Recently, the Inland Revenue Department (IRD) released the Issues Paper: Fringe Benefit Tax Options for Change, as well as a guidance on tax governance. In our latest edition of Tax Tips, we discuss both the proposed Fringe Benefit Tax changes and provide some initial observations on their impacts, and set out some key insights from the published guidance on tax governance.
Options for Fringe Benefit Tax (FBT) Change
On 1 April 2025, Inland Revenue released the Issues Paper: Fringe Benefit Tax Options For Change. The Paper proposes some of the most significant changes to the FBT regime since it was introduced 40 years ago. The “options for change” are encouraging for many businesses that encounter a high degree of compliance cost in determining their FBT liability each quarter, for what is often a relatively immaterial amount of tax.
The Paper proposes:
- To refocus the regime to capture benefits that are a substitution for cash remuneration; and
- To reduce the compliance ‘costs’ associated with the determination of FBT returns.
While this is far from a wholesale rewrite of the FBT regime, the Paper does propose some fundamental changes to the areas that have been identified as most problematic, including:
- FBT on motor vehicles
- Unclassified benefits
- Entertainment rules
Summary of proposed changes
Motor vehicles
There are various frustrations with the current approach to calculating FBT on motor vehicles. One of the biggest issues is that the FBT liability is based solely on a motor vehicle’s ‘availability’ for private use on any given day, regardless of how much it is actually used. For example, a vehicle limited to commuting between home and work may incur the same FBT costs as an unrestricted “perk” vehicle, leading to potential overestimation of its value as a benefit. This system can lead to a number of inefficiencies, such as policies that require employees to retrieve vehicles from a depot before a work trip, instead of allowing them to take the vehicle home the night before and travel straight from home.
Further complicating matters is the work-related vehicle exclusion, which is commonly misunderstood and incorrectly applied. Many taxpayers assume that vehicles meeting this “work-related” design criteria are exempt from FBT, regardless of their availability for private use.
Additionally, there are high compliance costs associated with determining an accurate FBT amount, as employers must track individual days when vehicles are unavailable or exempt.
Remuneration approach
The Paper proposes options to bring the calculation of FBT closer to the real value of providing the vehicle by taking a ‘remuneration approach’, aiming to reduce compliance burdens and eliminate outdated exceptions. FBT is inherently an imprecise way of taxing the private benefit of a motor vehicle, particularly when the private use of the vehicle is restricted. The proposed approach is more of a set-and-forget system, with rates re-evaluated periodically with reference to external standards for the remuneration effect of providing a motor vehicle.
The proposed “close enough is good enough” approach would simplify the FBT rules on motor vehicles. This would be done by having the employer group each motor vehicle within a short list of categories, ranging from full private use to vehicles used only for commuting between home and work sites. The overall goal is to lower compliance costs while providing a more accurate representation of the vehicle’s private use value to the employee, effectively creating a model that incorporates both availability and actual use considerations.
The following three categories have been proposed:
*The rate is the percentage of the fringe benefit taxable value that FBT will be payable on.
It is intended that the categories would apply to the following examples:
Category 1: any employee with a ‘perk’ vehicle, allowing unrestricted private use.
Category 2: workers with a main place of work (e.g. office workers) who engage in client visits and use their vehicle for commuting between home and work with limited private use.
Category 3: tradespeople who commute directly from home to their job sites, with no availability for other private use.
The Paper acknowledges that there will be other arrangements that do not neatly fall into any of these categories, again reflecting a “close enough is good enough” approach. Businesses will need to use some judgment, and there may also be incentives to rearrange the vehicle offering. This includes situations where private use is allowed on specific days that might now fall within Category 1.
Taxable value formulas
The remuneration approach will essentially replace the calculation of the number of days available in the taxable value formula. Currently, the taxable benefit starts at 20% of the GST-inclusive cost price of the vehicle per annum. The Paper proposes differentiating this rate based on the type of vehicle, as electric vehicles typically have a higher cost price but lower running costs. The proposed rates are:
Petrol/Diesel vehicles: 26%
Hybrid vehicles: 22.4%
Electric vehicles: 19.4%
These rates are based on data from AA and MBIE.
It is also proposed that the tax book value method be removed because it is not widely used and can cause confusion or misunderstanding of the rules.
Emergency vehicles
The Paper proposes to remove the emergency call exclusion, which is often misunderstood as it only applies on days when the vehicle is actually used for an emergency call. Instead, an exemption would be introduced for vehicles used for emergency services, which are visibly marked, to be exempt from FBT at all times.
Pool vehicles
The Paper introduces the concept of incidental use in relation to pool vehicles not usually available for private use. Incidental use includes situations where the vehicle use is:
Unusual
Of short duration
Ad hoc and not regular or frequent
For a limited purpose, and
Not a substitute for remuneration
Such use of the vehicle would be considered “incidental use” and would not be subject to FBT or affect the vehicle’s categorisation. This is a positive development for businesses and will ease a lot of frustration; for example, when an employee takes a vehicle home the night before an infrequent early morning work trip. It removes the need to track these days and the associated FBT cost, as it is clearly not a case of the car being provided as a substitute for remuneration.
