FBT – the forgotten and especially unloved tax

People generally are not overly enthusiastic about filing and paying taxes.  However, businesses seem to reserve a special disdain for fringe benefit tax or FBT.  FBT is seen as overly complex and difficult to comply with compared to other taxes.

In late August last year, the Inland Revenue released a report discussing the findings of a high-level review into the FBT system.  The findings included:

• FBT performs the primary task of ensuring that non-cash income is taxed so supports the tax system as a whole; and
• The perception is that FBT is not functioning well as it imposes a high compliance cost and the connection to remuneration seems to have been lost.
• The level of compliance is perceived as being low and there being a low level of enforcement.

In other words, the IRD’s findings are an honest and frank assessment of where FBT currently sits.  For years FBT has been put in the too hard basket by IRD and taxpayers alike.  FBT is an annoyance for businesses as it is time consuming for businesses to comply with but is barely a rounding error in the overall tax take.  However, while FBT is a low-value annoyance, FBT is an important anti-avoidance measure that serves a very useful purpose in preventing cash-pay being diverted to non-cash pay.  Therefore, FBT is not going away anytime soon.

The paper discussed the following potential actions to address the current position:

• Fundamental reform which could include:
  • Shifting fringe benefits into the PAYE scheme (unlikely); and/or
  • Re-establishing the link to remuneration of employees which could be by way of making the FBT target only specific benefits.
• Smaller reform which could include:
  • reviewing the certain benefits (motor vehicles is specifically mentioned); and
  • modernising the tax treatment of benefits to suit the current working practices; and
  • Reviewing thresholds and reducing compliance costs.
• Operational actions, including:
  • Analysing data to understand the level of compliance; and/or
  • Education programs to ensure businesses understand their FBT obligations; and/or
  • Compliance campaigns or other enforcement action.

IRD’s recommended policy approach is to review policy settings with an aim to re-introducing a connection to remuneration, modernising FBT, and reducing compliance costs.

In terms of an operational approach, the Inland Revenue has acknowledged that non-compliance needs to be addressed, but IRD are not proposing to rush straight to enforcement action.  Instead, the Inland Revenue wants to prioritising understanding the level of compliance and improving education about FBT.

One issue the IRD has acknowledged is that it has no idea how bad the level of compliance is.  This is because while the level of returns being filed is low, this can partly be explained by businesses making certain accounting adjustments that remove the need to return FBT on benefits being provided to employees.  However, it should be noted that where such adjustments are done, nil FBT returns are still supposed to be filed.

Here are a few interesting points are raised/acknowledged in the report:

• There is acknowledgment that there is an overreach on the “benefits” captured by FBT that are not a substitution for remuneration – an example raised was an employer giving flowers to an employee who has lost a loved one.
• The report acknowledges that there is a trend towards employers providing staff with wellness benefits – gym memberships etc.  These are generally subject to FBT as the health and safety exemption is too narrow to exclude these from a FBT liability.
• It was noted that the “on-premises exclusion” for FBT doesn’t fit well with modern flexible work practices.
• IRD does not recommend exempting electric vehicles from FBT because it sees that direct incentives (clean car discount etc) as a more coherent means to achieve the goal of increasing electric vehicle uptake.

The report does mention the work-related vehicle exemption in passing, but it does not specifically comment on the application of the exemption to double-cab utes.  In recent years, there has been a suspicion that this Government might try and change the work-related vehicle exemption as it effectively creates an incentive for businesses to buy utes for work vehicles.  That being said, it should be noted that this review was an IRD paper not a Government paper, so it is not focused on policy matters.

Education campaign has commenced

In September, IRD announced it was starting a campaign called “Get fringe benefit tax right” and announced that digital ads would start in October and taxpayers would be contacted about common mistakes.

The letter/email campaign started in November, and unfortunately it did not start well.  Many taxpayers were sent letters or emails about FBT obligations.  These emails suggest that IRD was writing to them because the GST adjustments on their fringe benefits were incorrect.  However, Inland Revenue acknowledged the following day that there were errors in the process for selecting recipients for these emails and some had been messaged in error and had not in fact made the GST adjustment errors discussed in the email.

Enforcement action

As mentioned earlier, the IRD has recognised that compliance with FBT is assumed to be poor, but they are not proposing to rush out and audit taxpayers.

Historically, we have typically seen IRD look at FBT in two scenarios:

• Queries about sign-written vehicles at supermarkets or boat ramps at popular holiday spots in weekends (especially long weekends) and over holiday periods; or
• Asking taxpayers to complete FBT questionnaires as part of wider audit activity.

In the past few years, there has not been too much IRD audit activity as IRD resources have been tied up with Covid related matters, bright line audits and the internal transformation project.  The transformation project is finished and the Covid assistance is a thing of the past, so therefore IRD should have additional resources to focus towards FBT if they chose to.

What does this mean moving forward?

We would welcome any changes that would simplify FBT and reintroduce the focus on non-cash remuneration and we hope that this comes to fruition sooner rather than later.  However, it is important to note that the recommendations discussed above are the recommendations of IRD, not the Government.  Ultimately, it is a Government decision whether the recommendations are adopted.  The problem here is that an overhaul of FBT has been recommended several times, but significant changes have never eventuated.  I can’t help but feel that this is not a high priority for the current Government.  If there was a change of Government later in the year, I think that would increase the odds of some real change happening here.  In any event, it is extremely unlikely that significant changes are made this year.

As mentioned above, IRD are proposing a restrained approach to enforcement.  However, it is fair to assume that some form of additional enforcement would follow an education programme.  Time will tell, but I suspect that we will see IRD more actively policing FBT towards the middle and end of this year.

 

Source: WKStrawbridge

 

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