FBTnews - 2006
Issue 14 March-April 2006
In this issue:
Newly enacted fringe benefit tax (FBT) legislation:
FBT prescribed interest rate for loans
Welcome to FBTnews
We've delayed this issue of FBTnews so that we could include the newly enacted fringe benefit tax (FBT) legislation. In the September and December 2005 issues we gave you an overview of the proposed changes to FBT. This issue further explains and clarifies the changes which became effective from 1 April 2006.
Key features that apply to motor vehicles
Valuation options
You can now calculate the fringe benefit value of motor vehicles that are available for private use by employees and shareholder employees, based on either the vehicle's tax value, or its cost price. A motor vehicle's tax value is its value for tax depreciation purposes at the beginning of the relevant tax or income year.
Having made your choice between the cost and tax value options, you must continue to use your chosen option until either:
- the vehicle is sold
- the vehicle ceases to be leased, or
- a period of five years has elapsed.
Valuation rate
The valuation rate on motor vehicles' fringe benefits using the cost price option has reduced from 24% to 20% annually. The equivalent rate using the tax value option is 36%.
Example
Latitude Zero Ltd buys a Holden Commodore for $63,000 GST-inclusive. It's available for private use by an employee. The table below compares the rates using each option before and after the legislation change.
| Before 1 April 2006 |
|
= | Taxable value |
|---|---|---|---|
|
90 |
= | $3,780 | |
| From 1 April 2006 | (Cost price x days available) x 5 % divided by 90 | = | Taxable value |
|
90 |
= | $3,150 | |
| From 1 April 2006 | (Tax value x days available) x 9% divided by 90 | = | Taxable value |
|
90 |
= | $5,670 |
Vehicles owned or leased before 1 April 2006
Vehicles on the books as at 1 April 2006 can be valued under the tax value option if they have already been valued for FBT purposes for a period of five years at cost.
Leased vehicles
Leased motor vehicles are now treated the same as owned vehicles for FBT purposes, which means that the vehicles have to be valued on the basis of either their cost or tax value.
Cost price of a previously leased vehicle
Lessees who lease a previously leased vehicle will be able to use its market value to determine its cost price for the subsequent lease provided the lessee and the previous lessee are not associated persons.
Using the previous example of Latitude Zero Ltd's Holden Commodore and assuming the vehicle is bought on 1 April 2006 and is available to the employee from that day, the following tables show the annual FBT payable using the new valuation rates:
- first for the cost price option
- then for the tax value option.
| Year ending 31 March | Original cost price of vehicle | Quarterly taxable value (cost price of vehicle x 5% x days available in quarter divided by days in quarter) | Annual taxable value on which FBTis payable | |
|---|---|---|---|---|
| 2007 | $63,000 | 4 quarters @ $3,150 | = | $12,600 |
| 2008 | $63,000 | 4 quarters @ $3,150 | = | $12,600 |
| 2009 | $63,000 | 4 quarters @ $3,150 | = | $12,600 |
| 2010 | $63,000 | 4 quarters @ $3,150 | = | $12,600 |
| 2011 | $63,000 | 4 quarters @ $3,150 | = | $12,600 |
| 2012 | $63,000 | 4 quarters @ $3,150 | = | $12,600 |
| Year ending 31 March | Tax value of vehicle depreciated at 36% DV per annum | Quarterly taxable value (tax value of vehicle x 9% x days available in quarter divided by days in quarter) | Annual taxable value on which FBT is payable | |
|---|---|---|---|---|
| 2007 | $63,000 | 4 quarters @ $5,670 | = | $22,680 |
| 2008 | $40,320 | 4 quarters @ $3,628 | = | $14,515 |
| 2009 | $25,804 | 4 quarters @ $2,322 | = | $ 9,289 |
| 2010 | $16,514 | 4 quarters @ $1,486 | = | $ 5,945 |
| 2011 | $10,568 | 4 quarters @ $ 951 | = | $ 3,804 |
| 2012 | $ 6,764* | 4 quarters @ $ 749 | = | $ 2,999 |
| * The minimum value of $8,333 must be used to calculate the taxable value once the vehicle's tax book value has depreciated to less than this amount. | ||||
Although the fifth and subsequent years will produce ongoing savings, an employer will pay significantly more FBT in the first three years under the tax value option.
Private motoring costs deductible when "9 to 5" and flip-flop" leases subject to FBT
When an employer or associated person has a right to use an employee's motor vehicle under an agreement or arrangement with the employee, the employer or associated person is treated as having a right to use the vehicle even when the employee uses, or has the right to use the vehicle privately. This means that FBT applies to any private use irrespective of whether there is any "suspension" of the lease when private use occurs.
The parties to the agreement or arrangement are, however, now allowed a deduction for expenses incurred in operating the motor vehicle during the period in which the employer or associated person is treated as having a right to use the vehicle. This means that the employee can deduct the costs incurred in relation to their private use of the vehicle as well as those in relation to its business use.
