FBT Tips and Tricks Prepared & Presented by nsatax Limited Disclaimer This seminar is of a general nature only. Please obtain specific advice on client situations as minor changes in facts can cause significantly different answers. This seminar also does not cover all recent changes or all aspects and law relevant to the entities covered. What We Will Cover Today Overview of FBT what is a fringe benefit and what categories are there? Overview of FBT exemptions Q & A style examples for common FBT areas such as Motor vehicles Benefits provided on premises Other benefits, including those outside FBT rules 1
FBT Overview What is a Fringe Benefit? Means a benefit provided by an employer to an employee in connection with employment that is a benefit of a type described in the FBT rules Not necessary for an employment relationship to exist at the time the employee receives the benefit Can apply to past, present and future employees What is a Fringe Benefit? FBT rules only apply to non-cash benefits Cash benefits are monetary remuneration and dealt with under the PAYE rules Free accommodation or board & lodgings specifically included in monetary remuneration definition even though non-cash 2
Who is an Employee? Employee = a person who receives or is entitled to receive a PAYE income payment Includes persons who receive salary and wages subject to PAYE, nondeduction shareholder salaries and schedular / withholding payments (company directors) Who is an Employee? Employee does not include persons whose only PAYE income payments are from: ACC earnings related compensation Payments to working partners Payments to working owners Income tested benefits Student allowances Parental leave payments Payments to non-resident contractors Categories of Fringe Benefits 3
Categories of Fringe Benefits Private use of motor vehicle Employment related loans Subsidised transport Contributions to super schemes Contributions to sick, accident or death benefit funds or funeral trusts Contributions to life or health insurance Unclassified benefits Motor Vehicles Focus on availability of vehicle for private use not on actual use Can have fringe benefit if vehicle available even if not actually used Motor vehicle does not include vehicle with gross laden weight > 3,500 kg Private use includes travel from home to work & any other travel that confers a private benefit on the employee Home as a Workplace Normally travel between home and work = fringe benefit But if home is a place of work, then arguably no benefit as travel between 2 places of work May be contentious given IRD s published view (see TIB Vol 16, No 10, November 2004) 4
Employment Related Loans Fringe benefit where loan to employee at less than FBT prescribed rate of interest; currently 6.13% Excludes employee share loans i.e. loan to enable employee to buy shares in company employer Excludes salary advances where loan < $2,000 and employment contract does not require employer to make advance Superannuation Contributions Excludes contributions to super funds i.e. NZ registered superannuation schemes; these are subject to ESCT (formerly SSCWT) under PAYE rules Excludes Kiwisaver contributions Effectively only applies to contributions to foreign super schemes Unclassified Benefits Includes all other non-cash benefits received by an employee in connection with employment not already specified or excluded Shareholder employees can elect to treat these benefits as dividends by making election on the FBT return Includes free or discounted goods and services 5
Unclassified Benefits Fringe benefit if goods provided to employee at less than cost to employer Cost is GST inclusive If employer manufactures, produces or processes goods, cost is the lowest price the goods are sold by the employer to other customers Exception for goods retailing at < $300 provided staff discount not > 5% Exemptions & Exclusions Charitable Organisations Charitable organisations exempt from FBT on benefits provided to employees unless employee involved in a business activity carried on by the charity which is outside its charitable activities (section CX 25) Applies to approved donees and listed charities 6
Short Term Charge Facilities Excludes short term charge facilities. Prior to 1 April 2014, where value of benefit more than 5% of employees salary or wages, no FBT exclusion From 1 April 2014, excludes short term charge facilities where value of benefit is more than the lesser of: 5% of salary or wages; and $1,200 Short Term Charge Facilities Short Term Charge Facility means an arrangement that enables an employee to obtain goods or services that have no connection with the employer or its operations by: Buying or hiring goods Charging the cost to an account From 1 April 2014 will also include providing consideration other than money for the goods or services, e.g. vouchers Charitable Organisations Charities should look to structure remuneration packages to take advantage of this exemption E.g. salary sacrifice in favour of noncash benefits Important to correctly classify benefits as non-cash benefits not monetary remuneration 7
