Law briefs: Tax savings can be made, but it's hard work

Employers hoping for lower fringe benefit tax costs will be disappointed by new laws.

The multi-rate FBT system may address the problem of overtaxing low-income employees, but the cost is a complicated and time-consuming calculation, as well as increased record-keeping requirements.

The new, four-tier multi-rate FBT system is an option available to employers who do not wish to pay FBT at 64 per cent.

Generally, under this new system - effective from April 1 this year - employers can attribute the benefits provided to their employees and pay FBT at rates based on the employee's marginal tax rate. Sounds simple? Think again.

Before the multi-rate calculation can be made, employers must determine and analyse for each employee the types of benefits provided and the FBT cost. Certain types of benefits, such as the provision of a company car, must be attributed. Other types of benefits must be attributed if the FBT costs during the year exceed $1000 or $2000. Examples might include Southern Cross medical insurance contributions (subject to a $1000 threshold), and gym membership fees ($2000 threshold).

If the FBT cost of benefits subject to the threshold is less than $1000 or $2000, as the case may be, the employer can choose either to attribute them to the employee, or pool them; that is, pay FBT at a certain flat rate. If the employer decides to attribute them, they must be attributed to all the employees who received them.

There are two FBT rates for pooled benefits, 49 per cent for employees who are not major shareholders and 64 per cent for those who are.

Employers must therefore be able to identify those benefits which are provided to major shareholders and those which are not.

The final FBT liability is the result of adding together the FBT on attributed and non-attributed benefits, and taking away the FBT paid in the first three quarters of the year, which may have been paid at 49 per cent or 64 per cent.

Take Fruity Co, as an example. It has an employee on a salary of $40,000. He is also given a company car with an FBT cost of $20,000 a year and contributions to health insurance worth $900 a year.

Assume that Fruity Co has paid FBT in the previous three quarters of $10,241. To work out the FBT payable under the multi-rate system, Fruity Co must go through the following steps:

1. Calculate the employee's cash remuneration (for Fruity Co this is $40,000).

2. Calculate the tax on cash remuneration ($8070).

3. Determine which types of benefits provided must be attributed to the employee (the car).

4. For benefits where there is a choice, decide which categories will be attributed to the employee and which will be pooled (the contributions to health insurance).

5. Calculate the taxable value of fringe benefits attributed to the employee during the year (assuming the contributions to health insurance will be pooled, for Fruity Co this is $20,000, being the car).

6. Calculate the fringe benefit inclusive of cash remuneration ($51,930).

7. Calculate the tax on fringe benefit, including of cash remuneration ($18,889).

8. Calculate the FBT liability for the employee ($10,819).

9. Calculate the FBT on non-attributed benefits (the contributions to health insurance - $441.

10. Calculate the final FBT liability ($1019).

Ten steps to get to the final answer; and that is for only one employee.

Yes, some savings can be made by adopting the multi-rate system. But these seem to be outweighed by the increase in compliance costs. Many employers will opt for ease and just pay FBT at 64 per cent.

The result - low-income employees will continue to be over-taxed.

* CCH (NZ) Ltd is a tax, business and employment law publisher based in Auckland. For further information, visit the CCH website at www.cch.co.nz or phone 0800 500 224.