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Introduction
How the multi-rate calculation works
Problems associated with the calculation
Proposal
How the proposal would work
Low-interest loans
Benefits and risks of the proposal
Other options
Ceasing to employ staff
| Proposed changes
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Introduction
9.1 Since its introduction, FBT has been criticised for the complexity of its calculations. The recent introduction of the multi-rate calculations has increased these concerns, which have been reflected both in the consultation with businesses and in the research undertaken.[23]
9.2 The FBT multi-rate system was introduced in April 2000 in response to the increase in the top personal tax rate to 39%, which raised the FBT rate to 64%. By better reflecting employees' personal marginal tax rates, the multi-rate calculation is intended to increase the accuracy of the tax system. This is done by reducing the rate of FBT applying to those who earn less than $60,000, while removing any incentive for high-income employees to substitute fringe benefits for monetary remuneration to avoid the 39% tax rate. Hence there are good conceptual reasons for retaining the multi-rate. The government recognises, however, that these gains have been at the expense of simplification and, accordingly, has been considering ways in which the rules could be made less complex.
How the multi-rate calculation works
9.3 Employers may file FBT returns quarterly,[24] annually or on an income year basis. Employers can file returns on an annual or income year basis only if their PAYE and specified superannuation contribution withholding tax deductions are less than $100,000 a year.
9.4 In general terms, employers that file quarterly FBT returns can either:
- pay FBT on all fringe benefits at the rate of 64% for the full year, in which case their use of the multi-rate calculation in the fourth quarter is optional; or
- pay FBT at 49% for the first three quarters and undertake the multi-rate calculation in the fourth quarter.
9.5 Employers paying on an annual or income year basis similarly have the choice of paying 64% on all fringe benefits or applying the multi-rate calculation.
9.6 The rules vary, depending on whether the benefits can be attributed to individual employees or have to be pooled as non-attributed benefits, the type of benefits and whether the employees are also major shareholders in the business. Special rules apply if insufficient information is available to undertake the multi-rate calculation at the time of filing the fourth quarter return.
9.7 Specifically, employers undertaking the multi-rate calculation must:
- determine the value of fringe benefits provided to each employee for the year;
- determine each employee's cash remuneration for the year;
- calculate the tax on that cash remuneration and determine the net cash remuneration;
- add the value of the attributed fringe benefits to the net cash remuneration for each employee to determine his or her fringe benefit-inclusive cash remuneration; and
- calculate the tax on the fringe benefit-inclusive cash remuneration.
9.8 The FBT liability is the difference between the tax on the fringe benefit-inclusive cash remuneration and the tax on cash remuneration. The FBT already paid during the year is deducted from this amount to get the final FBT that is payable or refundable.
Problems associated with the calculation
9.9 The multi-rate calculation provides an accurate assessment of an employer's FBT liability. However, it also increases the complexity and, therefore, compliance costs faced by employers because it requires additional calculations and the use of tax rates and thresholds specific to the calculation, instead of using the ordinary marginal tax rate scale.
9.10 This complexity increases the likelihood of errors, which in turn exposes employers to a higher risk of penalties and use-of-money interest. The high compliance costs associated with the calculations may also result in increased non-compliance.
Proposal
9.11 Advances in information technology make it possible to reconsider how FBT calculations are performed, who performs them, and where the responsibilities for each part of the process should lie. Specifically, the government proposes that Inland Revenue provide an on-line FBT calculator for optional use by employers who file their returns electronically.[25] Under this approach, employers could supply all the information required and the calculator would do the FBT calculations for them, as well as the multi-rate calculation at the end of the year. The calculation would become the basis of their FBT return. This would reduce compliance costs and give users results they could rely upon to be correct provided the information they supplied was correct.
9.12 This would be a complex system for Inland Revenue to design and deliver, so the application date of this proposal, if implemented, would depend on the changes required to Inland Revenue's systems and procedures. The earliest likely application date would probably be 1 April 2006.
How the proposal would work
9.13 Employers who filed quarterly would pay their FBT liability each quarter based on the current 49% or 64% rates. Each quarter they would also supply additional information electronically, to enable their current quarterly FBT liability to be determined and to carry out their end-of-year multi-rate calculation. At the end of the year they would be able to access the information previously provided to Inland Revenue and then would have to enter their employees' cash remuneration for the year. The FBT multi-rate calculation would be carried out by the calculator. If the employer was satisfied with the information provided, the resulting FBT calculations would form the final quarter's return and the amount due would become the employer's FBT assessment. Payment of the amount due would be required by the due date and could be made either electronically or manually.
9.14 Income year or annual filers would supply information at the end of the year or annually, and the calculator would perform the multi-rate calculation annually.
9.15 This proposal would not change the self-assessment system on which New Zealand's tax system is based, since the fundamental determination of the facts and the application of tax law to their own circumstances would remain with the taxpayer. Penalties could be imposed if taxpayers applied those laws incorrectly.
9.16 If, however, there were an error in the FBT assessed and it was attributable to an incorrect calculation, it would be the responsibility of Inland Revenue, not the employer. In that case, shortfall penalties would not be imposed on the employer. If the employer had, as a result of such an error, underpaid tax a new due date for payment would be set. Although no penalties would apply, use-of-money interest would. If there were an error in the FBT assessment attributable to incorrect information provided by the employer, it would be the responsibility of the employer. The normal penalty rules and use-of-money interest would apply to such errors.
