Common FBT and GST Questions
Angela Hodges • 28 November 2024
As accountants, you're often confronted with specific scenarios regarding Fringe Benefit Tax (FBT) and Goods and Services Tax (GST) that can present challenges for clients, particularly close companies and businesses providing non-monetary benefits. Below are answers to some common questions, aimed at clarifying these situations.
1. FBT on Company Vehicles Provided to Shareholders
For many close company clients, a common practice involves making a company vehicle available to shareholders, which triggers FBT liability. It is common to put through a shareholder reimbursement that effectively eliminates the fringe benefit, i.e. the calculation is generally 20% of the purchase price of the vehicle. A typical journal entry for each GST period might include:
- Debit: Current account (shareholder contribution)
- Credit: Company income (equal value of the benefit)
This structure arguably ensures no net benefit exists for FBT purposes.
Question: Is it necessary to file a NIL FBT return, and can it be filed annually if the criteria are met?
Yes, even if shareholder contributions reduce the FBT liability to zero, an FBT return is still required as there is technically a fringe benefit being provided. If the client qualifies, this can be done annually, provided the company meets the IRD’s filing criteria.
Many businesses overlook this technical requirement, making it a potential area of compliance focus for the IRD.
2. Gift Vouchers for Employees
Question: Are gift vouchers 100% deductible for the employer, subject to FBT? Can GST be claimed on the cost of the vouchers?
- Deductibility: Yes, gift vouchers are fully deductible to the employer for income tax purposes.
- FBT Liability: FBT applies to non-cashable gift vouchers. You may also consider whether they fall under the de minimis exemption for FBT. However, if a gift voucher can be exchanged for cash, it is treated as a PAYE payment rather than FBT.
- GST: GST is generally not claimable on the purchase of vouchers because the GST supply occurs when the voucher is redeemed, which is typically for private purposes. As such, the issuer of the voucher does not charge GST to the employer, so there is no GST to claim.
3. Gift Vouchers for Business Contacts
Question: Are gift vouchers for business contacts 100% deductible unless they are for food and drink? Can GST be claimed in either case?
- Income Tax Deduction: Yes, gift vouchers for business contacts are generally deductible unless they include food or drink, in which case the entertainment rules apply, reducing deductibility to 50%. While some tax advisors argue that entertainment rules should only apply if there is a private benefit or ‘entertainment’ element for the taxpayer, the IRD’s position remains firm: any gift of food or drink is subject to the entertainment rules, regardless of the taxpayer’s enjoyment or consumption of the benefit. I do question this as the entertainment rules are designed to make the private portion of any ‘entertainment’ non-deductible. If you are making gifts to clients and not and not ‘enjoying’ or ‘consuming’ any of the benefit, arguably the entertainment rules should not apply. However – that is clearly not the IRD position, the IRD expects any client gift that comprises food or drink to be subject to the entertainment rules.
- GST Treatment: Similar to the employee voucher scenario, GST is generally not claimable on gift vouchers at the time of purchase because no GST is charged by the issuer of the voucher. The GST supply occurs when the voucher is redeemed, which means there is typically no GST to claim upfront.
These scenarios illustrate common issues that arise regarding FBT and GST, especially for close companies and businesses offering employee benefits or client gifts. Ensuring that clients are aware of their filing obligations and clarifying tax positions on deductions and GST will help prevent compliance issues and optimise their tax outcomes.
*This publication contains generic information only. NZ Tax Desk Ltd is not responsible for any loss sustained by anyone relying on the contents of this publication. We recommend you obtain specific taxation advice for your circumstances.
