There seems to be a real grey area when it comes to understanding how FBT works and it is a topic that I am asked about a lot. It’s important to note that Inland Revenue are quite strict in their policing of the FBT rules, so seeking clarity around the topic and ensuring you have the right documentation in place is very, very important. Failure to do so, could result in Financial penalties for your company.
As a general rule, FBT is required when a company makes a vehicle available for any employee, shareholder or otherwise. Please note that the company will be subject to Fringe Benefit Tax, whether or not the vehicle is actually used for private purposes. However, like most things there are always a couple exceptions to the rules. Let’s take a look at these FBT exemptions now:
Work-related vehicles: In order to qualify as a work-related vehicle, all four of the following requirements must be met.
- The principle design of the vehicle cannot be for carrying passengers, like utes, light pick-up trucks, and all vehicles that are permanently without rear seats such as vans, station wagons, hatchbacks, panel vans, and four wheel drives
- Your company’s name or logo must be permanently and prominently displayed on the exterior of the vehicle. Magnetic or removable signs are not acceptable.
- Your company must notify affected employees in writing that the only private use allowable is travel between home and work, or travel incidental to business travel. We advise that your notification be by way of letter, rather than just referring to it in their employment contract. We can help you prepare the right documentation here.
- Your company must record quarterly checks on each vehicle, to ensure that the restriction is being followed. For example, you might check the logbook and petrol purchases, again talk to us about how to go about conducting these checks.
Now, an exception to the exception is that if a work-related vehicle meets the four conditions above but is available for private use on certain days, such as Saturdays and Sundays, a partial exemption is available.
Vehicles with a gross laden weight of more than 3,500 kilograms are not subject to FBT. This tends to cover all larger trucks and buses.
Daily Exemptions: Certain emergency calls and some out of town travel and can reduce the amount of FBT payable for vehicles otherwise available for private use.
It is important to seek expert advice, so talk to us or your own accountant about how FBT is calculated. In a nut shell FBT is calculated based on either the vehicle’s cost price (including GST), or on the vehicle’s tax value.
A motor vehicle’s tax value is its value for tax depreciation purposes at the beginning of the relevant tax or income year. Once you have chosen to use either the cost or tax value option you must continue that option until either the vehicle is sold, the vehicle lease ceases or five years have passed.
- If you are using the cost price option, FBT is calculated at 5% per quarter of the GST inclusive cost price of the motor vehicle, multiplied by 49.25%, being the Fringe Benefit Tax
- If you are using the tax value option, FBT is calculated at 9% per quarter of the GST inclusive depreciated value of the motor vehicle, multiplied by 49.25% being the Fringe Benefit Tax
A couple of helpful facts to know:
- FBT liability is reduced by the number of the days the vehicle was not available for private use or was exempt from FBT
- FBT is normally payable quarterly
- When it comes to shareholder – employees using a company vehicle, you need to talk to your trusted advisor and decide whether it is better that the vehicle in question be owned by the company or the shareholder-employee, as well as the do’s and don’ts of company vehicle use to be met to qualify for exemptions to FBT. This is where we can be of assistance.
So as I stated earlier, the IRD are quite strict in their policing of the FBT rules, so I do advise that you get together with your trusted advisor to find the best way to legally minimise your FBT exposure.
Contact us for more information 07 827 6006