Fringe Benefit Tax Explained

What is Fringe Benefit Tax (FBT)?

FBT is a tax that businesses must pay when they provide non-cash benefits to their employees, such as allowing private use of a business vehicle. Even if you, as a business owner, are the one using the vehicle for private purposes, FBT still applies.

The only exemption of FBT on business vehicles, is where the business vehicle is solely used for business purposes, and you have another vehicle available to use for personal use.

How Does FBT Appear in Your Financial Statements?

In your financial statements, the FBT on the private use of a business vehicle will appear as other income - we record the entry as a reimbursement from you as the business owner, to your company. However, it's important to understand that this doesn’t mean you need to make an immediate cash payment for the tax. Instead, this line offsets against the costs you’ve claimed for the vehicle in that year - costs such as fuel, repairs and maintenance, insurance, and depreciation.

The only immediate cost of fringe benefit tax is the GST portion which will go through your next GST return period after your accountant prepares your end of year accounts for the prior year.

How FBT Offsets Your Current Account

In accounting, there are two sides to every transaction - you might have heard of debits and credits. The income mentioned above is the credit - the debit is a drawing and is how we record the personal use of your vehicle. It means you don’t have to cash pay tax to the IRD or to your business for use of your vehicle, we do this for you via a manual accounting entry in your Xero/financial statements.

FBT doesn’t just only relate to business vehicles

If you receive any other fringe benefits as part of your business, these may also be subject to fringe benefit tax however private use of vehicles is what is most common.

Other examples where FBT comes into play includes

• Free, subsidised or discounted goods and services

• Employer contributions to insurance (such as health, accident or death benefit funds) and superannuation schemes (excluding Kiwisaver)

• Low-interest loans

Fringe Benefit Tax for benefits provided to your team

When you provide benefits such as private use of a vehicle or any other non-cash perks to your employees, these are subject to FBT. Unlike the FBT on private use of a business vehicle for the business owners where the adjustment is done through the end of year accounts, providing benefits to your team requires the filing of an actual FBT return. This return must be filed quarterly or annually with Inland Revenue, and a cash tax payment is necessary.

FBT does not apply to items already taxed, such as salary and wages, bonus payments (which should be processed through your payroll system), or employee allowances. The FBT is levied on the cost of the benefit provided to the employee. For example, if you offer an employee a company car, you will need to pay FBT on the portion of the car's value that reflects its availability for personal use.

As of July 2024, the FBT rate stands at 63.93%, which means the tax cost can accumulate quickly. If you’re unsure whether a benefit you’re providing is subject to FBT, or if you need help calculating the cost of offering such benefits, please get in touch for professional advice. We can help you navigate these obligations efficiently and ensure compliance while making the most of the benefits you provide to your team.

How to Avoid Paying FBT (Legally)

While Fringe Benefit Tax is often unavoidable when providing non-cash perks to employees or when using a business vehicle privately, there are legitimate ways to reduce or avoid paying FBT altogether. Here are a few key strategies:

1. Restrict Private Use of Business Vehicles

The most common area where FBT applies is private use of business vehicles. To avoid FBT:

• Ensure vehicles are classified as work-related vehicles (e.g., utes or vans that have clear company signage).

• Implement a vehicle use policy that strictly prohibits private use outside of travel to and from work. This could also include issuing a letter to yourself clearly noting the vehicles availability

• Keep a logbook or GPS tracking records to demonstrate business-only use.

• Ensure you have another vehicle available for private use (to support that the business vehicle isn't used privately).

2. Use Cash Allowances Instead of Providing Benefits

Rather than providing fringe benefits (like a company car), consider:

• Paying a car allowance or mileage reimbursement for business travel using a personal vehicle.

• These are treated as regular employee expenses and not subject to FBT if documented correctly.

3. Offer Exempt or Low-Value Benefits

Some benefits are exempt from FBT, or may fall under de minimis thresholds, such as:

• Free morning tea or occasional staff functions (within certain limits).

• Gifts and vouchers under $300 per employee per quarter (total under $22,500 annually for the business).

• Kiwisaver contributions (which are exempt).