Fringe Benefit Tax (FBT) Guide: Calculations, Examples & Compliance in New Zealand
Fringe Benefit Tax (FBT) Guide
Calculating FBT in New Zealand
Understanding FBT Quarters
First Quarter (Q1): January – March (90 or 91 days)
Second Quarter (Q2): April – June (91 days)
Third Quarter (Q3): July – September (92 days)
Fourth Quarter (Q4): October – December (92 days)
FB Value of Free or Discounted Goods/Services
Formula: Market Value (or Cost) – Amount Paid by the Employee
Example: If a product’s price is lower than the retail price or below the manufacturing cost, it’s considered a benefit.
Excluded Benefits (Not Subject to FBT)
- Salaries and wages
- Exempt income benefits related to employment
- Employer’s superannuation cash contributions
- Business tools (if the cost is below $5,000)
Motor Vehicle FBT Example
A company provides a $35,000 (GST-inclusive) motor vehicle to an employee for private use in Q4 20XX. The vehicle was used for emergency calls (5 days) and a business trip (7 days).
Calculate the taxable value:
Days available for private use: 92 (days in Q4) – 7 (business trip) – 5 (emergency calls) = 80 days
Schedule 5%: 5% of $35,000 = $1,750
Taxable Value: (80 days x $1,750) / 92 days = $1,521.74
Days Excluded from FBT Calculation:
- Vehicle breakdowns, repairs, or storage
- Emergency calls (6 pm – 6 am weekdays, anytime weekends/public holidays)
- Out-of-town business travel (24+ hours)
Loan FBT Example
ABC Limited provides a $20,000 loan to Wendy on April 1, 2023, at 3% interest. The prescribed rate for Q2 2023 is 7.89%.
Calculate the taxable value:
Method 1:
($20,000 x (7.89% – 3%) x 91 days) / 365 days = $243.83
Method 2:
($20,000 x 7.89% x 91 days) / 365 days = $393.42
($20,000 x 3% x 91 days) / 365 days = $149.59
$393.42 – $149.59 = $243.83
Note: For interest-free loans, use the prescribed rate and loan amount.
Business Tools
Business tools under $5,000 are not taxable. Cell phones, iPods, tablets, and computers provided primarily for business use are generally exempt.
Monetary Contributions
Monetary benefits are generally considered fringe benefits, unless specifically exempted. The annual exemption limit is $1,200.
Free or Discounted Goods and Services
- Manufactured Goods: Market Value
- Purchased Goods: Cost of Goods
- Services: Market Value
Taxable Value: Market Value (or Cost) – Amount Paid by Employee
Unclassified Benefit Exemption
Exemption if the taxable value per employee is under $300 per quarter or $1,200 per year, and the total employer cost is under $22,500 annually.
Fringe Benefit Tax and the Income Tax Act 2007
Free flights and accommodation provided by an employer for personal use are considered fringe benefits under Sections CX 2 and CX 17 of the Income Tax Act 2007.
GST Return Example
Invoice Basis vs. Payment Basis for GST
Invoice Basis: Account for GST when invoices are issued/received.
Payment Basis: Account for GST when payments are made/received.
Imputation Credits
Rate: 28%
Example:
Declared dividend: $0.08 per share
Shares owned: 2,000
Imputation credit per share: $0.08 x (28/72) = $0.0311
Total imputation credit: $0.0311 x 2,000 = $62.22
Total dividends: $0.08 x 2,000 = $160
Gross dividend: $62.22 + $160 = $222.22
RWT (5%): $222.22 x 5% = $11.11
Net dividend: $222.22 – $11.11 = $211.11
Objective of Imputation Credits
Eliminate double taxation of company profits by integrating corporate and personal tax systems.
How Imputation Credits Prevent Double Taxation
Shareholders claim a tax credit for company tax already paid on profits, offsetting their tax liability on dividends.
Partnerships and Trusts
Tax Treatment of Partnership Income (Limited Partner)
Limited partners are taxed individually on their share of profits, and losses are deductible up to their investment amount.
Tax Treatment of Trust Income (Minor Beneficiary)
Income distributed to minors is taxed at the trustee rate (33%), unless eligible for the minor beneficiary rule. Passive income may be taxed higher.
Partnership Income Taxation
Partnerships are not taxed directly; partners are taxed individually on their profit share, regardless of distribution.
Roles in a Trust
- Trustee: Manages trust assets according to the trust deed.
- Beneficiary: Entitled to benefits from trust assets.
Provisional Tax
Required for residual income tax over $5,000.
Calculating Provisional Tax
;
Standard uplift method Page Number 594– if the tax payer has filed a prior year income tax return (2022.223) then the provisional tax liability fi the 23/24 year will be 105% of the taxpayer’s RIT. This method is often more predictable and provides a clearer basis for estimating tax payments, especially when there is an expectation of higher profits. It also helps in avoiding underpayment penalties by using the previous year’s tax liability as a starting point.
