace, we aim to keep you safe and help you grow. Underpinning this is a firm tax strategy around how you return your taxes. Once the FBT position is confirmed, we use proven audit technology to automate the various FBT calculations required and then file with the Inland Revenue. We would be happy to meet with you to discuss your particular circumstances and recommend how you should be returning Fringe Benefit Tax.