Motor Vehicles - Fringe Benefit Tax (FBT) Applies

 
Grange Associates Ltd - 11 February 2012

This taxation treatment applies to motor vehicles provided by:

• Companies to shareholder employees
  
  
• Companies to employees
  
  
• Self employed persons to employees

• Partnerships to employees
  
  
• Trusts to employees

Where a motor vehicle is subject to FBT, that vehicle’s running costs and depreciation are fully tax deductible. Where the business is GST registered, all expenditure (capital and running costs) can be claimed as an input.

In respect of FBT, it is a question of a vehicle’s availability that matters, not its actual use.

FBT was originally introduced to tax non-cash benefits. Prior to its introduction it was possible for employers to skew remuneration packages towards non-cash benefits and effectively increase an employee’s after tax income. FBT aims to ensure that all remuneration (cash or non-cash) is taxed. The cost of FBT is borne by the employer and it is deductible by them for income tax purposes.

FBT is based on the value of the benefit provided to the employee and the benefit is deemed to include GST; hence, the employer treats the provision of the benefit as a GST output. The GST aspect is included on the FBT return filed by the employer, not on their GST return.

Motor vehicles are probably the most common fringe benefits provided by employers.

Provision of motor vehicles for FBT

For a motor vehicle to be subject to FBT, there must be:

• A motor vehicle
  
  
• Owned, leased or rented at any time during a period
  
  
• Made available to an employee on a day for their private use
  
  
• By an employer
  

What is a motor vehicle?

For FBT purposes a motor vehicle is a vehicle drawn or propelled by mechanical power with a gross laden weight of less than 3,500 kilograms, and includes trailers.

Not included are:

• A vehicle running on rails
  
  
• Certain trailers (trailers used as part of NZ Defence Force’s armament, one wheeler trailers designed for testing tyres or measuring speed)
  
  
• Vehicles designed and used in recreation, amusement or entertainment places which the public do not have access with motor vehicles
  
  
• A pedestrian-controlled machine
  
  
• Vehicles declared by Land Transport under section 168A not to be motor vehicles
  
  
• Mobility devices
  

The definition is very broad, only removing the very large and the extraordinary.

Vehicle’s owner and user

The technicalities of who and how the vehicle is owned, rented or leased are not focussed upon. Whatever the design of the ownership structure, FBT can result where an employer arranges for a motor vehicle to available for private use by a past, present or future employee.

Hence a FBT obligation can exist where:

• An associate of the employer provides the benefit
  
  
• The benefit is received by an associate of the employer’s employee
  
  
• The benefit is due to an arrangement arising from the past, present or future employment relationship between the employer and employee
  

Importantly, the benefit is not just the “private use” of the motor vehicle, it is the availability for the “private use”.

What is a day?

In relation to motor vehicles, FBT is calculated on the basis of daily availability.

The default day is an ordinary day, being a period of 24 hours which begins at midnight, and finishes 24 hours later. However, the employer is allowed to choose a starting time for any 24 hour period, and that 24 hour period will constitute a day for FBT purposes.

Private use

Where it is established that there is a motor vehicle provided, it is necessary to consider whether the vehicle is available for private use.

The definition is very wide and private use includes:

• The employee’s use of the vehicle for travel between home and work, and
  
  
• Any other travel that confers a private benefit on the employee
  

The Courts have considered “private use or enjoyment” on a number of occasions and the below case law provides some guidance:

An employee was required to garage the vehicle at home for security reasons. A letter from the employer to the employee that prohibited the employee’s private use of the motor vehicle was found to be sufficient to remove it from the “available for private use” requirement and as such from the FBT regime. Private use of the vehicle was forbidden and to do so would have been against the company’s policy. The High Court stated a preference for a resolution to be passed by the company and acknowledgement in writing from the employee where the prohibition is place.


By contrast in another case, where good records were not kept, a shareholder employee worked six days a week from home and from an office in town, had access to the vehicle at all times and confessed to occasionally using the vehicle privately. The employee had no other vehicle available to him. Here the Court found that vehicle was available to the employee for private use every day. This was despite a logbook being maintained (which could not be produced at the time of the hearing) and the vehicle being garaged at home for security reasons, which saved insurance premiums.

In another case, the Courts were asked to rule on whether the provision of a letter prohibiting an employee’s private use was sufficient to remove the vehicle from the FBT regime. The employee to whom the car was available worked from both business premises and also applied a significant part of their home to business use. The vehicle was stored at home for security purposes and the employer provided its employee with a letter restricting vehicle use solely to business use. The Court was satisfied that there was no fringe benefit provided, as the travel from home to work could be regarded as business travel (effectively work to work) due to the significant operations from the home. The employee was also able to show that they had an alternative travel means; another vehicle which was used for private travel.

In yet another case, whilst the legislation prescribed the travel from home to be work as private in nature, and the provision of a vehicle to transport an employee from home to work is a provision of a fringe benefit, it was found that providing a motor vehicle used in this situation was not always the provision of a fringe benefit. The taxpayer provided employees with vehicles to enable them to service and operate earthmoving equipment. Outside work hours, the vehicles were required to be stored at home (for easy access by the employees), the employees had signed contracts prohibiting private use, and the employees were obligated to maintain client contact and prepare bookwork at home. The High Court deemed the benefit to be in favour of the employer, not the employees, and also that the travel was essentially work to work in nature due to the amount of work required to be performed in the employees’ own homes.