Unclassified benefits
“Unclassified benefits” refer to all benefits provided to employees that do not fall into one of the listed categories of fringe benefits. The compliance costs associated with unclassified benefits can be excessive and problematic for employers, particularly since these benefits are often small-value items. Currently, there are de minimis thresholds in place to exempt smaller benefits from FBT requirements. However, for larger employers providing over $22,500 of unclassified benefits to their employees, this exemption does not apply.
The Paper proposes two potential options to refocus FBT on capturing remunerative benefits.
The first option proposes to exclude benefits that are:
Less than $200 (including GST)
Not provided as a substitute for remuneration
The $200 threshold is set per benefit.
This option would require a degree of interpretation from businesses. The Paper outlines some examples of when benefits would and would not be considered a substitute for remuneration, including examples such as flowers, recognition for work performance/effort, Christmas gifts, employer-branded merchandise, and casual sports event fees. Benefits that may be considered in substitution of remuneration include gym memberships, non-work-related travel, regular performance incentives, and employee points accrual rewards schemes.
The key indicators of whether a benefit is a substitute for remuneration include its regularity and whether the employee has any contractual or implied entitlement (such as through staff intranet publications) to the benefit.
The second option proposes introducing a prescribed list of exempt benefits as a schedule within legislation, which would likely include a range similar to the benefits listed above.
Entertainment
Currently, the entertainment rules coexist within both the income tax and FBT regimes, often causing frustration for businesses. Many apply a broad approach of claiming a 50% entertainment deduction within their income tax returns. To reduce overall compliance costs, the Paper proposes to integrate the entertainment deduction limitation with the FBT regime. This approach is similar to that used in other jurisdictions such as Australia and the United Kingdom.
In addition to moving entertainment into the FBT regime, the proposed changes seek to simplify the definition of entertainment. This simplification would involve the removal of prescribed lists of activities and would focus on the standard “nexus with income-earning activity” test. Additionally, this would result in entertainment provided to non-employees (e.g., potential clients) being captured within the FBT entertainment rules, where it otherwise would not be.
The Paper discusses two options for how this would apply.
The first option proposes the introduction of a $200 per employee exemption, which would apply to any non-remunerative entertainment.
Under this option, it is suggested that the net costs would decrease for the business (for tax-paying entities) based on a full income tax deduction being available for lower-value entertainment. However, net costs would increase for higher-value entertainment based on the applicable FBT rate.
The alternative option would be to exempt food and beverages, except those consumed at a party, social occasion, or celebration.
Other
Subsidised transport - The Paper proposes aligning treatment more closely with those experienced by offshore providers by using 25% of the average fare for the respective month in which the benefit is provided to determine the value of the benefit. This change will significantly reduce compliance costs for employers, particularly in the airline industry where pricing structures can be complex.
Reimbursements & open loop cards - Currently, when employees are reimbursed for a benefit they purchase themselves, it is taxable under the PAYE regime, which creates complexities, including the need to ‘gross-up’ the payments for PAYE and other payroll deductions. The same principles apply to 'open-loop' cards, which can essentially be used as money or money's worth. The Paper proposes subjecting these reimbursements and the provision of open-loop cards to FBT instead, which should simplify compliance, particularly in cases where the same benefit is provided both directly by the employer and through reimbursement (e.g., eye tests) which previously would have had differing tax treatments.
Customer rebates - When customers of an employer provide benefits to the employer’s employees, there is often complexity in determining this value. The Paper proposes using the market value of the benefit.
Data requirements
Inland Revenue has indicated that taxable benefits will likely need to be broken down into benefit categories within the filed FBT return to provide increased visibility. We do not expect this to significantly increase the compliance burden on businesses, as this information should already be included within calculation workpapers.
Furthermore, Inland Revenue proposes to introduce integration between third-party calculation software and the filing of the return.
PwC view
We are encouraged that Inland Revenue has acknowledged the need for changes to the FBT regime. There are likely to be both pros and cons to the proposals, but overall, any changes that meaningfully reduce the level of effort required to comply with the FBT legislation are a step in the right direction. There are many other areas of FBT that would benefit from an update. We hope that this is only the beginning and if Inland Revenue observes improved compliance and gains better information, those areas will also be reviewed.
We are here to help - please contact us if further discussion on any element of the FBT consultation document would be beneficial.
The Paper provides a relatively short period for consultation to potentially incorporate these changes into legislation later in the year. Submissions close on Monday 5 May 2025. Please contact your usual PwC advisor if you would like to make a submission, particularly regarding how the changes will or will not achieve the desired objectives. Let us know if you need assistance.
Tax Governance Practice Issue
IRD has continued to build on its expectations with respect to tax governance with the launch of published guidance on tax governance last week. This detailed guidance expands on themes that already emerged during the ‘Tax Governance in Practice’ including the need for:
- A top led approach to governance with regular reporting of material issues/ risk to the Board;
- Well documented tax strategy and controls framework, supported by process and procedural documentation across key tax types
- Regular testing of the effectiveness of tax controls, with updates made as required to address deficiencies.
Tax governance is an area that is already being routinely raised during the course of risk review and audit activity, and IRD has recently signalled the role that participating advisor reviews will play in limiting IRD’s compliance activities with respect to the quality of tax systems, processes and controls.
It is positive to see additional guidance in place to assist taxpayers with assessing the robustness of their current approach to governance and prepare for potential scrutiny in this area. While size and complexity remains an important consideration, the guidance does emphasise the expectation that taxpayers take action as needed to ensure tax risks are being proactively monitored and managed.
