As we near the end of the first quarter for fringe benefit tax (FBT) purposes, it is timely to remind ourselves of the requirements that must be met if an employer intends to rely on the exemption from FBT for work-related vehicles.
But let's start at the beginning.
FBT applies where a motor vehicle (defined widely) is made available by an employer to an employee, irrespective of whether it is owned or leased.
The key to this is not use, but availability. There are several exclusions from this provision, including for work-related vehicles.
For no FBT liability to arise under this exclusion, the employee and the employer must comply with a number of criteria.
Firstly, the employee must not use (or be allowed to use) the vehicle for private purposes other than home-to-work travel (provided home-to-work travel is a condition of their employment), or any incidental use associated with the normal use of the vehicle for business purposes.
The requirements for an employer are more numerous.
• The vehicle must prominently and permanently display the employer's business name or logo (a personalised plate or removable wheel cover is not sufficient).
• The vehicle cannot be a motor car (a motor car is defined as any vehicle designed exclusively or mainly to carry up to nine people).
• The private use of the vehicle by the employee must be prohibited, other than to the extent set out above. Any day it is used for private purposes, it is not a work-related vehicle, and FBT will apply.
A regular passenger vehicle (e.g. a hatchback or station wagon) can become a work-related vehicle if it is sufficiently redesigned. For example, the back seats could be permanently bolted down or removed. Case law confirms some physical change is required to achieve this; simply signwriting a motor car is not sufficient.
When relying on the exemption, the employer should ensure the employee has signed an acknowledgement they understand the business motor vehicle policy with respect to private use. The employer should regularly check the policy is being adhered to and enforced; otherwise the work-related-vehicle exemption may not apply.
It is our view employers should, at the very least, review their policies with respect to the provision of vehicles on an annual basis. Now is a perfect opportunity to do that to ensure an FBT liability does not inadvertently arise from the provision of motor vehicles to employees for business purposes.
Employers should be especially vigilant about private use during the weekends and Christmas holidays. Any visit to a Central Otago boat ramp in January clearly demonstrates the number of signwritten work-related vehicles that are being used for private purposes. If private use does occur, FBT should be paid in relation to the days in question to ensure the non-FBT position for the rest of the year is more defendable.
• Scott Mason is the tax principal at WHK in Dunedin.
