Week 7

Fringe Benefit Tax

(FBT), Capital Gains
Tax (CGT)
Learning Outcomes
By the end of the session students should get an
understanding of:
1. The history of FBT
2. What is a fringe benefit
3. Benefits that do not attract FBT
4. Tax filing and tax rates for FBT
5. Four main types of benefits that attract FBT
6. What is a Capital Gains Tax
7. Theory behind CGT
8. CGT in NZ and reviews to address CGT
Reading
• Coleman et al., (2021): Chapter 21 (Fringe Benefit
Tax)
Cases
• Roma Properties Ltd v CIR (1998)
• Commissioner of Inland Revenue v Schick (1998)
• Commissioner of Inland Revenue v Yes Accounting
Services Ltd (1999)
History of FBT in NZ
1. Payment of fringe benefits were used in the 1970s and
1980 to avoid tax payments » serious threat to NZ tax
base and led to inequities in the tax system
2. FBT was introduced on 1 April 1985 and is captured
under the income tax legislation under s RD 26(1).
3. Too many changes (rates, whether GST inclusive or
exclusive, options available) have resulted in an overly
complex FBT system. Resistance from employers and
calls to remove it. Government standing firm to retain
FBT because of equity maxim.
Introduction
• Forms part of the ITA 2007
• The governing provision is s RD 26(1):
• “an employer who provides a fringe benefit to an
employee is liable to pay FBT”
• Liability for FBT is imposed on the employer:
• To discourage employers from providing non-cash
benefits
• For administrative simplicity
• S BE 1(4) the person(or org) providing the FB to
another person must pay FBT
What is a fringe benefit?
• A benefit provided by an employer to an employee (or
an associated person), in connection with their
employment.
• Consists of:
• Making available of a motor vehicle for the employee’s
private use (s CX 6(1))
• Subsidised transport (s CX 9)
• Loans provided by employer to employee (s CX10(1))
• Contribution to sickness, accident, insurance or death benefit
fund (ss CX 14 and s CX 16)
• Contribution to a funeral trust (s CX 15)
• Free, Subsidised or Discounted goods/services (also known as
unclassified benefit) (ss CX 2(1)(b)(ii), CX 37)
Meaning of Employee & Employer

• Employee (defined in s YA 1)- person who is entitled to

receive a PAYE income payment.
• PAYE income payment- payment of salary or wages, an extra
pay or a schedular payment
• See Roma properties Ltd v CIR (1998)- Page 849 of textbook
• Employer- a person who is liable to pay a PAYE income
payment
• If an employer provides a fringe benefit to a person who is
associated with an employee (those within two degrees of
relationship are associates -ITA 2007, s YA 4). the benefit is
taxed in the same way.
Excluded Benefits – not subject to FBT
• Salaries and wages (s CX4)
• Benefit that was provided in relation to employment but
it is exempt income to the employee (s CX5)
• Employer’s superannuation cash contribution
• Business Tools if the cost is < $5000
• Benefits which relate to employees’ health or safety
under the Health and Safety in Employment Act 1992
• Distinctive work clothing provided by the employer to
the employee
Fringe benefit: Motor Vehicle
1. Fringe benefit arises when a MV is made available to an
employee for their private use (s CX6). Private use includes
use of the MV for travel between home and work, and any
other travel that confers a private benefit on the employee
(s CX36):
2. The two cases below- where availability of vehicle not
regarded as a fringe benefit
 Commissioner of Inland Revenue v Schick (1998) 18
NZTC 13,738 (HC)- See Page 851 of textbook
 Commissioner of Inland Revenue v Yes Accounting
Services Ltd (1999) 19 NZTC 15, 296 (HC)- See Page 852
of textbook
Fringe benefit: Motor Vehicle
(Exemptions)
1. Work related vehicles (s CX 6(2)):
1. Not a car
2. Employer’s identification is prominently
and permanently displayed on the
outside of the vehicle
3. The vehicle is not available for any private
use, or travel that is incidental to the
employee’s employment duties.
Value of MV fringe benefit calculation

• FBT on MV paid on quarterly, annual , or income year

basis
FBT = Days X Schedule 5 amount
90 (if quarterly) or 365(if annually)
• Days is the lesser of the no. of days of the vehicle is
available for private use or 90 (if quarterly) or 365 (if
annually)
• Schedule 5 amount differs between quarterly and
annual filers
Fringe benefit: Motor Vehicle
(Exempt Days)
1. When not made available for private use during the
standard 24 hours ending midnight
2. Break downs, being repaired, being stored in the
employer’s premises, parked at an airport carpark as
the employee was required to take a business-related
flight
3. Emergency calls (6pm-6am on weekdays, anytime
during weekends and public holidays)
4. Out of town business travel lasting at least 24 hours
Schedule 5 amount if using the Cost Price or the
Taxable Value option
FBT Period Options

Quarterly FBT calculation 5% of GST inclusive cost price OR

5.75% of GST exclusive cost price OR

9% of GST inclusive tax value OR

10.35% of GST exclusive tax value

Annual FBT 20% of GST inclusive cost price OR

Income year calculation 23% of GST exclusive cost price OR

36% of GST inclusive tax value OR

41.4% of GST exclusive tax value

Value of Fringe Benefit

• Employers have two options

1. 36% (or 9% if FBT is paid quarterly) of the vehicle’s
adjusted tax value (subject to a minimum of
$8333), OR
2. 20% (or 5% if FBT paid quarterly) of its cost
• These rates are applicable irrespective of whether
the MV is leased or owned

