Providing perks to employees such as paid parking or a Friday team lunch can be a great way to build culture. However, these benefits can also create unintended tax exposure if not managed correctly.
Inland Revenue is taking an increasingly close look at employee benefits. If you have not reviewed your Fringe Benefit Tax (FBT) position recently, there is a risk you could be facing unexpected costs.
The team lunch trap
Food is one of the more confusing areas for SME employers. While shouting the team a meal is common practice, the tax treatment can vary significantly depending on how it is provided.
For example, if food is delivered and consumed on business premises, it is generally fully deductible and not subject to FBT. However, if you take your team offsite to a café or restaurant, the expense is typically treated as entertainment and only 50% deductible.
It is a simple example, but one that highlights how small changes in how a benefit is provided can lead to very different tax outcomes.
Car parks and “substantially exclusive” use
Parking is another area where the detail matters.
If a car park is located on your business premises, or you lease a space where your business has substantially exclusive use, it is generally exempt from FBT.
However, reimbursing an employee for casual parking in a public facility is usually treated as a taxable benefit.
The “small perk” danger zone
It is common for businesses to assume that smaller benefits such as gym memberships, gift cards, or occasional gifts fall outside the FBT rules. In reality, these are often treated as unclassified benefits.
While there is a $300 per employee per quarter de minimis threshold, once this is exceeded the full value becomes taxable, not just the excess.
Without proper tracking, these smaller benefits can quickly accumulate and create an unexpected liability.
Avoid overpaying FBT
We often see businesses default to the top FBT rate of 63.93% for simplicity. However, this can result in overpaying, particularly where employees are not all on higher income levels.
Insurance benefits are another area where treatment is often misunderstood. Whether FBT or PAYE applies will typically depend on who owns the policy, the employer or the employee.
Applying the correct calculation method and treatment can ensure you are not paying more tax than necessary.
Taking a proactive approach
FBT does not need to be complex, but it does require careful attention. Misclassifying benefits or missing filing deadlines can result in interest and penalties, as well as increased scrutiny from Inland Revenue.
Taking the time to review your FBT position now can help ensure your employee benefits are structured correctly and your obligations are being met.
If you would like to discuss your FBT position or review how your current benefits are being treated, feel free to give me a call or get in touch with your usual PKF client manager.