The purpose of the FBT regime is to tax non-cash benefits employers provide to employees in substitution for monetary remuneration. It places a value on the likes of an employer-provided motor vehicle or health insurance and imposes tax on that value which the employer pays.
The paper focuses on reducing complexity and ensuring the regime is better targeted on benefits received in substitution for monetary remuneration.
The intention is a reduction in complexity will result in lower compliance costs for employers. The paper focuses on three problem areas — the provision of a motor vehicle for their private use, minor “unclassified” benefits, and entertainment expenditure.
A FBT liability arises when an employer makes a motor vehicle available to an employee for their private use, such as driving to and from work. The calculation of the FBT liability focuses on the days the vehicle is available for private use, which requires tracking these days and undertaking quarterly FBT calculations.
IR proposes to simplify this by requiring employers to categorise vehicles as having unrestricted private use, restricted private use or no private use with the FBT liability based on that categorisation. This change should reduce compliance costs for employers and remove the need to do quarterly calculations in relation to each vehicle.
The proposals also include changes to the valuation and calculation of the motor vehicle fringe benefit. This includes differentiating between petrol, hybrid and electric vehicles based on their different costs.
However, employers providing petrol-powered vehicles to employees may find their FBT liability increasing due a change in how the value of the benefit is calculated.
Taxpayers may be concerned by the proposal to remove the work-related vehicle exclusion from FBT. This exclusion is widely relied on, although as the paper points out, often incorrectly.
There has been a widely held view that a sign-written vehicle like a ute or van was exempt from FBT. Often overlooked was the requirement to restrict private use.
IR considers the proposal to categorise vehicles will mean the work-related vehicle exemption is no longer required, although IR is seeking submissions on this point.
The existing FBT rules contain an exclusion for minor “unclassified” benefits provided to employees, for example flowers or small gifts in recognition of service or as a Christmas gift.
However, the application of that exclusion relies on tracking the value of benefits received by each employee and total value of benefits received by all employees. This can involve a considerable amount of time and cost.
IR is proposing to either provide a blanket exclusion from FBT for unclassified benefits of $200 or less or, alternatively, provide a list of excluded benefits.
The first of these options would seem to provide the simplest approach, as IR is suggesting the existing exclusion would continue for unlisted benefits under the second option.
While excluding all benefits under $200 represent a simplification and will provide compliance savings to employers, IR does note a need for anti-avoidance measures to prevent employers providing multiple under $200 benefits to avoid FBT.
When an anti-avoidance provision is added to a measure it invariable adds to the complexity and erodes the value of the compliance savings.
The entertainment expenditure regime deals with expenditure on food and drink, and associated costs. This sits outside the FBT regime and is subject to rules that limit deductions on entertainment expenditure.
These rules are complex and difficult to apply with the tax outcome being vary fact specific, resulting in significant compliance issues for employers.
Bringing entertainment within the FBT regime would allow for full deductibility of entertainment expenditure traded off against an FBT liability in relation to that expenditure.
While this may provide benefit to those already filing FBT returns, there will be businesses that incur entertainment expenditure, but do not file FBT returns.
The removal of entertainment expenditure from the income tax return to the FBT return will increase compliance costs for those taxpayers, many of which are likely to be small businesses.
Overall, the paper contains good suggestions for reducing the complexity of the FBT regime and hopefully reducing compliance costs for employers. However, the is a lengthy process to go through before these proposals make it into legislation.
Through that process there is the potential for proposals to change significantly and anti-avoidance concerns to result in added complexity reducing the desired simplification and reduction in compliance costs.
The paper also notes that fiscal constraints may mean some proposals will not proceed particularly if they are likely to result in a reduction in overall FBT paid.
• Stephen Richards is a tax advisory partner at Findex in Dunedin.
