FBT changes aim to cut compliance costs

This article was current at the time of publication.

A revised Fringe Benefits Tax (FBT) regime is slated for inclusion in this year’s tax legislation and down for implementation from 1 April 2026.

Revenue Minister Simon Watts says the changes are intended to be revenue-neutral for the Crown, with a focus on reducing compliance costs.

The Inland Revenue (IR) consultation paper Fringe benefit tax – options for change proposes changes to the calculation of the private use of motor vehicles, unclassified benefits and moving the entertainment deduction limitation into the FBT regime.

Angus Ogilvie FCPA, Chair of CPA Australia’s New Zealand Tax Committee, says the proposed changes are generally welcome. However, he does maintain that a shift in attitude to “a very unpopular tax” would depend on how these changes play out “at the commercial coalface”.

“These are substantial changes that will require a good deal of promotion by IR if they are to be adopted,” he notes. 

CPA Australia’s submission in response to the IR’s consultation argues low-value benefits should be eliminated from the regime entirely, not just exempt them conditionally.

Failing that, the de minimis threshold for unclassified benefits should be raised from NZ$200 to NZ$500.

Andrew Dickeson FCPA, Taxation Services Director at Auckland-based business advisory firm Baker Tilly Staples Rodway, maintains that far from modernising and making the FBT regime simpler, the proposals will make FBT obligations more complex and, by the removal of the entertainment deduction limitation, bring many more businesses into the FBT net. 

Motor vehicles 

Dickeson says proposed changes to the treatment of the private use of motor vehicles are by far the most significant, covering around 75 per cent of FBT revenue.

“If you do anything wrong when you do FBT calculations, it’ll be motor vehicles.”

Dickeson says the current regime is “very unfair,” treating as fully taxable any vehicle “available” for private use, regardless of whether it is used privately. 

The consultation paper proposes increasing the weight limit used for defining a car for FBT purposes from 3500kg to 4500kg.

The “work-related vehicle” definition would be scrapped and replaced by categories of vehicle use which would reflect any limitations of private use.

To determine the taxable value of the motor vehicle, the current 20 per cent per annum cost base would be replaced by separate rules for petrol/diesel powered vehicles (26 per cent), hybrids (22.4 per cent) and fully electric vehicles (19.4 per cent) reflecting the lower on-going running costs of electric vehicles.

IR proposes a remuneration approach to more closely relate the FBT liability to the intended remuneration aspect of an employer-supplied vehicle. Such an approach would categorise motor vehicles according to their limitation on private use.

Category 1, “perk vehicles” will be those supplied entirely as part of remuneration and will attract 100 per cent FBT.

Category 3, “business use only” vehicles, not available at any time for private use, would be zero-rated.

The in-between “tool of trade” category 2 will be rated at 35 per cent of taxable value.

A Deloitte commentary explains that the difference between category 2 and 3 vehicles “is in essence, the workplace of an employee”.

“Vehicles which are routinely taken to variable work sites (for example, tradespeople, sales staff, project workers, community workers) would fall into category 3, but a vehicle which is routinely taken to the same worksite (for example, office workers) would fall into category 2.”

Deloitte notes fleet owners will need to look at their fleet policies in light of the new rules, if enacted.

IR will need to supply detailed commentary around what will be considered category 2 use, Dickeson maintains.

“Say, a plumber doing his rounds of jobs in his work van goes off course to buy a pie and a Coke at lunchtime. Strictly speaking, that’s private use.”

Double-cab ute myth

Both Dickeson and Ogilvie agree that the new regime will need to address the perception that double-cab utes are “automatically exempt” from FBT.

“How often do you see them parked up at the boat ramp? Ogilvie asks. “There’s ample evidence [the automatic work-related vehicle exemption] is being flouted.”

Dickeson says some commercial vehicle dealers are marketing double-cab utes as “FBT vehicles”. 

However, to qualify for the “work-related vehicle (WRV) exemption” a vehicle must, inter alia, have permanent company branding prominently displayed, have a gross laden weight of 3500kg or less, and be mainly designed to carry goods, or goods and passengers equally.

The WRV definition will be replaced by the “remuneration approach”.

Entertainment deductions

Under the proposed changes, the current 50 per cent deduction limitation on specific entertainment would remove any expenditure which fell into the new fringe benefits category of ‘entertainment’ and would be taxed at a flat rate of 49.25 per cent for entertainment for both employees and non-employees.

Entertainment would be either exempt under a de minimis rule of less than NZ$200 per person, or an exclusion for food and drink except for those provided at parties, social functions or celebrations – so excluding coffees and working lunches.

Unclassified benefits

IR proposes to replace the current de minimis rule of NZ$300 a quarter per employee or NZ$22,500 per annum per employer.

One option to replace the current approach is to exempt benefit less than $200 provided it is not in substitution for remuneration, determined by either frequency and regularity, and whether an employee can expect the benefit as part of their employment agreement. The second option is subscribing to a defined list of non-remunerative benefits.

Dickeson says some of the proposed changes will result in greater compliance burdens.

“It’s like the increased reporting required from trusts. With all the online disclosure documents, it’s taking us hours longer to do all the disclosures.

“For motor vehicles, it’ll be different types of vehicles.

“IR officials are seeking greater detail in reporting especially for motor vehicles’ different uses. It’ll all take more time.”

CPA Australia advocates that IR should rethink the April 2026 implementation date given changes are unlikely to be enacted before March 2026.