Date posted: 04/03/2021

Side effect of new 39% tax rate likely to result in overpaid FBT

NZ Tax Leader John Cuthbertson discusses the impact of the increased FBT rate for businesses, as a result of the increased 39% top personal tax rate.

In brief

  • A new flat FBT rate of 63.93% to benefits provided on or after 1 April 2021 resulting in many businesses paying more tax throughout the year than they need to
  • The increased compliance burden placed on businesses is a by-product of the increased 39% income tax rate for individuals
  • A more targeted approach could have been adopted to avoid the additional compliance time and cost for businesses, whilst still achieving the required policy outcome

Significant time and energy required to avoid overpaying tax

As part of last month’s Sharing Knowledge Webinar on the new 39% top personal tax rate, we asked members what one implication of the new rate they most wanted to know about. The answer was clearly “what does this mean for FBT?” 

The Taxation (Income Tax Rate and Other Amendments) Act applies from 1 April 2021, and in addition to setting the new top personal rate of 39%, amends fringe benefit tax rates as well as several other taxes. 

A new flat FBT rate of 63.93% to benefits provided on or after 1 April 2021 for the 2022 and later income years. 

This increased FBT rate draws heavily on the approach taken when we last had a higher top personal tax rate. However, while it may have been efficient for officials to recycle the old approach, New Zealand’s current income distribution means the FBT rate will have a disproportionate effect for businesses.

For simplicity, many businesses calculate their FBT obligations using the single rate or the flat annual rate of (currently) 49.25%. Compared to the income of most employees this rate results in broadly appropriate tax liabilities for the employer.  

However, the new rate is tied to a top personal income threshold that greatly exceeds that of most employees in New Zealand. The new flat rate of 69.93% will result in businesses paying more tax throughout the year than they need to. 

In addition to affecting cashflow, it will require significantly more time and energy at year end to make the necessary adjustments to ensure that businesses only pay the appropriate tax amount. While using the alternative FBT process would avoid over paying tax throughout the year, it requires undertaking separate calculations for each employee for attributed benefits. This can be done manually, or software can be purchased to assist in the process.

Why we have GTPP: commercial repercussions

The increased compliance burden placed on employers is a by-product of the increased 39% income tax rate for individuals. The enacting legislation was not subject to the ‘gold-standard’ generic tax policy process (GTPP) and expediting the passage of legislation has resulted in a suboptimal outcome for employers. In many cases employers will have no or few employees with income over the top threshold, yet they will be faced with a trade-off – either to pay additional FBT using a flat rate out of step with their employee income profile or incur extra compliance costs. 

A more targeted approach could have been adopted to avoid the additional compliance time and cost for businesses, whilst still achieving the required policy outcome. The current FBT rates should have been retained, with the new 63.93% rate applying only to those employees with income over the $180,000 threshold. That is to say; the policy design should have reflected that these employees are the exception, not the rule.

GTPP allows groups such as Chartered Accountants ANZ, business and taxpayers to provide feedback throughout the policy drafting and legislative process, on how new or amended legislation would impact taxpayers and the business community. It is a valuable and essential component of maintaining a trusted, efficient tax system.

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