Tax change threatens work perks
Some employees could be set to lose work perks as a result of the Government’s tax changes.
Employers have to pay 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 means 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 perks too expensive.
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 reason why is fringe benefits tax, or FBT. It ismeant to make sure that people pay tax on every kind of income they earn, even when that income does not come in the form ofmoney. It is designed to avoid a situation in which top earners are paid in flash cars and free flights to avoid paying tax at the top rate.
IRD uses a formula to calculate what the rate of FBT should be for the different tax rates tomake sure they align. With the new top rate passing through Parliament last week, IRD included a change to line up the 39 per cent top tax rate with a 63.93 per cent top FBT rate.
Most employers opt to pay a single FBT rate across all perks as it saves them the trouble of calculating individual rates for each employee. But the 63.93 per cent rate becomesmore expensive to apply across the board.
Deloitte tax partner Robyn Walker said businesses would have the choice of trimming back perks, paying a large FBT bill, or adding a lot of compliance costs to work out rates for each employee.
Walker said a lot of Deloitte’s clients opted to pay the flat 49.25 per cent rate because administrative costs were lower. But with that rate now rising to 63.93 per cent businesses might find it too costly to offer perks to employees, knowing they will be taxed at that higher rate.
Walker said there was no easy, cheap way to calculate the correct rate.
‘‘In order to minimise compliance costs, there are some ‘easier’ calculation rules, but this often results in tax being calculated at a higher rate thanmight be the marginal tax rate of the employee,’’ she said.
Getting the exact rate right would require huge compliance costs and data collection.
IRD said it could not predict how individual businesses would respond to the rate.
‘‘The new FBT rate is an integrity measure to stop people avoiding the new 39 per cent personal income tax rate,’’ an IRD spokesperson 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.’’