What is Fringe Benefit Tax?
Any benefit that an employee gets in addition to pay is still beholden to a tax: the fringe benefit tax (FBT).
Potential taxable benefits include a lot of different things: discounted goods and services, loans to employees, and vehicles; to name a few.
Potential taxable benefits include a lot of different things: discounted goods and services, loans to employees, and vehicles.
In the case of company cars, you can allow for partial or total private use of a work vehicle. This private use includes any travel to and from the employee in question’s home, as well as any other travel that involves a personal or domestic element.
For this benefit, you as a business owner have to pay company car tax—but only if there is availability for private use. Should the vehicle only be available for business use, there would be no personal benefit to the employee, and thus wouldn’t be beholden to the fringe benefit tax.
How fringe benefit tax works over the holidays
While your office might be closed, you may still need to pay FBT on the vehicles that your employees have access to. What you need to factor in is not necessarily the actual use of the vehicle, but rather the availability of the vehicle.
For example, one of your employees might have the full private use of a vehicle over Christmas. They decide to use it to go and visit their parents in the next city over. You would pay FBT on this, because it is available for their private use.
In another example, you might be storing your business vehicle at your office, locking the keys in an already locked office. The vehicle is not available for employee use, and thus you would be unlikely to need to pay FBT.
The IRD seems to have changed their focus from actual use of the vehicle to availability of the vehicle when considering FBT: keep this in mind when planning where and how your vehicles will be kept over the holidays.
How do I avoid paying FBT when I don’t need to?
The new focus of the IRD on availability rather than use has put even more focus on how you communicate with your employees on the rightful use of the vehicle. You need to have extremely explicit and well-communicated terms of use of the vehicle with your employees. Without the right documentation and communication, you could get stung with FBT over the holidays.
Without the right documentation and communication, you could get stung with FBT over the holidays.
For example, if you let your employees take the vehicle home over the holidays, you are making it readily available for their private use. The IRD might expect FBT to be paid as a result. However, if you had a letter addressed to each individual employee explaining the terms of use, and then signed by said employee, company-wide email and signed terms of vehicle use , you may be able to argue that you shouldn’t need to pay FBT. In this case, you would also need to actively monitor the company car use as well.
For example, if you had a contracting company and you sent a tradie home over the holidays with a ute to store, you may be able to avoid paying FBT as long as you tell them in writing that they are not supposed to use it for personal affairs.
There are other exemptions also available if your vehicle meets certain criteria, which you can read about here.
What if I’m also a shareholder?
If you are a shareholder in the company, as well as an employee, it might be more advantageous to pay out the vehicle use as a dividend, rather than as a benefit.
By calculating the value of the use of the vehicle, and assigning this to you as a company dividend, it will be taxed at a personal marginal rate, rather than at the company rate—it also means less admin and compliance on behalf of the company.
This is particularly effective for company owners in a start-up that may have a low salary. You can use this vehicle any time—including over the holidays—if you pay it out as a dividend instead of a benefit.
Another option would be if you have a small company with one or two motor vehicles available for private use by shareholder-employees. You can opt out of the FBT rules if you:
- Apply the rules for vehicle expenditure in your income tax return, and,
- Make an adjustment for private use under the rules for motor vehicle expenditure.
Summary
Long story short, if the vehicle is available for your employees to use, you need to make sure it is extremely clear as to how and when they can use it. Even if you don’t allow for private use of the vehicle, if you are lax in your documentation and communication, you may need to pay FBT.
If you’d prefer not to worry about these kinds of problems over the holidays, you can always hand over the tax work to Bellingham Wallace instead.
