ANALYSIS: Some Kiwi employees could lose benefits at work due to government tax changes.
Employers must pay employee benefits tax on the benefits they provide to their employees. This tax rate is set in relation to the income tax rates. The new top tax rate of 39% on income over $ 180,000 means that the tax rate for employee benefits has also changed.
Next tax year, these benefits will be taxed at a maximum rate of 63.93 percent, up from the current maximum rate of 49.25 percent. At this rate, employers may find the cost of benefits too high for their employees.
While the new tax rate only hits the richest 2 percent of earners, benefit taxes hit everyone, meaning lower-paid employees could have their benefits taxed at 63.93 percent.
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The Benefits Tax or FBT aims to ensure that people pay taxes on all types of income they earn, even when that income is not cash. It is designed to avoid a situation where the best earners are paid in flash cars and free plane flights to avoid paying too much tax at the highest rate.
The IRD uses a formula to calculate the FBT rate for the different tax rates to make sure they line up. Along with the new top rate passed by Parliament last week, the IRD included a change that would align the top tax rate of 39% to a top FBT rate of 63.93.
It sounds a bit complicated – and it is. It’s also complicated for businesses. For each benefit offered to employees, they must determine the exact rate of FBT to be paid. As a result, offering employees the benefit of a work car becomes a very complicated task.
For this reason, most employers choose to pay a single rate of FBT for all of their benefits, as it saves them from having to calculate individual rates for each employee.
But with the new higher rates of 63.93%, this single rate becomes much more expensive to apply at all levels.
Deloitte’s tax partner Robyn Walker says companies have the choice of reducing benefits, paying a large FBT bill, or adding many additional compliance costs to determine FBT rates for each employee and tax their benefits. at this rate. No easy task.
“The rules have been around since 2000. The rules came into effect when we last increased the tax rate to 39 percent,” Walker said.
Between 2000 and 2009, the FBT rate was also 63.93 percent.
“We moved to a lower cost compliance model when the top FBT rate rose to 49.25%.
Walker said many Deloitte clients chose to pay the fixed rate of 49.25% because the administrative costs were lower.
That made sense with a rate of 49.25 percent, but with that rate now reaching 63.93 percent, companies might find it too expensive to offer employee benefits, knowing that they will be taxed at that rate plus. raised.
Some companies might choose not to pay the flat rate of FBT, but that would mean calculating the FBT rate for each employee. But Walker said it would incur additional compliance costs because there was no easy, cheap way to calculate the correct rate.
Walker said there were solutions employers could use, but they still relied on people who often pay a higher tax rate.
“In order to minimize compliance costs, there are ‘easier’ calculation rules, but this often results in the tax being calculated at a rate higher than the employee’s marginal tax rate – currently , some benefits will default to FBT at 42.86 per cent, this increases to 49.25 per cent, ”she said.
Getting the exact right rate would require huge compliance costs and data collection.
“This will force employees to collect data in real time,” Walker said.
“It will be computerized to some degree but it will be manual to a certain dimension,” she said.
The IRD said it couldn’t predict how individual companies would react to the rate.
“IR cannot accurately predict how employers in general will react. The response will be different from company to company, ”said a spokesperson.
They said the changes were made to accommodate the new, higher tax rate.
“The new FBT rate is a measure of integrity to prevent people from avoiding the new personal income tax rate of 39%,” they said.
“The 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 otherwise have been paid if an employee had received wages or equivalent wages instead of the benefit in kind, ”they said. .