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The mid-1980s also saw some radical changes to the New Zealand tax landscape, with the introduction of new regimes that, today, feel like they’ve been with us forever. In particular, Goods and Services Tax was introduced, as was Fringe Benefit Tax (FBT).
The rationale for introducing FBT was quite straight-forward. Employees being paid normal wages and salaries were (and continue to be) taxed through the PAYE system. However, employees whose remuneration packages included non-cash items were generally not taxed. Such “fringe benefits” typically included a company car, low-interest loans, subsidised goods and services and other benefits.
That situation encouraged the practice of salary sacrifice. An employer and employee could negotiate a total remuneration package that had a lower cash component (and therefore a lesser amount subject to tax) with the difference made up in other benefits not subject to tax. Depending on the outcome of the negotiation, the tax saving could benefit either the employer (with a lower gross cost yet the employee still receiving the same net value) or the employee (with the total gross value remaining the same, but a higher net value).
The introduction of FBT changed that. Payable by the employer, it is an important factor in determining the total cost of employing someone. Anecdotally, the most common benefits provided relate to motor vehicles – and often the FBT relates to the shareholder-employee of a business run through a company structure.
There are many rules and exceptions that relate to FBT, making it a complex and time-consuming tax to deal with. It has been tinkered with over the years, most notably early last decade. At that time, the flat rate of 49% was changed to a system of specifically attributing benefits to employees, and matching the FBT rate to each employee’s personal effective tax rate. This made doing FBT calculations even more convoluted.
Recently, the Minister of Revenue has announced proposed further changes to the FBT rules. Essentially, two main changes are planned.
The first addresses an oddity regarding the provision of car parks, arising from a general exception from FBT for certain benefits provided on the employer’s premises. If the employer provides a carpark space that is owned or specifically leased, then there is no FBT. However, if the benefit is simply the right to any space in a facility then there is FBT as no particular space is owned or leased, and so cannot be said to be part of the employer’s premises. The proposed changes will generally see all carparks subject to FBT (with some exceptions – of course).
The second change will ensure that certain benefits are included in assessing a person’s entitlement to social assistance (eg Working for Families, student loans, child support). Some provision for this already exists but it is generally limited to where a person is a controlling shareholder in a company that employs them
The general exemption for charities is also to be reviewed. Some charities have taken advantage of this loophole to significantly swap cash salaries for benefits in kind, such as grocery and petrol vouchers. While that may well comply with the “black letter” of the law, it is arguably (to paraphrase recent court decisions on tax avoidance) not quite what Parliament had in mind.
FBT is the bane of many payroll administrators. It is complicated to work with. But it is a necessary component of a robust tax system. The proposed changes won’t make calculating FBT easier but they will further the integrity and fairness of the tax system.
Geordie HooftPartner, Tax
Grant Thornton New Zealand Ltd
T +64 (0)3 379 9580
E geordie.hooft@nz.gt.com