Do your employees use company vehicles for private use? You could be liable for a Fringe Benefit Tax aka the FBT, here is what you need to know.
WHAT DOES A FRINGE BENEFIT TAX APPLY TO?
Fringe benefit is another way of say non-monetary reward, this includes
- Company vehicles available for private use,
- Free, subsidized or discounted goods and services,
- Special low-interest loans
- Employer contribution to insurance or superannuation schemes.
*FBT does not apply to a sole trader or partnership businesses, instead adjustments are made to their GST and PAYE tax payments.
The private use of a company vehicle can be overlooked as a benefit in addition to remuneration because of our friendly lend a hand kiwi culture, but the tax man doesn’t see it that way.
FBT can apply to all work vehicles including operation and finance leased, (if you’re not sure what that means check out our last post) and a vehicle owned by the company. It is important to note that if a vehicle is available for private use by an employee or shareholder, regardless of whether use occurs or not, the employer has a liability for an FBT.
However, there are exemptions for the FBT if your company vehicle meets all of the following:
- The principle design is not for carrying passengers, these include utes, light trucks and vehicles altered to permanently not have rear seats.
- The company’s name and logo must be permanently and prominently displayed on the vehicle.
- The employees and shareholders must be informed that the vehicle is for work purposes only with the exception of traveling between work and home. It is preferable this be done in writing or ideally in the employment contract.
- The company must complete quarterly checks of the logo book and petrol purchases for the vehicle. Accurately maintaining these records is very important.
If your company vehicle meets the above criteria but is available for private use on particular days for employees on call outs outside normal hours you can be eligible for a partial exemption.
However, if the above criteria are met and the vehicle is stored at a shareholder’s home and the business premises is also the shareholder’s home, the vehicle cannot under any circumstances be used for private purposes if the company wishes to avoid a FBT. If the shareholder’s home is a secondary work premise, EG a home office, then a restricted private use condition can be applied.
WHAT DOES IRD LOOK FOR IN RESTRICTED PRIVATE USE?
The employer must have clear details on the restrictions, confirm and provide evidence that the employee is aware of these restrictions, and at request produce a log book of both personal and business mileage proving observance of the restrictions.
NB: If the log book records are not regularly monitored, the vehicle is available for private use on the weekends, or the signage on the vehicle is removable the IRD can enforce a FBT
FBT DOES NOT APPLY IF
- The vehicle is stored on the company premise which is not a shareholder’s home
- The vehicle has a gross laden weight above 3,500 kilograms
- If an employee contributes towards the value of the vehicle by way of payment to the employer
HOW IS FBT CALCULATED?
FBT is calculated on either the vehicle’s cost price (including GST) or on its “tax value” (ie depreciated value at the start of the income year in question). Once you elect to use a method you must continue using that method until either:
- the vehicle is sold
- the vehicle lease ends
- five years have passed
Vehicle Cost Price Method
Every quarter 5% of the vehicles cost price inclusive of GST is multiplied by 49.24%
Tax Value Method
Every quarter 9% of the vehicles depreciated value inclusive of GST is multiplied by 49.25%
NB: Liability is reduced by the number of the days the vehicle was not available for private use or was exempt from FBT.
WHEN DO COMPANIES USUALLY PAY FBT?
Most small businesses will elect to file and pay FBT annually. A quarterly option does exist and is mandatory for employers whose gross amounts of taxes in the preceding year exceeded $500,000.
FBT is a tricky subject and often it is better to be safe than sorry when it comes to the tax man, check out the IRD website for FBT on Company Vehicles or give us a call.