Waikato Business News November/December 2016

52 WAIKATO BUSINESS NEWS November/December 2016
The Devil is
in the detail
It is rare for highly valued employees to
be remunerated solely in cash. Typically,
a ‘remuneration package’ includes a
combination of cash and non-cash
incentives.
Non-cash incentives
inherently give rise to
the potential imposition
of fringe benefit tax (FBT) and
one of the most common forms
is the private use of a vehicle.
FBT on vehicles is neither
new nor rare. However,
we invariably encounter errors
in FBT calculations due to the
murky and complicated nature
of the rules and principles that
apply. One of the fundamental
starting points to keep in mind
is that FBT is merely a proxy
for PAYE. The FBT rates are
a ‘gross up’ of a net salary/
wage amount, ie. $100 @ 33%
= $33 of tax, so a fringe benefit
value of $67 @ the FBT
rate of 49.25%, also equals $33.
If I were to digress, I would
suggest that we get rid of FBT
completely and suggest it is simply
included within the PAYE
return, on a gross up basis. But
I won’t deviate, let’s stay on
track.
Your most likely thought
is, ‘how can I minimise my
FBT liability on vehicles provided
to employees?’ But this
shouldn’t be your starting point.
30098
The important question is,
when vehicles are provided to
employees, how much private
use do you want them to have?
It should then be a case of practically
restricting a vehicle’s use
to that level, and that drives the
amount of FBT payable.
The concept of being ‘available
for private use’ can be
misleading. The key thing to
remember is that if a vehicle
is available to an employee for
private use, FBT is payable
whether or not the vehicle is
actually used. By definition, if a
vehicle is used for home to work
travel that will be captured as
private use. However, if a vehicle
qualifies as a "work related
vehicle", that same travel from
home to work is not considered
private use.
To qualify as a work-related
vehicle it can’t be designed to
principally carry passengers (eg.
a Ute will qualify as a work
related vehicle). The name of
the employer’s business also
needs to be identified permanently
and obviously on the
vehicle’s exterior (eg. sign written).
A common error is to treat
a sign written sedan that is never
used to carry passengers as a
work-related vehicle. Finally,
it needs to be a condition of
employment that the employee
stores the vehicle at home.
Restrictions on private use
should be agreed in writing
and monitored to avoid FBT.
For example, if an employee is
restricted from using a work-related
vehicle at the weekend,
then the employer should periodically
take the odometer reading
on Friday afternoon and
Monday morning, the difference
should be the distance from
work to home, and back. If documentation
is put in place, but it
is found that the employee and
employer are ‘quietly’ ignoring
the restrictions, the paperwork
will be ignored and FBT is likely
to apply.
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When it comes to calculating
the FBT payable, the quarterly
equation appears to be simple
enough: work out the proportion
of days that the vehicle was
available for private use during
the quarter, and multiply this by
the relevant vehicle value and a
specific percentage. However,
each of these elements can be
easily misunderstood.
There are certain instances
where a vehicle is deemed to
be not available for private use,
and thus such days are excluded
from the FBT calculation.
Specific exclusions include:
when a vehicle is stored on the
business premises; if the vehicle
is used for an emergency call
between 6pm and 6am; and the
employee travels out of town for
business.
Once an employer has determined
the private use proportion
for a vehicle, this is multiplied
by the vehicle’s value. There are
TAXATION AND THE LAW
> BY HAYDEN FARROW
Hayden Farrow is a PwC Executive Director based in the
Waikato office. Email: hayden.d.farrow@nz.pwc.com
two methods available to determine
a vehicle’s value - either
the cost price method, or the tax
book value (TBV) method. The
TBV method is the original cost
price (including or excluding
GST depending on the rate) less
its total accumulated depreciation
at the start of the FBT
period. A minimum value of
$8,333 applies when using the
TBV method.
Once an employer has chosen
which method to use for
a particular vehicle, they must
continue to use the same method
for that vehicle for five years.
Typically, the cost price method
is used from acquisition because
the TBV method front loads the
FBT liability. After five years
employers should then switch to
the TBV method, which should
give rise to a reduction in the
annual amount of FBT payable.
Cue our next common error:
Where there is a switch from the
cost method to the TBV method
after five years, the minimum
amount of $8,333 is not an automatic
option. The $8,333 minimum
is only applicable where
a vehicle’s TBV is less than
$8,333.
As a general rule, FBT is
calculated based on GST inclusive
vehicle values. GST exclusive
values can be used, but
the fringe benefit calculation
percentage needs to be adjusted
accordingly. The quarterly
percentage using the cost price
method is adjusted from 5%
to 5.75%, and the percentage
using the TBV method adjusts
from 9% to 10.35%. A common
error is to use the GST exclusive
vehicle values multiplied by the
lower of each applicable rate.
Another misunderstanding is to
apply the 5% rate to all vehicles,
even when the TBV method has
been used.
FBT can be frustrating
because it takes considerable
time to calculate, for what can
seem like a small amount of tax.
But it is worthwhile reviewing
both the availability on which
FBT is being calculated and the
calculation itself. There may be
savings to be had or errors to
be identified, both of which can
add up over a period of time.
The comments in this article
of a general nature and should
not be relied on for specific
cases. Taxpayers should seek
specific advice.
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