The key theme drawn from the above cases, and other similar cases, is that home to work travel may be deemed not to be private travel where there is substantial work done in the employee’s home for employer’s benefit, and proper records and contractual agreements have been maintained.

As a minimum the following documentation should be available to show:

• The employer, in writing, has prohibited the use of the motor vehicle for private purposes
  
  
• The employee has acknowledged this prohibition in writing
  
  
• The employer takes regular active steps to ensure that the employee is not in breach of this agreement
  
  
• There is sufficient business activity conducted in the employee’s home, such a having plant or equipment, trading stock at home, and a home office
  
  
• The employee has another mode of transport available for private travel purposes
  

Where there is a private benefit available to the employee, a calculation of fringe benefit must be undertaken, and a payment made to Inland Revenue.

Available days excluded

Even when a motor vehicle is available for private use, some days can then be excluded.

Work related vehicles

First, it must be noted that it is not just the type of vehicle that provides the exclusion from the FBT regime; it is also how that vehicle is used, or is available to be used, on that particular day that excludes it. This is often misunderstood, with the assumption being made that there is an automatic exclusion from FBT for vehicles with the physical attributes of a work related vehicle.

A work related vehicle must not be car. A car is a motor vehicle designed exclusively or mainly to carry people, and includes motor vehicles that have rear doors and collapsible rear seats, but does not include a minibus (3 or more permanent rows of seats each accommodating 2 or more adults), moped, motorcycle or taxi cab.

Accordingly, the following could qualify as a work related vehicle:

• Utes
  
  
• Trucks
  
  
• Vans
  

And the following in most circumstances won’t qualify;

• Sedans
  
  
• Station Wagons
  
  
• Four-wheel drives designed for the carriage of passengers

However, station wagons with the rear seat permanently bolted down or removed may be eligible. As could vehicles temporarily modified by the employer, but only while those modifications are in place. For example, a hatchback in which the employer folds down the rear seat and inserts a custom-fitted plywood floor, which extends from the back of the front seats to the tail gate, may qualify while the plywood is in place and the vehicle is used for the carriage of goods as part of the employer’s business operations.

A work related vehicle (not a car) must have the employer’s logo or name predominately and permanently displayed on its exterior.

A work related vehicle is excluded from FBT on days where the employee’s only private use (actual or available) is:

• Travel to or from home, which is necessary and a condition of their employment; and
  
  
• Any other travel which is incidental to the business use

Accordingly, an electrician’s van parked at a remote beach on a hot Saturday afternoon in mid January probably does not qualify as a work related vehicle for that day, at least.

Sufficient records must be maintained by the employer to substantiate the days claimed as FBT exempt under the work related vehicle exclusion.

Emergency call outs

Where a motor vehicle (a car or even that electrician’s van) which would otherwise attract FBT for that day is used for an emergency call out, that vehicle is deemed not to be available for private use that day, irrespective of there having been actual or available private use.

An emergency call out must be at the employer’s, or their client’s, or customer’s, or a member of the public’s request and the purpose of the visit must be for:

• Essential services relating to the operation of the plant or machinery of the employer, or their client or customer; or
  
  
• Essential services relating to the maintenance of services provided by a local authority or public authority; or
  
  
• Essential services relating to the carrying on of a business for the supply of energy or fuel to the public; or
  
  
• Emergency services relating to the health or safety of any person

And there are limitations placed on the hours which an emergency call out can occur. These are:

• It must be between 6pm and 6am Monday to Friday, or
  
  
• Anytime on Saturday, Sunday, or public holiday

However, there are no limitations placed around call outs relating to the health or safety of any person.

Inland Revenue requires records to be kept to substantiate when call outs are made, and these should include:

• The date of the call out
  
  
• The time of the call out
  
  
• The recipient of the call out
  
  
• The reason for the call out

Frequent travel on business

A frequent travel exemption applies where the nature of the employee’s service requires the employee to use a motor vehicle to be away from home on a regular basis during their employment. The employee needs to be away for a continuous period of 24 hours, or more, and excludes the benefit for this period for FBT purposes. Hence, the day of the departure, the day of return and the days in between are all excluded from the FBT calculation.

Again Inland Revenue require records to be kept, including;

• The dates the travel is undertaken
  
  
• The times of departure and return
  
  
• Details of the business undertaken

Where there is regular and frequent travel there is an opportunity to reduce record keeping by maintaining a test logbook.

Valuing the fringe benefit

If it is determined that an employer has made a vehicle available for private use, we then need to calculate the value of the benefit that the employee is receiving.

For vehicles purchased or leased after 1 April 2006, there are two methods available to calculate the employer’s fringe benefit liability: Cost or Tax Value.

Once the employer has chosen which method they will use for FBT, that method must be used for at least the next five years of the vehicles ownership, or until the vehicle is sold, whichever is earlier.

