What is Fringe Benefit Tax (FBT)?
FBT is a tax regime that applies to non-cash benefits provided to employees. While cash bonuses are taxed as regular income, non-cash perks - such as Christmas hampers or gift vouchers - fall under FBT rules.
Cash allowances while not subject to FBT can be taxable (as employment income). There are circumstances where a cash allowance is not taxable (exempt) but sufficient evidence is required to support it is a reimbursement of business expenditure incurred by the employee.
Common pitfalls: Gift cards, vouchers, and allowances
One frequent error is misinterpreting the exemption for small-value unclassified benefits.
“If you are providing unclassified benefits of less than $300 per employee per quarter, an exemption may apply (no FBT). But if the total value of unclassified benefits provided exceeds $300 per employee per quarter or the total value to all employees in an income year is more than $22,500, the exemption no longer applies (as there is an absolute threshold) and all of the unclassified benefits would be subject to FBT. Therefore it’s important for an employer to keep track of all unclassified benefits provided – gifts, vouchers, hampers etc.” - Sandita Singh, Tax Associate Director, BDO Auckland
Importantly, the $300 limit is cumulative - multiple small gifts can quickly exceed the threshold. Employers often focus on the first threshold ($300 per quarter) and overlook the second ($22,500 per year), so it’s vital to keep track of all benefits provided throughout the year.
Motor vehicles: Navigating the rules
Motor vehicles are a common employee benefit and a key focus for Inland Revenue. The critical factor is “availability for use” - if an employee can use the vehicle privately, FBT applies. Even if a car is taken home for security reasons (a benefit to the employer), recent guidance clarifies that this is considered a private benefit (more than incidental to the employer benefit) and subject to FBT.
“Availability for use is probably the key thing about whether a benefit arises that could be captured under the FBT regime. The key is: have you restricted your employee from being able to use that vehicle?” - James Peck, Tax Associate, BDO Christchurch
Work-related vehicle exemption
This exemption typically applies to vehicles not designed for passengers, such as vans and utes. Employees may take these vehicles home, but any other private use must be strictly prohibited. Employers must also ensure vehicles meet criteria such as signwriting and usage restrictions. An employer may consider allowing the employee to use the vehicle privately on weekends and public holidays to reduce the number of days the vehicle is subject to FBT (and therefore reduce the FBT cost).
Emergency call-outs and home as a workplace
If an employee takes a vehicle home for emergency call-outs, an exemption may apply, but only for days when a call-out occurs. The concept of “home as a workplace” is relevant for itinerant workers, such as those visiting multiple sites daily. In these cases, travel between home and work sites may not be considered a private benefit. This is very fact specific and the work undertaken at home must not be only for personal choice.
E-bikes and e-scooters: New legislative amendments
Recent changes allow employers to provide bikes or scooters, including electric models, for commuting without triggering FBT provided the primary purpose is travel to work. Salary sacrifice arrangements may also apply (so employees can “pay” for the equipment on a pre-tax basis), but these are subject to separate rules.
Proposed changes: What’s next for FBT and motor vehicles?
A recent consultation paper from Inland Revenue proposes significant changes to FBT for motor vehicles. The suggested approach would remove the work-related vehicle exemption and introduce a remuneration-based system, categorising vehicles as broadly perk vehicles, mixed-use vehicles, or business tools. Currently the FBT cost for a vehicle (per day) would be the same if the vehicle was simply taken home for security reasons (with all other private use restricted) and where the private use is unrestricted. The proposed rules seek to reduce this imbalance.
“A recent consultation paper from Inland Revenue is looking to simplify how FBT applies to motor vehicles. The idea of the proposed rules is to distinguish the FBT cost depending on the nature of the use of the underlying vehicle.” - Sandita Singh, Tax Associate Director, BDO Auckland
But that’s not all. The August tax bill has introduced some practical changes that employers should keep on their radar:
Equalisation of FBT and PAYE - keeping things simple: From 1 April 2026, if you’re reimbursing employee expenses for an unclassified benefit and you’ve already accounted for either FBT or PAYE, you won’t need to worry about the other. It’s a welcome move to help avoid double-taxing the same benefit.
Gift cards - new rules for open loop cards: Gift cards are always a hot topic. Open loop gift cards (prepaid cards you can use almost anywhere) have traditionally been treated as “money” and taxed as PAYE income. But from 16 April 2025, these cards will fall under the FBT regime instead. So, if you’re rewarding staff with open loop gift cards, make sure you’re across the new rules.
Investment boost on motor vehicles: From 1 April 2026 the legislation will be amended to be explicit that for calculating FBT on motor vehicles, the 20% Investment Boost deduction is ignored. This change aims to make things clearer and more consistent for employers.
These updates are all about making FBT simpler and fairer, but they do mean businesses need to stay alert and adapt their processes. If you’re unsure how these changes might affect your organisation, it’s a great time to reach out for expert advice.
Calculation methods: Single rate vs. alternate rate
Historically, many businesses used the single rate method, taxing benefits at the highest rate (63.93%, previously 49.25%). With tax rates rising, alternate rate calculation methods - attributing benefits to individual employees based on their marginal tax rate - are becoming more popular. While these methods can be complex, software solutions are available to assist. Inland Revenue has also introduced simplified versions, allowing employers to split employees into groups or apply hybrid approaches (depending on the earnings of the underlying employees etc).
Key tips for employers- Understand the thresholds for small-value benefits ($300 per employee per quarter) and be aware there is a maximum benefit limit ($22,500 for all employees) per year.
- Review motor vehicle policies to ensure compliance with FBT rules, especially regarding private use (is the employee formally restricted and are checks being undertaken to confirm compliance with restriction).
- Stay informed about legislative changes and consider how they may affect your business.
- Explore alternate calculation methods to potentially reduce your FBT liability (relevant where employees earn less than $180,000).
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