OPINION: Let me begin by stating for the record two things about fringe benefit tax (FBT): The provision of fringe benefits as part of an employee's remuneration should be subject to tax; and the design, and the continued application of FBT, is not entirely logical.
Prior to the introduction of FBT many employers provided low or no interest loans, motor vehicles, medical insurance and other benefits. The provision of these "perks" was non-assessable to the employees receiving the benefits, but fully deductible to the employers. Give that at the time the top marginal rate of personal income tax was 66 per cent, providing tax-free fringe benefits was a very effective way of rewarding staff.
It is important to note, however, that accommodation provided by employers to employees was treated as personal income and subject to PAYE.
It was not a surprise that the taxation of fringe benefits was introduced in the mid-1980s, but it was surprising that it was imposed on employers rather than employees. At the time most other countries had systems of determining the value of the benefit and taxing that value as personal income. The official line was that it was administratively easier for employers to pay FBT than collect PAYE on the value of fringe benefits. I suspect it had as much to do with appearing not to impose additional tax on individuals.
FBT is designed to encourage employers to pay the monetary value of the benefit, which is then generally subject to PAYE, instead of providing the benefit. The after-tax cost of a company providing a taxable fringe benefit to employees on the top marginal tax rate is more than the after-tax cost of paying the equivalent value as wages or salary. Despite this, however, charities are exempt from FBT, unless the employee receiving the benefit is employed in a business run for charitable purposes.
There is a common misconception that work-related vehicles are totally exempt from FBT. This is not actually the case; if there is private use, other than travel to and from work and incidental private use, there is a fringe benefit on that day. For example, use of the firm's twin cab ute to tow a boat or caravan over the summer holidays is a fringe benefit.
Even if there is no private use, a work- related vehicle must be a motor vehicle that prominently and permanently displays on its exterior that form of identification the employer regularly uses in carrying on its undertaking.
The Inland Revenue Department (IRD) states that "the employer must notify employees in writing that the only private use the vehicle is available for is for travel between home and work and travel incidental to business travel. We suggest you give employees a separate letter explaining this restriction rather than simply mentioning it as another clause in an employment contract."
That raises the thorny issue of taking a car home for safe garaging, which I will cover in a future article.
It is no wonder that FBT is one of our least complied-with taxes and is frequently an issue that results in adjustments after an IRD audit.
Murray McClennan is director of Tax Central Ltd. He can be contacted by emailing email@example.com. The above comments are of a general nature only and are not a substitute for specific advice.
- The Southland Times