Fringe Benefit Tax (FBT) turns 40 this year, and it is showing its age. Designed for the 1980s, it has become increasingly disconnected from today’s working environment -complex in design, compliance-heavy and easy to misapply. CA ANZ has long called for a simplified FBT system that targets genuine substitutes for salary and aligns with modern work arrangements.

Despite its limitations, FBT plays an important integrity role in ensuring non-cash remuneration is taxed similarly to salary or wages. Inland Revenue’s (IR) newly released issues paper Options for change – FBT presents a timely opportunity to modernise the framework. While the proposals aim to be broadly fiscally neutral, the direction is clear: simplify administration, reduce compliance costs and retain the integrity of the income tax system.

The consultation focuses on key areas:

Motor vehicles: use over form

FBT treatment of motor vehicles has proven to be administratively demanding, with current rules often misunderstood and difficult to apply in practice. The proposals represent a shift from form (i.e. the type of vehicle) to function (how the vehicle is used). This includes:

• A new categorisation system based on private vs. business use:
  • Category 1: Primarily private use (100% FBT applicable)
  • Category 2: Business use with limited private access (35%)
  • Category 3: Business-only use (0%)

The current “availability for private use” and “day count” tests would be replaced by use-based proxies.

• An optional valuation method would apply fixed annual values based on fuel type (petrol/diesel, hybrid, or EV), set by Inland Revenue with reference to external benchmarks (e.g. AA) and reviewed every four years.
• Incidental private use — such as rare, short-term, or non-remunerative personal travel — would be excluded from triggering FBT under the new rules.
• The work-related vehicle exemption and emergency call-out exemption would be removed, reflecting the change in approach to calculation of FBT on motor vehicles. Concerns have been expressed over the misuse and poor understanding of the current work-related vehicle exemption.

Additional supporting proposals include:

• A new exemption for motor vehicles used by emergency services.
• Increasing the FBT weight threshold from 3,500 kg to 4,500 kg to account for heavier hybrids and EVs.
• Removal of the tax book value method — owned vehicles would default to the cost price method, which typically provides the lowest taxable value for the first 3 years of ownership and is the method most used currently.

Rethinking unclassified benefits

FBT applies to “unclassified benefits” (i.e. goods and services that don't fall into specific categories). These are notoriously difficult to track, especially for larger employers. IR’s proposals aim to focus taxation only on in-kind benefits that substitute for salary, offering two possible approaches:

1. A remuneration test with a $200 cap per benefit.  Both conditions must be met for exclusion.
2. Schedule-based exemptions, automatically excluding non-remunerative benefits. 

Importantly, both options would eliminate the current $300 per employee per quarter cap and the $22,500 employer annual cap, both of which have been widely breached and have triggered full FBT liability in practice. The “on-premises” exemption would remain.

The remuneration test with a $200 threshold option appears more practical, offering flexibility while reducing tracking burdens — a key compliance cost today. 

Entertainment: Proceed with caution

Perhaps the most controversial proposal is the incorporation of entertainment expenditure into FBT, replacing the current deduction-limitation rules. Under this model, entertainment would be taxed as a fringe benefit unless exempted by one of two methods:

• If the cost per employee is below the current or proposed cap, but this may raise tracking issues.
• If food and beverages are not consumed at a party, celebration, or similar function.

A “deeming rule” would be introduced to treat all entertainment recipients as employees, simplifying administration — but not necessarily compliance.

While the goal is to reduce boundary issues between entertainment and FBT, the shift could increase compliance and tax costs for employers. CA ANZ recommends deferring any changes in this area, to allow more time for fuller consultation, systems updates and education.

CA ANZ will continue to engage with members and prepare a full submission on the proposed changes.