On Premises Exemption Benefits other than free, discounted, or subsidised travel, accommodation, or clothing provided on the employers premises exempt from FBT Applies to staff meals, staff cafeterias, creches, flu vaccinations & carparks if part of employer s premises IRD rulings on carparks distinguish between leases and licences On Premises Exemption Lease generally confers an exclusive right to occupy the property Licence is a non-exclusive right to occupy For carparks to form part of employer s premises, likely to require exclusive right to occupy designated carparks (section CX 23) Free, Subsidised or Discounted Goods & Services General exemption of $300 per employee per quarter or $1,200 p.a. if annual filer If exemption exceeded, FBT applies to full benefit i.e. exemption not deducted Maximum $22,500 for all employees p.a. If quarterly filer & exemption exceeded in 4 th quarter, FBT only payable for that quarter (section RD 45) 8
Health & Safety No FBT on benefits arising from undertaking hazard management initiatives e.g. provision of protective clothing or health checks and flu vaccinations (if off premises) Does not extend to items such as gym subscriptions or employer-paid health insurance premiums (section CX 24) Business Tools No FBT where employee can enjoy private use of business tools such as laptops, phones etc provided mainly used for business and cost less than $5,000 including GST (section CX 21) Benefits Provided Instead of Allowances No FBT on benefits which remove the need that would otherwise exist for the employer to pay the employee an allowance which would be exempt income (section CX 19) Examples include taxi chits or petrol vouchers to cover business related travel 9
Other Exemptions Assistance with preparation of income tax returns where costs would otherwise be deductible to the employee (section CX 27) Contributions to income protection insurance where payment of the insurance to the employee would be income of the employee (section CX 26B) Distinctive work clothing (section CX 30) Practical Examples Questions & s Motor Vehicles 10
ABC Ltd Bob is the Director of ABC Ltd, an office supply company. Bob has a dedicated home office and boardroom at his home. He works from home 2 days per week and regularly holds meetings and sees clients from his home office. ABC Ltd has provided Bob with a company car. The vehicle is generally only used for travel between Bob s home office and work and for other work duties on Monday to Friday, but is used privately on Saturday and Sunday. Questions Bob wants to know whether there is an FBT liability, and if so, what his options are to minimise the cost What do you advise him? Currently FBT payable on taxable value for 7/7 days per week No restriction on private use Mon to Fri and actually used privately Sat/Sun Options to minimise restrict private use Mon to Fri and pay FBT on Sat/Sun only 11
Ensure: Restriction letter in place No actual private use Mon to Fri. Keep a log book for 3 months to prove this Evidence kept by ABC Ltd of checks on compliance with restriction (IRD will ask the question) Address home office issue (next slide) with client Availability of second vehicle important Home Office Issue Travel between home and work vs. 2 places of work The work is not required to be performed at home due to its nature. Does not fit within IRD statement However, a bona fide place of business, a significant amount of work performed at home. Fits within case law nsatax view: Position is defendable based on relevant case law. However, advise client of IRD view and be prepared to argue your case in the event of IRD scrutiny Further Options Bob purchases or leases his own vehicle and seeks a reimbursement for business use Reimbursement = tax free payment to Bob However, must be based on actual cost of business use or a reasonable estimate of cost 12
Further Options Bob makes employee contribution = FBT taxable value Taxable value = either 9% per quarter of tax book value incl. GST or 5% per quarter of cost incl. GST. Contribution must be equal to taxable value to eliminate FBT liability Contribution is taxable income to ABC Ltd and a deemed supply for GST Question What if Bob did not have a home office, but was instead required to store the company vehicle at home because no secure garaging was available at the premises of ABC Ltd? What would you advise Bob in this instance? Again, ensure the following are met/in place: Letter restricting private use and obliging Bob to store the vehicle at home Ideally, an insurance policy requiring the vehicle to be stored overnight in a locked garage No availability of such storage at the business premises No actual private use of the vehicle. Bob should be able to point to another private vehicle available for his private use. Evidence kept by ABC Ltd of checks on compliance with restriction 13
