The do's and don'ts of Fringe Benefit Tax

As a small business owner you'll be aware that if you provide fringe benefits to your employees you must file a regular Fringe Benefit Tax (FBT) return. Like anything involving T- A - X, there are some dos and don'ts to help you better navigate your way.

But first, what is classed as a fringe benefit? A wide range of goods and services can be classified as fringe benefits. Some of the most common examples are the private use of a motor vehicle, subsidised transport, a low interest loan, some superannuation contributions (but not Kiwisaver), and contributions to health and life insurance.

Neil Russ, tax partner at Buddle Findlay, offers some 'Dos and Don'ts':

Do:

* Get good tax advice on how your business needs to comply with FBT

* Make sure you pay on time to avoid penalties and interest on late payments – most businesses will need to pay quarterly, some small businesses can pay annually

* Remember that you'll need to adjust FBT calculations when the new tax rates take effect on 1 April 2009

* Include any discounts you have negotiated for your staff with third party suppliers, unless the discount meets the requirements for an exemption

* Include fringe benefits provided to shareholder-employees

* Include fringe benefits provided to people associated with employees

Don't:

* Try to pay employees "in-kind" with goods and services to avoid tax – it doesn't work and the penalties and interest payments could be huge

* Guess the value of fringe benefits provided – make sure you have documented a clear and acceptable method of calculating value

However, Mr Russ says FBT is a major source of unnecessary compliance costs to employers and should be simplified or even scrapped. He suggests FBT calculations are highly complex and the penalties for getting it wrong are potentially very high.

"Because of arbitrary distinctions between what is and isn't a fringe benefit, FBT creates distortions and alters behaviour", says Mr Russ. "A prime example is the provision of car parks to employees. Under the current law, a leased car park is exempt from FBT, while a licensed car park is not."

Mr Russ explains that this is because benefits provided "on the premises of an employer" are not subject to FBT. The IRD considers that leased car parks are part of an employer's premise, while a licensed car park does not have the same status. He believes this arbitrary and pointless distinction has changed the way car parks are provided, and "in effect, the FBT tail is wagging the business community dog"

Another complicated area is the provision of a motor vehicle for private use by an employee says Mr Russ.

"Travel to and from work is deemed by law to be private use, which means that if an employee has the use of a company car and takes this car home each night, the employer needs to apportion the use of the motor vehicle between work and private use".

For employees who spend their working day outside an office, such as travelling salespeople who commute throughout the day between clients, it is obviously impractical to return the car to the office each night. There are some exemptions from FBT in these situations, and to ensure they fit within them, employers need to get good tax advice, enter into robust agreements with employees, and keep meticulous records.

Although there is no news about the tax being scrapped, there is new legislation that should be enacted early in 2009 aimed primarily at simplifying FBT for small and medium-sized enterprises. The legislation plans to reduce tax-related compliance.

For example the annual return filing threshold will be raised from $100,000 to $250,000, and annual filing for companies with few shareholders would be available if their FBT liability rose solely from provision of up to two vehicles to shareholder-employees. The changes would increase the number of employers that could file and pay the tax annually, rather than quarterly.

* For more information on FBT or to access a useful calculator, visit www.ird.govt.nz