- Estimation Method :The estimation method involves forecasting the current year’s income and calculating the tax liability based on the estimate. the advantage of this method is that the paxpayer can avoid paying too much provisional tax, however under estimation and underpayments of provisional ta can lead to late payment penalties, use of money interest or any shortfall penalties.
Income Tax Liability
Calculate the total tax liability a taxpayer with taxable income of $135,000 = Total Tax Liability = $1,470 + $5,950 + $6,600 + $21,450 = $35,470
• Filing taxpayer- a person who is not a non-filing
taxpayer.
• A filing taxpayer (IR3 return)- a person who received
other type of income apart from salary, wages, interest
or dividends.
Non-filing taxpayer
• A person who is not required in terms of s 33AA (1) of TAA to file a
return and to whom one of the following applies
– they do not receive an income for the year
– the CIR is not required to send them an income statement
for a tax year
• A person who chooses not to file a return (eg non resident
entertainer)
• A person who derives only a non resident passive income (income
requiring minimal or no effort) to which s RB 3 applies
Meaning of business- ITA 2007 defines business as
including any profession, trade, manufacture or
undertaking carried out for pecuniary profit (sYA1
-In what circumstance may IRD cancel interest incurred on underpayment of tax?
If the taxpayer pays the balance in full within the grace period (usually 30 days) specified on a notice of assessment or statement of account, the interest incurred during this period is automatically cancelled.
-Gross income: interest paid on overpayments of tax is considered gross income and is assessable in the lY in which it is refunded. This also applies if the taxpayer has credited the amount of interest towards paying other unpaid tax.
-pay Deductible: fterest paid on underpayment of tax Is deductible for bufiness incone in the me year it is charged. aine Dran nA 1กสว
Individual tax rate page 484
Tax credit overview
- Foreign income tax – when working overseas but New Zealand tax resifent not refundable
- Imputation credit – attached to dividends received If the credits over the year exceed the taxpayer’s income
tax liability then tax has been overpaid and excess credits
remain. Imputation – individuals carry forward as a credit of
tax to the next income year [s LA 5(4) and s LE 3(2)]].
Company, Trustee & Maori Authority convert to loss
under s LE 2(3) and carry forward. - RWT on Dividends(income is dividend) – usually 28% imputation credit + withholding tacx of 5% = 33%
- RWT on interest – same as the individual income tax
- Pay tax payments : refundbale
- Provisional tax paid (3 Instalment)
Tax credit on gifts : Page number 530 example 13.5
Provisional Vs Terminal Tax : Provisional tax is an estimate of a taxpayer’s income tax liability for the current year, paid in instalments throughout the year to help manage cash flow. It allows adjustments based on actual income and can lead to refunds or penalties if overpaid or underpaid. In contrast, terminal tax is the final amount owed after the tax return is filed, reflecting the actual income for the year. It is paid once the taxpayer’s income has been assessed, with any outstanding balance due after accounting for provisional tax payments. Both provisional and terminal tax can incur penalties and interest if not paid on time.
The Inland Revenue Department (IRD) in New Zealand employs several measures to discourage taxpayers from non-compliance with their provisional tax obligations. Here are some key steps:
- Penalties and Interest: The IRD imposes late payment penalties, typically a 1% penalty on the unpaid amount after the due date, followed by an additional 4% if the tax remains unpaid after seven days. Interest also accrues on any unpaid tax, increasing the overall amount owed.
- Communication and Reminders: The IRD sends reminders to taxpayers about upcoming provisional tax payments and provides information on their obligations. This proactive communication helps ensure taxpayers are aware of their responsibilities.
- Automatic Assessments: For some taxpayers, the IRD may calculate provisional tax automatically based on the previous year’s tax return, making it easier for taxpayers to comply with their obligations.
- Compliance Reviews and Audits: The IRD conducts compliance reviews and audits to identify taxpayers who consistently underpay or fail to file. This serves as a deterrent and encourages adherence to tax obligations
Difference between tax Avoidance and Evasion Tax avoidance and tax evasion are two very different things when it comes to taxes. Tax avoidance is the legal practice of finding ways to minimize your tax bill by using strategies allowed under the law. For instance, if Anne makes contributions to her retirement savings account, she reduces her taxable income, which is a legitimate form of tax avoidance. On the other hand, tax evasion is illegal and involves hiding income or falsifying information to avoid paying taxes. An example of tax evasion would be if Anne didn’t report income from a side job or claimed expenses that weren’t legitimate. While tax avoidance is perfectly acceptable, tax evasion can lead to serious legal consequences.
If a taxpayer is late paying their tax or underpays their tax, there are consequences. Late payment or underpayment of tax may result in penalties and interest being charged by the tax authority. These penalties and interest are imposed to encourage timely and accurate tax payments. It’s important for taxpayers to fulfill their tax obligations on time to avoid these additional costs.