Example
Runabout Motors has a car valued at $40,000 for mechanic Dave to use to pick up spare parts. If spare parts need to be picked up at the end of the day, Dave's employer lets Dave take the car home and bring it back the next morning. Over the quarter Dave takes the car home on 27 nights, none of which are consecutive. These occasions, when the car is available for Dave's private use, result in an FBT liability. Dave's employer has elected 6 pm as the time the FBT day will start as Dave always takes the vehicle home after that time. See the comparison table below:
| Days available for private use with elected start time of 6pm | 27 days | x | (Cost price of vehicle x 5%) divided by days in a quarter | = | Taxable value $600 |
|---|---|---|---|---|---|
|
90 | |||||
| Days available for private use without election (based on calendar days) | 54 days | x | (Cost price of vehicle x 5%) divided by days in a quarter | = | Taxable value $1,200 |
|
90 |
Please let us know the start time you've elected to use and the FBT return to which the election applies. Elections will last for a minimum of two years and apply to all the employer's vehicles. If no election is made, FBT will be based on calendar days beginning at midnight as at present.
Other amendments
Exempting the private use of employer-provided business tools valued at under $5,000
The private use of a business tool such as a laptop or a mobile phone that an employer provides to an employee, will not be subject to FBT providing the tool is mainly used for business and it does not cost more than $5,000.
Health and safety related benefits
Health and/or safety related benefits provided to an employee will not be a fringe benefit, regardless of where they are provided, when they arise from measures taken by the employer to manage workplace hazards in accordance with the Health and Safety in Employment Act 1992.
Goods provided at discount by third parties
FBT does not apply where an employer secures bulk discounts or provides services to employees provided they are available to other groups of a comparable number on an arm's-length basis.
For example, a discounted gym membership is offered to employees of ABC bank which has 200 employees through an arrangement between the bank and the gym. This will not be liable for FBT as long as it is the gym's practice to offer the same discount to other groups of around 200 persons.
Exemption from FBT for employer-paid family travel
In certain circumstances an employer can pay the travel costs of an employee's partner and/or family to enable them to visit an employee who is required to work out of town and no FBT will apply. To qualify for the exemption, the value of the travel must not exceed the amount that would have been provided as a tax-free allowance to the employee had the employee travelled home instead.
Limitation to exemption for charitable organisations
When a charitable organisation provides a benefit to an employee by way of a short-term charge facility, FBT is payable if the value of that facility exceeds 5% of the employee's salary or wages in a tax year. A short-term charge facility is an arrangement that enables an employee to obtain goods and services that have no connection to the charitable organisation or its operations and where the liability for payment for part or all of the amount rests with the organisation.
Disposal of rights under share purchase option
Clarification that share options cancelled in exchange for cash are a "disposal" and therefore income to the employee rather than a fringe benefit.
FBT elections over the phone
You can now elect to file annual or income year FBT returns by calling us on 0800 377 772, rather than completing a Fringe benefit tax election (IR414).
As an employer, your annual gross PAYE tax deductions and SSCWT deductions must be $100,000 or less to file annual or income year returns.
General anti-avoidance rule extended to cover FBT
Under this extension if an FBT arrangement is considered void we may adjust any amount of excluded income of a person affected by the arrangement to counteract any tax advantage they may have obtained.
On premises exemption
The "on premises" exemption now includes other companies in the same group.
Definition of subsidised transport extended
The definition of subsidised transport now also covers an employer who is a member of a group of companies that includes a public transport operator.
New $2,000 threshold for certain loans to reduce compliance costs
Loans that are advances against salary or wages are exempt from FBT provided that the outstanding loan balance is not more than $2,000 and the loan is not a requirement of the employment contract.
General exemption thresholds for goods and services
The general exemption thresholds applying to goods and services provided to employees have increased. Please visit our fringe benefit section on www.ird.govt.nz for more information on these increases.
Market interest rate calculation for employment-related loans
Employers such as banks and financial institutions which are in the business of lending money to the public now have the additional option of valuing the benefit from employment-related loans provided to employees at an appropriate market rate. All other employers must continue to use the prescribed rate.
An election to use the market rate option applies for two years and Inland Revenue requires prior notification for any subsequent change.
Income protection insurance premiums paid by an employer
Employer contributions to income protection insurance for an employee are exempt from FBT provided that the employer is liable for the premiums and any payout of the insurance to the employee is treated as income to the employee.
More information
Fringe benefit tax (FBT) has more information on the changes.
We'll also continue to update you and provide examples in future newsletters and Tax Information Bulletins.
Kathleen Clement
Manager
Delivery, Planning and Initiation
FBT prescribed interest rate for loans
The prescribed rate for interest for calculating the fringe benefit value of low-interest loans to employees remains at 9.01% for the quarter beginning 1 January 2006.
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Date published: 04 Apr 2006
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