Question 6- lecture handout

Cost Price of Motor Vehicle Includes
1. The Purchase price of the vehicle
2. The cost of initial registration and licence plate fees
3. The cost of accessories, components and equipment
fitted to the vehicle at time of purchase- other than
business accessories (those that are fitted to the
vehicle required for and relating solely to the
business operations for which the vehicle is used and
are depreciable property)
4. The cost of transporting the MV to the place where it
is first used
What is excluded from MV Cost price?
1. Annual vehicle re-licencing
2. The cost of sign writing or painting the vehicle in
employers colour
3. Road user charges
4. The cost of financing the vehicle
5. The cost of business accessories (such as two-way
radio, roof-mounted flashing lights, and electronic
testing or monitoring equipment) – items that are
permanently fixed to the vehicle
Fringe benefit for low interest loan

• Fringe benefit arises if loan was provided to

employee because of employment relationship.
• Loan –defined as amount of money lent
• The taxable value
= IRD prescribed rate (or acceptable market rate) –
actual interest rate.
• See example 21.15 page 862 of textbook
• Prescribed rates from IRD: see page 863 (current
prescribed rate = 5.77%)
Question 9 Lecture handout
Free or Discounted goods/services

1. Employer makes free, discounted or subsidised

goods available to its employees (this is FB under s RD
40)
2. Value of benefit:
 Manufactured goods = the market value of
the goods
 Purchased goods = cost of the goods
 Services = market value
3. The value of the fringe benefit = market value (or
cost) minus amount paid by the employee
4. The taxable value is GST inclusive
Employer contributions

1. Contributions to:
 Sickness, accident or death benefit funds
 Includes superannuation schemes
 Life or health insurance
2. Value of taxable fringe benefit = Employer
contributions minus employee contributions.
3. The taxable value is GST inclusive
Specific Benefits – Car Parks
1.Employer-provided car parks – benefits used or
consumed by an employee on the employer’s premises
are exempt from FBT (s CX23). This exemption includes
a car park provided to an employee where:
1. The carpark is on a land or in a building owned or leased by
the employer;
2. There is an exclusive right to occupy the property; and
3. There is a legal estate or interest in that property
2.Specific examples of carparks which may or may not be
exempted from FBT. See Table 21.7 on p. 874
Specific Benefits – Distinctive Work
Clothing
Distinctive work clothing provided by employers to
employees is not subject to FBT (s CX 30)
Distinctive work clothing is clothing that:
• Is worn by an employee as a uniform (or part of a
uniform) that is identifiable with the employer;
• Is worn during or as an incidence of employment
• Is not clothing that employees would normally wear
privately
Distinction between unclassified
benefits from other fringe benefits
There is an exemption from FBT for unclassified benefits (s
RD 45) if these conditions are satisfied:
 Taxable value of benefits to each employee does not
exceed $300 per quarter (or $1200 p.a); AND
 Total taxable value of benefits to all employees does
not exceed $22,500 for the whole year.
 If these two conditions are satisfied, then the
employer does not need to file FBT for the
unclassified benefits for the quarter
Types of filers (single rate option)

1. Quarterly
2. Annually
3. Rate is 49.25 per cent of the taxable
value of all fringe benefits in each of the
four quarters; OR
4. Annually: pay at 49.25%
Filing and paying FBT - Quarterly
Quarters Period Due

1 1 Apr – 30 June 20 July

2 1 July – 30 Sep 20 Oct

3 1 Oct – 31 Dec 20 Jan

4 1 Jan – 31 Mar 31 May

Capital and Capital Gains
 Capital can be defined as an item of wealth or an asset
capable of producing wealth.
 Buildings, land, plant and machinery, investments and
intellectual property are all capital.
 Rent, interest, royalties, dividends and other payments
derived from them are income. When the capital item is
sold or realised it is a capital receipt and is not income.
 A capital gain is defined as the increase in value of an asset
capable of producing wealth, after any associated
transaction or brokerage costs have been deducted.
CGT in NZ and International reviews

1.Unlike Australia, UK and US, NZ does not have a separate and

comprehensive CGT regime.
2.Increasing pressure from OECD to have a separate CGT.
3.However, since there is no separate CGT in New Zealand, this has
resulted in favourable international tax competitiveness index for
NZ. NZ is currently ranked no:2 after Estonia in 2016 in terms of
the international tax competitiveness index (See Tax Foundation
report).
4.Contrary to popular belief, certain capital gains in NZ are caught
under the taxable income regime in the Income Tax Act 2007 (ITA
2007). In other words, income received from capital transactions
are classified as income received in the course of carrying on
business.
Rationale for and against CGT

1. Maxims of good taxation

2. Argument for and against CGT is contentious in New
Zealand.
3. NZ rates favourably in International Tax
Competitiveness Index because it does not have a
separate CGT.
4. NZ tax on capital gains are considered “ad hoc” and
unsystematic because some capital revenues are
treated as incomes.
5. NZ has a “hybrid tax system for CGT”
Capital gains and the Bright-line test
1. Overcome problems associated with the intention tests under
s CB 6
2. Require vendors and sellers to have a New Zealand bank
account and IRD number
3. Bright – line test (changed from 27 March 2021). Tax on gains
made on residential property bought and sold within 10
years.
4. Exclusions:
 Owner occupied residence
 Inherited properties
 transferred to you as the executor /administrator of a
deceased estate
New Zealand and CGT
Should New Zealand adopt a comprehensive and
separate CGT regime?
Issues to be considered:
 Compliance costs
 Administrative costs
 CGT base, rate, calculation
 Need to define asset, disposal and timing as to when CGT is
captured
 Cost- benefit analysis by the government
 Political suicide for political parties suggesting
comprehensive CGT