ANALYSIS: Some Kiwi employees could be set to lose work perks as a result of the Government’s tax changes.

Employers have to pay the fringe benefit tax on the perks they offer their employees. That tax rate is set in relation to the income tax rates. The new top tax rate of 39 per cent on income earned over $180,000 meant the tax rate for employee perks has also changed.

Next tax year those perks will be taxed at a top rate of 63.93 per cent – up from the current top rate of 49.25 per cent. At that rate, employers could find the cost of perks too expensive for their employees.

While the new tax rate only hits the top 2 per cent of income earners, taxes on perks hit everyone meaning employees on the lowest pay could have their perks taxed at 63.93 per cent

The fringe benefits tax or FBT is meant to make sure that people pay tax on every kind of income they earn, even when that income doesn’t come in the form of money. It’s designed to avoid a situation in which top earners are paid in flash cars and free plane flights to avoid paying too much tax at the top rate.

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

It sounds a bit complicated – and it is. It’s complicated for businesses too. For each perk offered to employees, they have to work out the exact rate of FBT to pay. All of a sudden, offering employees the perk of a work car becomes a very complicated task.

For that reason, most employers opt to pay a single rate of FBT across all of their perks as it saves them the trouble of calculating individual rates for each employee.

But with the new, higher rates of 63.93 per cent – that single rate becomes a lot more expensive to apply across the board.

Deloitte tax partner Robyn Walker says businesses have the choice of trimming back perks, paying a large FBT bill, or adding on a lot of extra compliance costs to work out FBT rates for each employee and taxing their perks at that rate. No easy task.

“The rules have been around since 2000. The rules first came in when we last put up the tax rate to 39 per cent,” Walker said

Between 2000 and 2009 the FBT rate was 63.93 per cent as well.

“We went to a lower compliance cost model when the top FBT rate went to 49.25 per cent more employers were accepting paying that tax rate and saving the compliance cost,” she said.

Walker said a lot of Deloitte’s clients opted to pay the flat 49.25 per cent rate because administrative cost was lower.

This made some sense with a rate of 49.25 per cent, but with that rate now rising to 63.93 per cent businesses might find it too costly to offer perks to employees, knowing they’ll be taxed at that higher rate.

Some businesses might opt not to pay the flat top rate of FBT but that would mean working out each individual employee’s FBT rate. But Walker said this would come with added compliance cost as there was no easy, cheap way to calculate the correct rate.

Walker said that there were some fixes employers could use, but they still relied on people often paying a higher rate of tax.

“In order to minimise compliance costs, there are some ‘easier’ calculation rules, but this often results in tax being calculated at a higher rate than might be the marginal tax rate of the employee – currently certain benefits will default to FBT at 42.86 per cent, this is increasing to 49.25 per cent,” she said.

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

“It will require employees to collect data on a real time basis,” Walker said.

“It will be computerised to certain degrees but it will be manual to a certain dimension,” she said.

IRD said that it could not predict how individuals businesses would respond to the rate.

“IR cannot accurately predict how employers in general will react. The response will be different from business to business,” said a spokesperson.

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

“The new FBT rate is an integrity measure to stop people avoiding the new 39 per cent 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 takes into account the PAYE which would have otherwise been paid had an employee received an equivalent salary or wages instead of the fringe benefit,” they said.