Government Moves To Make Fringe Benefit Tax Fairer
13 March 2000
Government Moves To Make FBT Fairer To Ordinary Workers
Fringe benefits will be made subject to a three-tier tax as the Government moves to address a long-standing unfairness in the FBT regime, Revenue Minister Michael Cullen announced today.
"The purpose of the change is to reduce the over-taxation of fringe benefits received by low-income and middle-income people, and to limit opportunities for tax avoidance by high-income people," Dr Cullen said.
Fringe benefit tax, currently set at a rate of 49 percent, will rise to 64 percent in tandem with the introduction on April 1 of the new 39 percent income tax rate.
"The rate of fringe benefit tax must be tied to the top personal tax rate to prevent those on high-incomes avoiding the higher tax rate by substituting for taxable income fringe benefits such as expensive cars and low-interest loans," Dr Cullen said.
"But currently all fringe benefits are taxed at the top rate, even when the people receiving them are not top income earners. The fringe benefits of those people are being over-taxed.
"This is a long-standing problem which has been around since the FBT was first introduced in 1985. The Government will ameliorate this by shifting to a multi-rate system.
"Employers will be able to choose FBT rates that better correspond to the remuneration of individual employees. They may choose between paying a flat rate of 64 percent on all fringe benefits, or using rates of 27 percent, 49 percent or 64 percent, whichever is the most appropriate. The tax rate will be based on the employee
?s tax rate. The latter option will involve a square-up process at the end of the year. Benefits not attributed to an individual employee will be subject to FBT at a flat rate of 49 percent."
"The Government will also introduce measures to prevent employees negotiating to be paid by different but associated employers, to limit their ability to avoid a higher fringe benefit tax.
"The multi-rate system will introduce greater accuracy into the taxation of fringe benefits. But we have to balance that achievement against the fact that it will also cause some increase in compliance costs for the employers who choose to use it. We have tried to minimise these costs wherever possible," Dr Cullen said.
The changes to the fringe benefit tax system will be included in a bill to be introduced into Parliament later this month.
Questions and answers ? multi-rate fringe benefit tax
What sort of fringe benefits have to be attributed?
Employers will be required to attribute all cars used solely or predominantly by one employee, all low-interest loans, and other fringe benefits with a taxable value exceeding $1,000 over the year. For example, if an employee earns $45,000 a year working for a company involved in transportation, and receives subsidised transport valued at $1,200 over the year, the employer would have to attribute and therefore apply the 49 percent FBT rate to that fringe benefit.
Can I attribute all fringe benefits?
Some employers may wish to also attribute low-value benefits, especially where a large number of their employees receiving fringe benefits have low-incomes. For example, if a company provided medical insurance to its workers with the premium per person costing $800 over the year, it would be able to attribute these benefits should it wish.
However, those who decide to attribute these low-value benefits, must attribute the entire category to all recipients. In other words, employers cannot just attribute the medical insurance they provide to low-income employees and apply the non-attributed rate of 49 percent to the medical insurance provided to high-income earners.
Group benefits such as pool-vehicles cannot be attributed unless there is a predominant user.
Will these changes affect my fringe benefit tax return filing obligations?
Currently, most employers file fringe benefit returns quarterly, with a small number filing annually or by income year. Under these changes, quarterly filers could opt to pay FBT at a flat 49 percent or 64 percent rate for the first three quarters in the year. In the year-end fourth quarter, the employer would undertake the square-up process whereby benefits attributed to individual employees would be taxed on that employee?s tax rate based on income received from that employer. Employers filing annually or by income year can choose between paying a flat 64 percent, or undertaking the square-up.
For quarterly filers, FBT returns are currently due on the 20th day of the month following the end of the return period. In recognition of any increase in complexity and compliance costs, the due date for the fourth quarter square-up return will be extended from 20 April to 31 May.
Do I have to undertake the square-up?
Employers can opt not to undertake the square-up and simply continue to file at 64 percent in every quarter. This could be an appropriate option for either employers with predominantly high-income employees, or for employers who only provide a small number of fringe benefits. However, the fourth quarter payment is final, and therefore an employer could not pay 64 percent on all benefits and then seek to undertake a square-up for that year at a later date.