Further Consideration Similar to home office scenario, could be contentious in light of IRD s published view. Possibly more so given no home office in use However, case law supports no benefit therefore no FBT in these circumstances however IRD will argue otherwise Car Parks Question ABC Ltd wants to provide car parks to its employees. It does not have sufficient space available at its building premises, however the public car park across the road has spaces available. ABC Ltd negotiates the following terms under a car park licence agreement: 14
Question Lease of allocated spaces for use only by ABC Ltd employees 24hours/7 days The allocated spaces are labelled with ABC Ltd s name Access to the part of the building where spaces are located are not restricted, however a towaway sign is present Does ABC Ltd have to account for FBT on the car parks provided to employees? No Despite the agreement being labelled as a licence the rights conferred to ABC Limited are similar to the rights and privileges of ownership ABC Ltd has exclusive possession of the car parks and it has the ability to exclude other people from using them (i.e. via the tow-away restriction) Hallmarks of a Car Park Lease Right of exclusive possession All rights and privileges associated with ownership Allocated space (or floor) 15
Childcare Facilities Question XYZ Ltd has offices in Auckland CBD, the North Shore and West Auckland. XYZ Ltd is proposing to establish a childcare facility at its Auckland CBD location which will be available to staff at no cost Does XYZ Ltd have to account for FBT on the free childcare? No Providing childcare facilities at no cost to employees = fringe benefit However childcare provided on premises is exempt In this case the childcare facility is located at one of the premises owned by the employer, so qualifies for the on premises exemption 16
Question What if staff were required to sacrifice part of their salary in exchange for the childcare services? Arguably there is a reduced benefit as employees effectively pay for the childcare services by taking a salary sacrifice, however there may still be some benefit as the payment is made via pre-tax income. In any case, the FBT on premises exemption would apply again The IRD made a binding ruling on this very issue for childcare services provided to Westpac employees where there was a salary sacrifice it was concluded no FBT liability arises See Product Ruling BR Prd 06/03, TIB, Vol 18, No 9, October 2006 concerning childcare benefit provided to Westpac employees 17
Question What if the North Shore office was owned by a different company to that which owned the CBD and West Auckland offices? Would the FBT treatment change for staff members using the childcare service who are from the North Shore office? No, providing the two companies are within the same group of companies (i.e. 66% commonly owned) However, if the two companies are not at least 66% commonly owned then the on premises exemption does not apply and FBT would be payable in this instance Gym Facilities 18
Gym Facilities Similar analysis as that for childcare facilities Gym facilities provided on employer premises or an associate with >66% commonality exempt from FBT Question ABC Ltd is trying to promote a healthy work place. It is considering ways to encourage staff to take up a membership with City Gyms Ltd (non associated) What tax implications arise if ABC Ltd provide free memberships to staff members? What if ABC Ltd negotiates a special corporate rate with City Gyms Ltd for its staff? Free membership = may be subject to FBT, as benefit provided If ABC Ltd reimburses staff for their own membership then = monetary remuneration Could meet unclassified benefit exemption if less than $300 per employee per quarter (or $1,200 per annum) and less than $22,500 per annum for all employees 19
If ABC Ltd negotiates a corporate rate with City Gyms Ltd, then no FBT/PAYE issues, as the corporate rate is offered by a third party on an arm s length basis Effectively no benefit arising in connection with employment rate is offered by City Gyms Ltd to certain customer (i.e. corporate) segments Note this is on the basis that staff pay that rate and is not paid by employer Other Benefits Rugby/Sporting Tickets Question Cathy is an employee of NRL Mad Ltd and has purchased NRL Nines tickets so she can take clients to the games The tickets are general entry tickets Does NRL Mad Ltd have to account for FBT on the tickets? Are there any other tax implications? 20
Arguably there is no benefit to Cathy she is entertaining clients, so no FBT What about entertainment expenditure? In this case, expenditure not subject to entertainment limitations as it does not fit within the specified categories in the entertainment regime (i.e. no corporate box, etc) However, if Cathy was provided tickets to take her family to the games, then FBT may arise on the value of the benefit Again determine whether unclassified benefit exemption can be met Other Benefits Accommodation 21
