Bread and butter. Bat and ball. Fish and chips. Somethings in life are just meant to be together, and it is easy to see why they belong.

But consider another two things that commonly appear together; motor vehicles and FBT (Fringe Benefit Tax). It just doesn’t feel the same as the others, does it? The question arises, therefore; why does a potentially vital cog in a business always seem to attract FBT?

To answer this question, consider the advantages of vehicle ownership in a business; deductions for running costs such as depreciation, petrol, registration and repairs are generally allowed against taxable income. These deductions reduce income tax liability and help retain vital cash in a business that would otherwise be paid to Inland Revenue. Furthermore, if the business is GST registered, a GST credit claim may be available for the initial purchase price.

For example, if a company pays $120,000 for a vehicle, it can expect a tax reduction of up to $24,417 comprising a $15,652 GST credit, and a reduction in income tax of $8,765 (as the result of depreciation), in the first full year of its use. This is even before considering other tax-deductible costs. 

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Given the existence of opportunity to reduce taxation, and the ability for business owners to easily run vehicle costs through a business, it is not surprising that there are, and rightly so, provisions in place within the FBT regime for vehicles to be taxed, and employers providing vehicles to employees where opportunity exists for non-business use will be liable for FBT. 

The salient point here is that it is not a question of whether there is actual private vehicle use that determines if it is subject to FBT, but whether the vehicle is available for private use by an employee.

It's not you, it’s me…

Being in the FBT regime adds compliance and administrative work to an employer as registration and the filing of FBT returns will be required in addition to paying FBT. For this reason, we are often asked; what are the alternatives to FBT when a business provides vehicles to employees?

Closely held companies

From 1 April 2017, closely held companies where the only fringe benefit provided is a motor vehicle for a shareholder-employee, a company may elect to be exempted from FBT, and only claim a business portion of vehicle expenditure. Essentially, this means reducing tax deductions to exclude private vehicle costs incurred. This streamlined approach aligns treatment of company vehicle expenses with existing treatment for sole traders and partners in a partnership, where there is an absence of an employer-employee relationship.

Employee contributions

Contributions made by employees can be offset against the FBT liability of an employer. Where a cash contribution is made by an employee that is equal to the taxable value of the vehicle provided to an employee, there will be no FBT liability. The taxable value of a motor vehicle is based on the cost price, or tax value, of the vehicle and the number of days it is available for private use. 

Shareholder-employees may make a non-cash contribution by way of a journal entry to the shareholder’s current account. Irrespective of whether the contribution is cash, or non-cash, contributions are subject to GST and income tax.

In a scenario where an employee contributes partially, for example paying for petrol costs out of their own pocket, that contribution can also be used to reduce the employer’s FBT liability.

Allowances paid to employees

Instead of providing a vehicle to an employee for work purposes, an employer may choose to provide an allowance to employees for travel.  Allowances are normally subject to PAYE but in certain circumstances they are tax free in the hands of the employee. These circumstances include travel to fulfill overtime, shift or weekend duties that is outside the normal hours of work, travel due to a temporary change in workplace, or if there is a need to transport special work-related tools and equipment. 

An employer may also reimburse an employee for on-the-job related travel. Reimbursing allowance payments are tax deductible to the employer, and tax free to the employee. Employers can claim GST on reimbursements of employment related costs.

Incidentally, since allowances are generally benchmarked against costs, and costs tend to only increase with inflation, the astute use of allowances as part of a renumeration package can effectively manage salary increases over time. 

Work-related vehicle exemptions

Exemptions from FBT are available for work-related vehicles, and emergency and business travel. Each exemption has its specific requirements. 

Work-related vehicles are light vehicles, with a principal design that is not for carrying passengers (taxis excluded), with the prominent and permanent display of business identification on the exterior. In addition, documented policies excluding the use of the vehicle by the employee for private purposes must also be in place. 

Heavier vehicles, such as trucks exceeding 3.5 tonnes, may still be subject to FBT under the unclassified benefit section of the regime. 

Exemptions from FBT for emergency and business travel may apply to the relevant days during the financial year, and an exemption is also available for days that a vehicle is unavailable to the employee. However for the remainder of the year the vehicle will remain subject to FBT and in such cases FBT is adjusted to reflect the periods of time that the exemptions apply.

Where do we go from here?

With the financial year end rapidly approaching business owners are now busy planning for growth for the new year. The experienced advisors at Bellingham Wallace are skilled at cutting through the complexities of FBT compliance and can provide tailored recommendations to ensure that the tax consequences of investments decisions are correctly managed.