Unraveling the Ins and Outs of Fringe Benefit Tax: Everything You Need to Know

What is Fringe Benefit Tax?

Fringe Benefit Tax (FBT) is a tax imposed on employers for providing non-cash benefits to their employees or their employees' associates. It is designed to ensure that employees are not receiving additional benefits in lieu of taxable income. FBT is separate from income tax and is calculated on the taxable value of the fringe benefits provided. Still with us? Good.

Fringe Benefits can be anything provided to an employee or their associate in addition to their salary or wages. They can include company cars, private health insurance, discounted or free goods or services, and even holiday accommodation. It's important to note that fringe benefits are usually provided by the employer, but in some cases, they may be provided by third parties under an arrangement with the employer.

‍

Understanding the purpose of Fringe Benefits:

The purpose of providing Fringe Benefits is to attract and retain talented employees by offering additional perks and incentives. It's a way for employers to enhance their overall employee package without solely relying on salary increases (a win for both the employer and the employee). Fringe Benefits can be particularly appealing to employees as they provide tax advantages and can improve their quality of life outside of work.

From an employer's perspective, offering Fringe Benefits can be beneficial for various reasons. It can help foster a positive work culture, increase employee satisfaction and productivity, and make the company more competitive in attracting top talent. However, it's essential to understand the tax implications associated with providing these benefits to ensure compliance with FBT regulations.

‍

Types of Fringe Benefits:

Fringe Benefits come in various forms, and it's important to be aware of the different categories to determine their tax implications. Some common types of fringe benefits include:

1. Company cars: Providing employees with a company car for both work and personal use is a popular fringe benefit. The taxable value of the benefit depends on factors such as the car's value, the distance traveled for private use, and the employee's income.

2. Health insurance: Offering private health insurance coverage to employees can also be considered a fringe benefit. The taxable value is generally the cost of the premium paid by the employer.

3. Discounts on goods or services: If an employer offers employees discounted or free goods or services, such as gym memberships or products from the company, these can be considered fringe benefits. The taxable value is usually the difference between the normal selling price and the price paid by the employee.
4. Entertainment and holidays: Providing employees with entertainment or holiday accommodation can also be subject to FBT. The taxable value is based on the cost incurred by the employer.

‍

Fringe Benefit Tax rates:

The tax rate for Fringe Benefits depends on the type of benefit provided and the employee's income level. It's crucial to stay up to date with the current tax rates and thresholds applicable to fringe benefits in your country to ensure compliance and accurate calculation of FBT liabilities.

‍

Calculating Fringe Benefit Tax:

Calculating Fringe Benefit Tax can be a complex process, as it involves determining the taxable value of the benefits provided and applying the relevant tax rate. The taxable value is generally based on the cost to the employer of providing the benefit, including any associated expenses.

To calculate the taxable value, the employer needs to keep detailed records of the benefits provided and their associated costs. It's important to include any GST (Goods and Services Tax) paid on the benefits, as this can affect the taxable value. The taxable value is then multiplied by the applicable tax rate to determine the FBT liability.

In some cases, specific valuation methods may be used to determine the taxable value of certain Fringe Benefits. For example, when calculating the taxable value of car fringe benefits, the employer can choose between the statutory formula method or the operating cost method, depending on which results in the lower taxable value.

When it comes to calculating FBT, accuracy is key. It's advisable to seek professional advice or consult the official guidelines provided by tax authorities to ensure the correct calculation of FBT liabilities. If you’ve got questions (we’re not surprised) reach out to us here.

‍

Exemptions and concessions for Fringe Benefit Tax:

While FBT is generally applicable to most Fringe Benefits provided by employers, there are exemptions and concessions available that can help reduce the overall FBT liability. These exemptions and concessions vary between countries and can differ based on factors such as the type of benefit provided and the nature of the employer.

It's important to familiarise yourself with the exemptions and concessions that may apply to your specific situation. This can help minimise your FBT liability and ensure you are taking advantage of any available tax savings.

‍

Reporting and lodging Fringe Benefit Tax returns:

As an employer, it is your responsibility to report and lodge Fringe Benefit Tax returns with the relevant tax authority. Maintain accurate records of all Fringe Benefits provided and associated costs throughout the year to ensure smooth reporting and lodgment of FBT returns. Failure to comply with the reporting requirements can result in penalties and additional tax liabilities.

‍

Common mistakes to avoid with Fringe Benefit Tax:

Navigating the complexities of Fringe Benefit Tax can be challenging, and it's easy to make mistakes that can result in unnecessary tax liabilities or compliance issues. Here are some common mistakes to avoid when dealing with FBT:

1. Incorrect valuation of Fringe Benefits: It's essential to use the correct valuation methods and keep accurate records to determine the taxable value of fringe benefits. Using incorrect or outdated valuation methods can result in incorrect FBT calculations.

2. Failure to identify eligible exemptions and concessions: Many employers overlook available exemptions and concessions that can help reduce their FBT liability. It's important to stay informed about the specific exemptions and concessions that may apply to your situation to take full advantage of any tax savings.

3. Inadequate record-keeping: Keeping detailed records of fringe benefits provided and associated costs is crucial for accurate FBT reporting. Failure to maintain adequate records can result in difficulties during the lodgment process and potential penalties.

4. Incorrect reporting and lodgment: Failing to report Fringe Benefits correctly or missing lodgment deadlines can lead to penalties and additional tax liabilities. It's important to understand the reporting requirements and deadlines specific to your jurisdiction and ensure timely and accurate reporting.

By being aware of these common mistakes, you can minimise the risk of errors and ensure compliance with FBT regulations.

‍

Fringe Benefit Tax planning and strategies:

FBT planning and strategies involve proactively managing Fringe Benefits to minimise the overall FBT liability. By implementing effective strategies, employers can maximise tax savings and optimise their employee benefit packages. Here are some commonly used FBT planning strategies:

1. Salary packaging: Salary packaging allows employees to receive certain benefits in place of part of their salary. By structuring the remuneration package effectively, employees can enjoy tax savings, and employers can reduce their FBT liability.

2. Timing of benefits: Careful timing of fringe benefits can help manage the FBT liability. For example, providing benefits at the end of the financial year may result in a lower FBT liability, as the taxable value is based on the period from April to March.

3. Utilising exemptions and concessions: As mentioned earlier, exemptions and concessions can significantly reduce the FBT liability. By identifying and utilising applicable exemptions and concessions, employers can minimise their tax obligations.

4. Structuring employee benefits: Employers can structure employee benefits in a way that maximises tax efficiency. For example, providing benefits that are exempt from FBT, such as work-related items or tools, can help reduce the overall FBT liability.

It's important to consult with a tax professional or seek advice from experts in FBT planning to ensure you are implementing the most effective strategies for your specific circumstances.

‍

It’s time to start offering Fringe Benefits!

Fringe Benefit Tax is a complex area of taxation that can often leave business owners scratching their heads. However, by understanding the ins and outs of FBT, you can navigate FBT with confidence. So, don't let FBT overwhelm you - tackle it head-on and reap the benefits of a well-managed fringe benefit program.

Remember we're here to help with all of your New Zealand small business accounting services. If you think it's time to offload the stress of accounting and bookkeeping, get in touch for your free non-obligatory chat.

‍