Employee benefits could be eliminated after the government tax change

ANALYSIS: Some Kiwi employees could lose job benefits as a result of government tax changes.

Employers have to pay fringe benefits tax on the benefits they offer to their employees. That tax rate is set relative to income tax rates. The new maximum tax rate of 39 percent on earned income of more than $ 180,000 meant that the tax rate for employee benefits has also changed.

Next fiscal year, those benefits will be taxed at a maximum rate of 63.93 percent, up from the current maximum rate of 49.25 percent. At that rate, employers may find the cost of benefits too high for their employees.

While the new tax rate only affects the top 2 percent of earners, benefits taxes affect everyone, meaning lower-paid employees could have their benefits taxed at 63.93 percent .

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The fringe benefits tax or FBT is meant to ensure that people pay taxes on all types of income they earn, even when that income does not come in the form of money. It’s designed to avoid a situation where top earners get paid in flash cars and free plane flights to avoid paying too much tax at the top rate.

The IRD uses a formula to calculate what the FBT rate should be for the different tax rates to make sure they line up. With the new top rate approved by Parliament last week, the IRD included a change that would align the top tax rate of 39% with a top FBT rate of 63.93%.

It sounds a bit complicated, and it is. It is also complicated for companies. For each benefit offered to employees, they have to calculate the exact FBT rate to pay. Suddenly, offering employees the benefits of a work car becomes a very difficult task.

For that reason, most employers choose to pay a one-time FBT fee on all of their benefits, as it saves them the hassle of calculating individual fees for each employee.

But with the new higher rates of 63.93 percent, that single rate becomes much more expensive to apply across the board.

Deloitte tax partner Robyn Walker says companies have the option of cutting profits, paying a large FBT bill, or adding a lot of additional compliance costs to calculate FBT fees for each employee and tax their profits at that rate. . It is not an easy task.

“The rules have been around since 2000. The rules first came in the last time we raised the tax rate to 39 percent,” Walker said.

Between 2000 and 2009, the FBT rate was also 63.93%.

“We moved to a lower cost of compliance model when the maximum FBT rate was 49.25 percent more than employers who agreed to pay that tax rate and save the cost of compliance,” he said.

Walker said many of Deloitte’s clients chose to pay the flat rate of 49.25 percent because the administrative cost was less.

This made some sense with a rate of 49.25 percent, but with that rate now increasing to 63.93 percent, companies might find it too costly to offer employee benefits, knowing they will have to pay taxes at that higher rate. high.

Some companies may choose not to pay the fixed maximum FBT fee, but that would mean calculating the FBT fee for each individual employee. But Walker said this would come with an added cost of compliance, as there was no cheap and easy way to calculate the correct rate.

Walker said there were some solutions employers could use, but still trusted people to often pay a higher tax rate.

“To minimize compliance costs, there are some ‘easier’ calculation rules, but this often results in taxes being calculated at a higher rate than the employee’s marginal tax rate; currently certain benefits will default to FBT at 42.86 percent, this is increasing to 49.25 percent, ”he said.

Getting the exact rate right would require enormous data collection and compliance cost.

“It will require employees to collect data in real time,” Walker said.

“It will be computerized to certain degrees, but it will be manual to some extent,” he said.

The IRD said it could not predict how individual companies would respond to the rate.

“RI cannot accurately predict how employers in general will react. The answer will be different from company to company, ”said a spokesperson.

They said the changes were made to respond to the new higher income tax rate.

“The new FBT rate is a measure of integrity to prevent people from avoiding the new 39 percent personal income tax rate,” they said.

“FBT rates and thresholds are calculated using the after-tax value of a benefit paid to an employee and take into account the PAYE that would have otherwise been paid if an employee had received an equivalent salary or wages in lieu of the benefit additional, “they said. .