Question Bill has landed a new job as a farm manager for Farms Ltd. Bill is expected to live and work on the farm as part of his duties, and is accordingly provided with a home at no cost for him and his family to live in Bill is also provided with unlimited use of the farm ute What are the tax implications? Market value of accommodation = employment income/subject to PAYE. Despite being a non cash benefit, this is a specific inclusion in employment income Legislation recently enacted confirming market value of accommodation taxable. Certain exemptions apply for secondments and out of town travel but no discount beyond market value Unlimited use of ute may be subject to FBT Use of the ute on the farm (i.e. premises) is exempt due to on-premises exemption The ute would be capable of being a work related vehicle if it was sign written with Farm Ltd s name, etc However, currently private use (except travel between work and home) is not restricted A work related vehicle still has to have private use restricted to be exempt from FBT (plus evidence of regular checks). So potentially FBT in this case 22
What if employer also pays electricity for farm house? If power bill in the name of the employer, this is an unclassified fringe benefit subject to FBT unless exemption applies If power bill in the name of the employee, this is subject to PAYE Other Benefits Away from Home Costs Question Angela is being sent to Sydney on secondment for 3 months Her employer, NZ Ltd has agreed to pay her accommodation and travel costs and a daily allowance of $50 per day to cover incidentals during this time What are the tax implications of these payments? 23
Accommodation (up to 3 months) and travel costs tax free Refer IRD Determination DET 09/04 Eligible Relocation Expenses (TIB Vol 21, No 9, Dec 2009) which allows up to 3 months tax free What if secondment was for 12 months? New legislation recently enacted. Secondment for continuous period, accommodation will be tax free for up to 2 years Effective from 1 April 2015, with employers being able to elect to apply the rules back to 1 January 2011 (provided they have not taken a tax position that the accommodation was taxable before 6 December 2012, the date of the Commissioner s Statement outlining Inland Revenue s interpretation of the law) What About Daily Allowance? Daily allowance tax free, provided it represents an estimate of costs incurred (i.e. should have supporting science as to how daily figure reached). Otherwise employment income Note legislation now clarifies work related meals exempt (section CW 17B) 24
Other Benefits Unclassified Benefits Unclassified Benefits Captures any other benefit provided that is not specifically defined Examples Xmas gifts, rewards, hampers, etc May be exempt if thresholds not breached Question ABC Ltd has implemented a new staff rewards scheme. If staff members reach monthly targets, then they accrue a certain amount of points Once a minimum number of points is reached, staff can choose a reward. The rewards/goods are provided by a third party who specialises in employee reward schemes (similar to Fly Buys system) 25
Question What are the tax implications: When a staff member accrues points at the end of each month, and When a gift is redeemed? When points are accrued: No tax implications as no benefit or value provided to staff at this point The points are not redeemable and have no value other than for participating in the rewards scheme No entitlement to a reward arises until (a) staff reach a minimum point level and (b) choose a reward When a gift is redeemed FBT liability arises at this point ABC Ltd effectively provides a gift/free good to the staff member when required point level reached and staff member chooses the gift 26
However, may still be exempt, if: Value of gifts provided is less than $300/per employee/per quarter and Total cost not more than $22,500 in last four quarters (including current quarter) Other Benefits Shareholder Employees Question Jack is a shareholder employee of XYZ Limited Jack has received a number of fringe benefits throughout the year, including: Company vehicle (available for private use) Interest free loan Xmas gift and hamper Rugby World Cup Tickets for Jack and his family 27
Question Does XYZ have to account for FBT on ALL the benefits provided? No, Jack may choose to receive the unclassified benefits as a deemed dividend However, FBT must be paid on the motor vehicle and interest free loan i.e. he cannot elect for these categories to be dividends If XYZ Ltd is an ordinary company, then the value of the Xmas gift & hamper and Rugby tickets is a deemed dividend if so elected Election must be made in relevant FBT period. Determined quarterly but deemed to arise six months after balance date XYZ Ltd can elect to attach IC s to the value. May be preferable if excess IC s available and shareholder employee has lower tax rate or losses 28
If XYZ Ltd is a QC, then non cash dividends are exempt, so no further tax cost on these benefits Benefit not taxable to shareholder and not deductible to QC If QC shareholder has borrowed to acquire shares, interest deductions can be reduced by amount of non cash dividend received Questions 29