Cost Method

When calculating the cost price of the vehicle for FBT, the following must be included:

• Purchase price
  
  
• Initial on-road costs (i.e initial registration, licence plate costs etc)
  
  
• Costs of any accessories and additional equipment fitted at the time of purchase or any time thereafter (stereo, towbar, roof racks etc)
  
  
• Any transportation costs in getting the vehicle to where it will first be used
  
  
• All of these costs must include GST

The above costs (including GST) are then multiplied by either:

• 5%, if FBT is returned on a quarterly basis, or
  
  
• 20% if FBT is returned on an annual basis

Example 1: A company purchases a new vehicle for $38,000 including GST. On-road costs are $1,200 and roof racks are fitted at a cost of $1,800. Therefore our total cost price would be $38,000 + $1200 + $1800 = $41,000. If the company returned FBT on an annual basis, the fringe benefit value would be $41,000 x 20% = $8,200.

Tax Value Method

If you choose to use the tax value, the calculation is based on:

• The original cost price of the vehicle (including GST) less the total accumulated depreciation on the vehicle

But there is a minimum value which applies to this method of $8,333, so if your tax value calculation is less than that, you must use $8,333 as your default value.

Under this method, your tax value cost (including GST) is then multiplied by either:

• 9% if FBT is returned on a quarterly basis, or
  
• 36% if FBT is returned on an annual basis

Example 2: A company purchased a vehicle two years ago for $41,000 including GST. Accumulated depreciation on the vehicle to date totals $15,400. Therefore our tax value would be $41,000 - $15,400 = $25,600. So, if the company returned FBT on an annual basis, the fringe benefit value would be $25,600 x 36% = $9,216.

Choosing a Method

As you can see from the above examples, if a brand new vehicle is purchased it is generally preferable to use the cost method for the first five years of ownership. It may then be prudent to switch to the tax value method.  You are only allowed to switch between methods every five years, so it's important to choose the most tax-effective method.

Leased Vehicles

If a vehicle is leased by an employer, the fringe benefit value can still be calculated with either the cost method or the tax value method. The lessor must provide the relevant values for the calculations to be made.

Pooled Vehicles

If there are a number of vehicles available for an employee to use, there are some basic rules to determine the value of the fringe benefit.

• If the employee mainly uses one specific vehicle, use the value of that vehicle only
  
• If they use more than one vehicle, use the highest value of all vehicles in the pool
  
• If the employer is in the business of selling motor vehicles and the vehicles being used by an employee are trading stock, use the average value of all vehicles in the pool

Calculating the Benefit

Once you have established your fringe benefit value, using either the cost or tax value method, and worked out how many days the vehicle was available for private use (deducting any excluded days as mentioned previously), the following formulas are used to calculate the value of the fringe benefit:

Quarterly = Days available for private use x fringe benefit value
                                                      90

Annually = Days available for private use x fringe benefit value
                                                   365

Using our previous examples outlined above, and adding the assumption that the vehicle is used on out of town travel 12 days per quarter or 48 days per year and this is the only time it is not available for private use, we can make the following calculations:

Cost Method

Quarterly:

Total Cost Price $41,000 x 5% = $2,050 fringe benefit value
Days Available: 90 - 12 = 78

78 x 2,050 = $1,776.67 taxable benefit provided during the period
  90

Annually:

Total Cost Price $41,000 x 20% = $8,200 fringe benefit value
Days Available: 365 – 48 = 317

317 x 8200 = $7,121.64 taxable benefit provided during the period
  365

Tax Value Method

Quarterly:

Tax Value $25,600 x 9% = $2,304 fringe benefit value
Days Available: 90 – 12 = 78
78 x 2,304 = $1,996.80 taxable benefit provided during the period
  90

Annually:

Tax Value $25,600 x 36% = $9,216 fringe benefit value
Days Available: 365 – 48 = 317

317 x 9,216 = $8,004.03 taxable benefit provided during the period
  365

Calculating Fringe Benefit Tax

FBT can be paid either at a single rate of 49.25% or at a rate based on employees’ tax rates (multi-rate).

Single Rate Option

If you choose the single rate option, when applying it to our quarterly cost method figure above of $1,776.67, the resulting FBT payable would be as follows:

Fringe Benefit Tax Calculation $1,776.67 x 49.25% = $875.01

GST on Fringe Benefit $1,776.67 x 3/23               = $231.74

Total Payable for Quarter                               = $1,106.75

If an employee makes a contribution towards their fringe benefit, this is first deducted from the initial fringe benefit value, before it is multiplied by 49.25%, thus reducing the tax payable.

Multi-Rate Option

If you use the single rate option for the first three quarters of the year, you can still elect to use the multi-rate option by completing a wash-up calculation in quarter four.

If you intend to use the multi-rate option for all four quarters, the rate for the first three quarters is 43% and then a wash-up calculation is made in quarter four to ensure the correct amount of FBT has been paid.

Given the reduction in personal income tax rates, the multi-rate option no longer holds any extra benefit over the single-rate option.

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