FBTnews - 2005

Issue 12 September 2005

In this issue:

• FBT review
• FBT prescribed interest rate for loans
• What is exempt and what is subject to FBT when an employee relocates from one country to another?

Welcome to FBTnews

If you have an FBT topic you'd like to see in the newsletter you can write to the Editor, FBTnews, PO Box 2198, Wellington or email us at fbt.news@ird.govt.nz and we'll aim to cover the topic in a future edition.

FBT review

New legislation proposes a number of changes relating to FBT, designed to reduce compliance costs and remove anomalies in the rules while maintaining the objectives of FBT.

A review of FBT began in October 2002, when the Government asked taxpayers to identify areas they wished to be addressed.

A discussion document, Streamlining the taxation of fringe benefits, was released in December 2003 and over 60 submissions were received. The proposed legislative changes are the outcome of consultation with key submitters.

Proposed amendments

Motor vehicles

Valuation basis

Owners will have the choice of calculating the fringe benefit based on the vehicle's tax value for depreciation purposes or, as at present, its cost.

The value of motor vehicles for FBT purposes was the issue most frequently raised in submissions. Under the current rules, FBT liability remains constant as the vehicle declines in value over time.

The tax value option which allows for the depreciation of vehicles will be useful to employers who hold vehicles for more than five years. Under this option there is a minimum tax value of $8,333.

Valuation rate

The current annual valuation rate applying to the fringe benefit that arises where an employee has the use of an employer-provided vehicle reduces from 24% to 20% of cost.

The equivalent rate under the alternative tax value option will be 36%.

A review of the cost of motoring shows a decline over the past 20 years, therefore, using a rate of 24% of a vehicle's cost overstates the value of the benefit.  Reducing the rate should provide employers with a significant saving in FBT.

Leased vehicles

The treatment of leased vehicles will be aligned with that of owned vehicles so that the fringe benefit from a leased vehicle will be based on its cost price or tax value rather than as at present, its market value.

Lessors will be required to disclose to the lessee the relevant cost price or tax value of the vehicle for FBT purposes.

The "suspension" of vehicle leases will be legislatively overridden and private use will be treated as a fringe benefit. Vehicles leased from shareholder-employees will be treated the same as all other leased vehicles so that FBT will be liable where the vehicle is available for private use.

Elect start time for an FBT day

Employers will be able to elect the start time of an FBT day to be any time in a 24-hour period.

With this option you may choose to begin the FBT day at, for example, 6 pm.  Any private travel between 6 pm on the chosen day and 6 pm the following day would be treated as being the same day.  An election applies to all the employer's vehicles and lasts for two years. If no election is made, the current calendar day would apply.

Other changes

Loans to employees

Employers will have the option of valuing the benefit of loans to employees at either the prescribed rate of interest or the market rate. This removes the risk of a fringe benefit arising as a result of the prescribed rate becoming out-of-date even when the employer is charging the employee the market rate.

Minimum-value thresholds

The minimum-value thresholds that apply to unclassified fringe benefits will increase - for employees to $200 each quarter, and for employers to $15,000 yearly.

This change is designed to reduce compliance costs for employers who provide only small miscellaneous fringe benefits by keeping them out of the FBT net.

Exempting private use of business tools

The private use of employer-owned or leased business tools, such as laptops and mobile phones, will be exempt from FBT when they are used primarily for business purposes, and the cost of any tool does not exceed $5,000.

Health and safety obligations

Health and safety related benefits (such as health checks) will be exempt from FBT irrespective of whether they are provided on or off the employer's premises. The health and safety related benefits must be as a result of responses aimed at eliminating workplace hazards under the Health and Safety in Employment Act.

Income protection insurance

An employee will be able to claim an income tax deduction for income protection insurance premiums paid by their employer on their behalf. Income protection insurance contributions paid by employers, for the benefit of employees will be subject to FBT.

"On-premises" exemption

The "on-premises" exemption will be extended to other entities in the same group. To recognise that entities within a group may operate more like a single economic entity, the general on-premises exemption is being extended to include the premises of other companies in the same group who share 66%, or greater, common ownership with the employer company.

Application of general anti-avoidance rule

The general anti-avoidance rule for income tax will be applied to FBT. This change will mean that arrangements that survive the specific anti-avoidance rule on a technicality might still be caught as avoidance.

Discounts to employees

FBT will not apply to benefits that arise when an employer secures bulk discounts for employees, provided the discounts are available to other groups of a comparable size, who have negotiated the discounts on an arm's-length basis, unrelated to employment.

Charities exemption

The provision of credit cards and other short-term credit facilities will be excluded from the exemption that allows non-cash benefits provided to employees of charitable organisations to be exempt from FBT. This will not apply when the aggregate value of the benefits in a year does not exceed 5% of an employee's salary.

Employer-paid family travel

An exemption from FBT will be allowed when an employer pays for a member of an employee's family to travel to visit the employee. The travel must be because of a temporary change in the employee's place of work. This exemption is limited to the amount that would have been exempt from FBT if the employee had made the visit.

Share options

Clarification that the cancellation of share options in exchange for cash is a disposal and is therefore employment income of the employee and not a fringe benefit.

Filing and election changes

An election to change to paying FBT annually or on an income year basis will be able to be made by telephone instead of having to be in writing.

Companies with non-standard balance dates who elect to switch from quarterly filing to income year part-way through a year must complete a final quarterly payment calculation in relation to any incomplete year.

Employers ceasing to employ staff

Employers who cease to employ staff during the year, and have no intention of replacing them, will have the option of applying the 64% FBT rate rather than the multi-rate for their final IR 420.

When will the changes apply from?

It is proposed that the amendments will apply from 1 April 2006, or, for employers who pay FBT on an income year basis, from the income year beginning on or after that date.

We'll give you more information about the changes in future issues of FBTnews.

FBT prescribed interest rate for loans

For the quarter beginning 1 July 2005 the prescribed rate of interest for calculating the fringe benefit value of low-interest loans to employees is 9.01%. This is an increase from the previous quarter's rate of 8.76%.

What is exempt and what is subject to FBT when an employee relocates from one country to another?

As a guide, benefits in cash are assessable income of the employee, while benefits in kind are an FBT liability to the employer.

Generally, where an employer requires an employee to transfer to a new location and the costs of relocation are reimbursed by the employer, this is treated as exempt income to the employee.  This includes payments that reimburse for costs associated with the transfer, such as legal costs and land agents' fees incurred on selling and buying a residence. In addition, any allowance paid to an employee on transfer who is maintaining two homes while the first one is being sold is exempt.

Not exempt is any payment made to compensate an employee for additional capital and interest costs that may be incurred as a result of having to purchase a residence in a higher cost area. This is assessable income to the employee.

Any expenses reimbursed to an employee as part of their remuneration package, where there has been no requirement to move, are assessable income to the employee.

 

Kathleen Clement
Manager
Delivery, Planning and Initiation

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Date published: 07 Sep 2005

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