Fringe benefit tax for builders

By - , Build 164

Fringe benefit tax rules are complex and often applied incorrectly. We explain some of the common errors and misconceptions, but it may be worth a visit to your accountant for some specific advice.

FRINGE BENEFIT TAX (FBT) is a tax that an employer pays when they provide an employee with a benefit that isn’t cash. Common examples are:

  • free, subsidised or discounted goods and services
  • low-interest loans
  • contributions to insurance
  • motor vehicles available for private use.

Vehicle use most common fringe benefit

The most common type of fringe benefit is where an employer provides an employee with a motor vehicle that is available to use privately. This happens all the time in the construction industry, with employees having the use of vans and utes.

Vehicle only has to be available to use

One common misconception is that the vehicle actually has to be used privately for FBT to apply. The legislation provides for the concept of the vehicle being available for private use.

Inland Revenue’s policy is that FBT applies to a motor vehicle when that vehicle is made available for an employee’s private use, not when the employee uses the vehicle privately.

For example, if Fred’s Contracting Ltd allows Chris, a valued employee, to use the company’s Holden Commodore sedan, FBT needs to be considered. This is irrespective of whether Chris actually uses the car or not.

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Travel from home to work considered private

Also important point is that travel from home to work is almost always considered private travel. In Chris’s case, if he travels from home to work and doesn’t use the car privately any other time, there is still a potential FBT issue.

Exclusion for work-related vehicle

There is an exclusion for work-related vehicles. If this is met, no FBT will need to be paid.

To use the exclusion, the following conditions must apply:

  • The form of identification that the employer regularly uses in carrying out their business must be displayed prominently and permanently on the exterior.
  • The motor vehicle can’t be a car as defined for the purposes of the FBT rules.
  • The motor vehicle cannot be available for the employee’s private use except travelling to and from work and where that private use is incidental to business use.

Using the Fred’s Contracting Ltd example, the work-related vehicle exclusion cannot apply. The Holden Commodore sedan is considered a car.

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Utes and vans not cars

But what about a Toyota Hilux? Inland Revenue considers that utes and vans are not cars and therefore the exclusion could potentially apply. The other two criteria still need to be met, including prominently displayed signwriting and the vehicle not being available for private use – except to and from work.

FBT usually applies to labour-only contractors

What about Steve, who works at Fred’s Contracting? He is an independent contractor and allowed to use the company’s Holden Commodore.

It is common to have contractors instead of employees. You would assume that, as the contractors are not employees and they don’t get holiday pay, sick leave or an employment agreement, FBT won’t apply.

However, an employee for the purposes of FBT is someone that receives a PAYE income payment, and labour-only contractors who have withholding tax deducted meet this definition.

In most situations, being an independent contractor won’t escape the FBT rules.

Changes if employee of your own company

FBT also catches out shareholder employees operating their business via a company. Traditionally, many small companies have opted to keep their vehicles outside of the company as it becomes too complicated and expensive to account for and pay FBT.

From 1 April 2017, Inland Revenue says that if you operate via a company, as long as the voting interests in the company are held by natural persons (no trusts) and there are five or fewer shareholders, the company can purchase up to two vehicles and no FBT is payable.

The upshot is that, after you’ve determined a percentage of business use, you can claim that portion of GST and various running costs, including depreciation and that’s it. If the business percentage changes from year to year, you adjust the GST claim every balance date and alter what percentage of expenses you claim the following year.

May be time to review your FBT practices

This article highlights only some of the issues in the construction industry. It’s a great time to get your local tax advisor to review your current FBT practices and identify whether the rules are being correctly applied and whether there may be any scope to reduce your current FBT liability.

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For more

This is intended as general advice only. For specific advice, contact your advisor or local Staples Rodway office.

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Articles are correct at the time of publication but may have since become outdated.

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