Tax 'a killer for fringe benefits'

By BRIAN FALLOW

WELLINGTON - Planned changes to the fringe benefit tax regime will be another nail in the coffin of fringe benefits, says PricewaterhouseCoopers tax partner John Shewan.

"It's the old story of a trade-off between compliance costs and the desire to save a bit of tax," he said. "It's another incentive to move from providing fringe benefits to just paying more cash.

"Employers are sick of spending half their time working for the Government."

Revenue Minister Michael Cullen yesterday gave more detail on the policy of allowing fringe benefits that can be directly linked to an individual employee, such as cars and loans, to be subject to tax at a rate equating to their marginal tax rate.

At present fringe benefit tax is levied at 49 per cent, which equates to the top tax rate of 33c, whether the employee benefiting is in that tax bracket or not. The anomaly will be exacerbated when the top income tax rate rises to 39c on April 1.

A new tax bill to be introduced to Parliament this month will require employers to attribute to the employee concerned cars used solely or predominantly by that employee, all low-interest loans and other fringe benefits with a taxable value of more than $1000 a year.

"Employers may choose between paying a flat rate of 64 per cent [equivalent to 39 per cent on cash in the employee's hand] or using rates of 27 per cent, 40 per cent or 64 per cent, whichever is appropriate based on the employee's tax rate," Dr Cullen said.

The flat rate might be appropriate for employers with mostly high-income employees or who only provided a few fringe benefits.

Benefits not attributed to an individual employee would be subject to fringe benefit tax at a flat rate of 49 per cent.

Group benefits such as pool vehicles could not be attributed unless there was a predominant user.

Employers might also wish to attribute low-value benefits, especially where a large number of employees receiving fringe benefits were on low incomes, Dr Cullen said.

An example would be medical insurance on which the premium per person was under $1000.

Most employers file fringe benefit tax returns quarterly. They can opt to pay the tax at a flat rate of 49 per cent or 64 per cent for the first three quarters, with a square-up process in the fourth-quarter.

Mr Shewan said he believed there had been a dramatic decline in the provision of fringe benefits over the years.