Fringe benefits are an essential component of employee compensation in New Zealand. This refers to the valuable perks provided by the employer that go beyond regular wages. Understanding how these benefits work and their tax implications is important for both employers and employees. This blog talks about what fringe benefits are, and how they work here in NZ.
What Are Fringe Benefits?
Fringe benefits are non-cash perks employers provide to their employees in addition to their regular salary or wages. These benefits range from using a company car for private purposes to subsidised health insurance or discounted goods and services. In NZ, fringe benefits are subject to Fringe Benefits Tax (FBT), which ensures employees are taxed on the full value of their compensation package, not just their cash salary.
Types of Fringe Benefits:
Private Use of Company Vehicles:
This is a common fringe benefit that allows employees to use company cars for personal reasons. However, this benefit comes with its own set of tax obligations.
Subsidised Goods and Services:
Employers may offer goods or services at a discount or for free, such as discounted products from the company’s stock.
Employer Contributions:
Contributions to health insurance, superannuation schemes, or other insurance plans on behalf of the employee are also considered fringe benefits.
Low-Interest Loans:
Employers may provide loans to employees at interest rates lower than the market rate. This is treated as a fringe benefit.
These benefits are a powerful tool for attracting and retaining talent, as they can significantly improve an employee’s overall compensation package.
Pros and Cons of Offering Fringe Benefits
Did you know that offering fringe benefits can be a double-edged sword for businesses? While they offer significant advantages, they also come with challenges that must be carefully managed.
Advantages:
Attracting and Retaining Talent:
Fringe benefits make a company more attractive to potential employees and can help retain existing staff by raising their overall compensation package.
Improves Morale and Productivity:
Benefits such as health insurance, wellness programs, and flexible work arrangements show employees that their well-being is valued at the company, leading to increased job satisfaction and productivity.
Tax Advantages:
Some fringe benefits, such as contributions to qualified retirement plans, may be tax-deductible for the business, reducing the overall tax burden.
Disadvantages:
Cost:
Providing fringe benefits can be expensive, particularly for small businesses with limited budgets. It’s essential to carefully evaluate which benefits are most valuable to employees and which are cost-effective for the company.
Administrative Burden:
Managing fringe benefits can be complex and time-consuming, requiring accurate record-keeping and compliance with various tax regulations.
Legal Compliance:
Ensuring that all benefits comply with legal requirements can be challenging, particularly in areas like FBT, where the rules are complex.
How Does FBT Work?
FBT is a tax that applies to most non-cash perks provided by employers. It is calculated based on the value of the benefit rather than the cost to the employer. Understanding how to calculate FBT correctly is crucial, as errors can lead to significant tax liabilities.
FBT Calculation Methods:
1. The Single Rate Method:
This is the simplest method, applying a flat rate to the value of all benefits provided.
2. The Alternate Rate Method:
This is a more tailored calculation, which can be beneficial for employers with employees in different income brackets.
3. The Short-Form Alternate Rate Method:
A simplified version of the alternate rate method, this option is available for smaller businesses or those with fewer fringe benefits to manage.
Each method has its own pros and cons, and the choice of method can impact the overall tax liability. For instance, using the wrong method could result in overpaying or underpaying FBT, which could receive penalties from the Inland Revenue Department (IRD).
Common Errors in FBT Calculation:
Incorrect Vehicle Valuation:
One of the most frequent mistakes is using the wrong value for company vehicles provided as a fringe benefit. Employers must ensure they use the correct valuation method, such as the cost price or tax book value, depending on the situation.
Incorrect GST Claims:
Another common error involves the incorrect calculation or claiming of GST on fringe benefits. It’s important to ensure that GST is calculated correctly and not claimed in the company’s GST return if it has already been accounted for within FBT.
Tax Implications of Fringe Benefits
The tax treatment of fringe benefits in NZ can be complex, with different rules applying to taxable and non-taxable benefits.
Taxable vs. Nontaxable Benefits:
Taxable Benefits:
These benefits are included in the employee’s gross income and are subject to income tax, Social Security, and other payroll taxes. Examples include company vehicles for personal use, gym memberships, and cash bonuses.
Nontaxable Benefits:
These benefits are excluded from the employee’s gross income and are not subject to income tax. Examples include employer-provided spending accounts like flexible spending accounts (FSAs) and small, infrequent gifts like holiday bonuses.
Employers must be aware of the distinctions between these types of benefits to ensure compliance with tax laws and to maximise the advantages of offering fringe benefits.
Common Mistakes and Best Practices
Even with the best intentions, businesses can make mistakes in administering fringe benefits. Understanding these common pitfalls and how to avoid them is vital.
Common Mistakes:
Incorrect FBT Rates:
Using outdated or incorrect FBT rates can lead to underpayment or overpayment of taxes.
Overpayment on Superannuation:
Some businesses mistakenly pay FBT on superannuation contributions when specified superannuation contribution withholding tax (SSCWT) has already been paid.
Inadequate Record-Keeping:
Poor record-keeping can result in errors in FBT calculations and compliance issues.
Best Practices:
Regular Reviews:
Regularly review your fringe benefit offerings and FBT calculations to ensure compliance and optimise tax efficiency.
Consult Professionals:
Given the complexity of FBT rules, it’s advisable to seek professional advice from tax advisors or accountants. They can guide a business on compliance, planning, and optimisation strategies tailored to the specific needs of each.
Tailored Benefits Packages:
Customise your benefits package to meet the needs of your employees while also considering the cost and administrative burden.
Conclusion
Fringe benefits are an essential component of employee compensation, but they come with significant tax implications. Understanding how FBT works and implementing best practices can help businesses manage the complexities of offering fringe benefits while ensuring compliance and optimising tax efficiency. If you are new to this, we advise you to invest in professional advice that can save you time, money, and potential headaches down the road.
