From the 1st of April 2021, a new 39% tax bracket came into effect on individual income earned over $180,000. This change has had a flow on effect to Fringe Benefit Tax (FBT) and to the rates used when it is calculated.
FBT is a tax paid by employers on benefits provided to employees that don’t get taxed via the PAYE system. For example, a company vehicle provided to an employee where private use is allowed would be subject to the tax.
Due to the top personal tax rate changing from 33% to 39%, the rate applied to taxable benefits has also increased. It’s time to review the FBT calculation methods available to businesses to ensure the best calculation method is being used.
Single rate calculation method
Using this method, benefits are taxed at 63.93% (previously 49.25%). (Note the new top tax rate is 39% on Gross income which is the same as 63.93% on Net income). This rate is used for each quarterly return. This is the taxable equivalent of the tax rate on income earned over $180,000. This method is the easiest to prepare, however it defaults to the top tax rate, which can lead to over taxation.
Alternate rate calculation method
Using this method, benefits are taxed at 49.25% (previously 42.86%) for the first three quarters. In the fourth quarter, a wash up calculation is prepared. This wash up aligns the FBT payable for each employee to their marginal tax rates. This method avoids over taxation, but is more complex to calculate. In the past, take up of this method has not been significant, due to the time taken to prepare the calculation versus the tax saving. However, given the large increase in the top marginal tax rate, it may be worth considering.
As a general rule of thumb, you should be using the single rate method if all your employees’ taxable income is over $180,000 for the year. Most people earn less than $180,000, therefore the alternate rate will be beneficial to most employers and should be considered.
If you are preparing FBT returns in house we recommend you contact us to ensure that you are using the method most applicable to your organization and that the calculations you are preparing are correct.