9.17 Although the proposal should reduce errors in final computation, there might still be errors in the underlying data which employers would want to correct. A simple way to achieve this would be to allow the information to be updated in the following quarter, with the employer having a mechanism to indicate which quarter the correction relates to.
Information required
9.18 Employers using the calculator would be required to supply certain general information in relation to their employees. Specific information would also be required for each class of fringe benefit, to enable the FBT liability to be determined. The information requirements and the frequency of provision are shown in table 3.
Table 3: Provision of information by quarterly FBT filers under the proposed system[26] |
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| Information | Frequency of provision | ||
| Employee-specific information | |||
| Employee's name | Only when the employer starts to provide benefit | ||
| An FBT rate election (49%, 64%, or whether shareholder employee) | Annually | ||
| Employee's remuneration | Annually | ||
| Vehicle | |||
| Vehicle identifier | Once/only when vehicle changes | ||
| Cost of the vehicle | Once/only when vehicle changes | ||
| Number of days available for private use | Quarterly | ||
| Employee contribution | Quarterly | ||
| Low-interest loans | |||
| Year the loan was granted (if non-reviewable) | Once | ||
| Highest interest rate applying to loan for month | Quarterly | ||
| Lowest loan balance in period | Quarterly | ||
| Discounted goods/services | |||
| Value of discounted goods | Quarterly | ||
| Value of subsidised transport | Quarterly | ||
| Value of employer contributions to fund | Quarterly | ||
| Employee contribution towards cost of fringe benefit | Quarterly | ||
| Example of how the electronic calculator would be used
An employer provides a motor vehicle to a new employee. The employee's income exceeds $60,000 and the employer decides to pay fringe benefit tax each quarter based on the 49% rate. The employer will provide to Inland Revenue, on the first FBT return, the employee's name, the FBT rate chosen, the vehicle identifier, and the cost of the vehicle. This information will be required only once, unless circumstances change. Each quarter, the employer will also supply the calculator with the number of days the car was available for private use and the amount of any contributions the employee makes. The information would be retained in the calculator, along with other information provided on the employer monthly schedule and used at the end of the year to undertake the end-of-year square-up. The employer would be able to access the information on-line, confirm it and deduct the FBT paid during the year and pay any remaining FBT by the due date. |
Low-interest loans
9.19 At present, the calculation of the FBT liability on low-interest loans for a given period requires an employer to determine the daily loan balance during the period. This imposes compliance costs on the employer, who must keep and undertake calculations. To simplify the amount of information that has to be supplied to the calculator, it is proposed that the employer provide the lowest loan balance for the period to Inland Revenue. This is likely to be the latest loan balance.
9.20 When another fringe benefit is provided to an employee or an employee begins to receive a fringe benefit, the information would be supplied when the employer makes the next quarter's FBT payment.
Benefits and risks of the proposal
9.21 The proposal's principal benefits lie in reducing employers' risks of making calculation errors, their spending less time on revising numbers, a reduced likelihood of penalties being applied, and a probable reduction in stress.
9.22 Since the FBT multi-rate system has been introduced relatively recently, some of the concerns about its compliance costs may reflect the transition to the new rules rather than permanent compliance costs. Therefore the expected benefit of the proposal may be less than anticipated.
9.23 Although there could be a reduction in compliance costs associated with the calculations, there would be an increase in compliance costs in providing information more frequently, even though the process had been simplified.
Other options
Use employee's top marginal tax rate instead
9.24 An alternative proposal is to simplify the FBT calculation and thereby do away with the multi-rate calculation. The proposal would replace the multi-rate calculation and tax the fringe benefit at the FBT equivalent rate of each employee's top marginal tax rate. The calculation would involve:
- determining the fringe benefits provided to each employee for the quarter;
- determining the employee's likely gross cash remuneration for the year;
- determining the highest marginal tax rate that applies to the cash remuneration of the employee; and
- taxing the fringe benefit at the FBT rate equivalent to the employee's highest marginal tax rate.
9.25 This calculation would be undertaken each quarter by the employer. Simplifying the calculation could enable the FBT calculation to be a full and final payment of the employer's liability.
9.26 This alternative proposal would reduce compliance costs for employers, especially those who do not have access to on-line or computerised FBT calculation tools. The calculation would be less accurate, however, and might increase an employer's FBT liability.
9.27 The government would also need to introduce anti-avoidance measures to ensure that there was no additional incentive to provide remuneration in the form of fringe benefits when an employee's marginal tax rate was less than the top rate.
A single average rate
9.28 Many submissions advocated a return to a single rate system as one of their most preferred simplification measures. Generally, submissions advocated a rate below 64% to ensure that low and middle-income earners would not be disadvantaged. The government considers that there are strong conceptual reasons for retaining some form of multi-rate and notes that employers have the option of using the single rate of 64% for all fringe benefits. As a possible alternative means of simplification it seeks comment on whether a flat rate that produces the same overall revenue as at present would be preferred to the other options raised here. That rate would be around 54%. This approach would trade off accuracy for simplicity, while achieving the same overall revenue result.
Ceasing to employ staff
9.29 Employers who cease to employ staff and do not intend to replace them during the year are still required to undertake the multi-rate calculation in their final return. It is proposed to reduce compliance costs by amending section ND 8(1) so that employers also have the option of applying the flat rate of 64% in their final return.
[23] See appendix.
[24] On the 20th of July, October and January, with the final quarter due on 31 May.
[25] A survey undertaken by Inland Revenue suggested reasonable support among employers for this type of option.
[26] Based on current FBT requirements.