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Among the biggest winners from the Government’s proposed Foreign Investment Fund (FIF) reforms are likely to be US citizens living in New Zealand. The proposed Revenue Account Method, which is set to take effect from 1 April 2025, offers significant relief from the sometimes harsh and often unfair outcomes created when the US and NZ tax systems collide. The Double Tax Problem for US Citizens Unlike most countries, the United States taxes individuals based on citizenship, not residency. This means that US citizens remain fully taxable by the IRS no matter where in the world they live. When they become New Zealand tax residents, they are subject to NZ’s FIF rules – which tax unrealised gains each year. The problem is that these deemed gains are not recognised by the US tax system, which only taxes actual income or realised gains. This mismatch creates a common scenario where a US citizen in NZ pays tax to New Zealand on phantom FIF income (including unrealised capital gains) but then pays US tax again when the investment is eventually sold – with no US tax credit for the NZ tax already paid. The result is real, permanent double taxation. How the Revenue Account Method Helps The proposed Revenue Account Method addresses these challenges by bringing New Zealand’s tax treatment of FIF investments more in line with the US tax system, as it only taxes: Tax is only triggered when dividends are received or capital gains are realised, allowing US citizens to align taxable events across both jurisdictions. Capital gains are only partially taxed in NZ (70%), and foreign tax credits may be available in the US when realisation occurs (US tax advice will be required). For example, under current rules, FIF income is often calculated using the Fair Dividend Rate (FDR) method – which taxes 5% of the opening value of most foreign shares annually, even if no income is actually received. While this is straightforward from a compliance perspective, it does not align well with US capital gains tax rules, which only tax gains when they are realised. This mismatch can lead to several problems: Double taxation : US citizens in New Zealand can be taxed on notional income under the FIF regime that doesn’t correspond to any US tax liability, meaning no foreign tax credit is available in the US. Compliance complexity : The requirement to use different tax bases (realisation for US purposes, deemed accrual/unrealised gains in NZ) creates extra complexity for reporting and record-keeping. Cash flow issues : As no cash is received under FDR (and potentially CV), taxpayers may be forced to fund NZ tax from other sources or liquidate investments earlier than intended. For US citizens holding private equity, start-up shares, or unlisted interests acquired prior to NZ tax residency, this new method could make a substantial difference. It removes the need to fund NZ tax liabilities out of pocket for income never actually received. The new Revenue Account Method should be especially attractive to US citizens holding equity in start-ups, employee share schemes, or private investment vehicles, where growth potential is high but cash flow is minimal. However, it is important to remember that ultimately this method will still tax capital gains on these offshore investments, as well as taxing dividends. The Revenue Account Method should not be a default go-to for new residents, as some taxpayers may have more favourable outcomes with the existing FIF methods. See our more detailed article on the new Revenue Account Method here. Planning Tips for US Citizens and Advisors If you or your clients are US citizens becoming NZ tax residents, consider the following planning steps: Document asset values on entry : For investments eligible for the Revenue Account Method, the cost base will be the value at the time NZ tax residence begins. A formal valuation may be required to substantiate this. Review eligibility : Confirm that the taxpayer became fully tax resident in NZ on or after 1 April 2024 and that investments were acquired before residency (or pursuant to pre-residency arrangements). Coordinate with US tax advisors : Cross-border alignment is key. A coordinated strategy that considers both US and NZ tax consequences will reduce surprises and improve outcomes. Contact us to discuss how these changes could affect your US-NZ tax position. Disclaimer: The information provided in this article is general in nature and does not constitute personalised tax advice. You should consult with a qualified tax adviser familiar with both US and NZ tax systems before making any decisions based on this content.
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The Inland Revenue has recently released a new draft Interpretation Statement, PUB 0040: Income tax – overdrawn shareholder loan account balances . This statement is currently open for consultation until 2 August 2024. Family-owned small businesses often operate through close companies. Given the significant control shareholders have over these companies, it is common for them to withdraw company funds for personal use. These amounts are commonly transacted through the Shareholder Current Account. The issue is when these Shareholder Current Accounts become overdrawn. In practice, the reasoning behind an overdrawn Shareholder Current Account can often be the sale of a capital asset and the withdrawal of those funds by the shareholder (without declaring a dividend). Unfortunately, we also commonly see this when a company, or the shareholders, are struggling financially. In this context it is perhaps timely, given the struggles businesses have been going through, for the Inland Revenue to issue a reminder about the potential tax issues these overdrawn Shareholder Current Accounts can present. Understanding Shareholder Loan Accounts and Their Tax Implications Firstly, the Inland Revenue refers to a Shareholder Loan Account. In practice, this is often a Shareholder Current Account, thus I have used the terminology interchangeably. Shareholder Current Accounts are generally informal arrangements between close companies and their shareholders, documenting any advances made between the two. When a shareholder withdraws more money from the company than they have advanced, the account becomes overdrawn, leading to several potential tax issues. The following tax issues apply equally to a Shareholder Loan balance, where the shareholder owes the company funds. Tax Issues Arising from Overdrawn Shareholder Loan Accounts 1. Dividend Income: If a shareholder pays no or low interest on an overdrawn loan account, dividend income may arise. For this reason, the company will generally charge the shareholders interest on the overdrawn shareholder current account. 2. Fringe Benefit Tax (FBT): Shareholder-employees who pay no or low interest on their overdrawn accounts may face FBT liabilities. 3. Interest Income: Companies charging interest on overdrawn accounts generate interest income. This interest will be taxable income to the company and may be non-deductible to the shareholder (discussed further below). 4. Resident Withholding Tax (RWT): Companies can claim a tax credit for RWT withheld from interest payable. The credit is claimable in the year the interest is derived, provided the RWT has been paid to Inland Revenue. 5. Interest Deductibility: Interest paid by shareholders on overdrawn accounts is typically not deductible as it often funds private expenditure. However, if the borrowed money is used for income-earning activities or businesses, a deduction may be available, subject to documentation and general limitations. 6. Withholding and Reporting Requirements: Shareholders paying RWT may have obligations to deduct RWT on interest paid to the company on the balance of the current account (or loan). 7. Debt Forgiveness: If a shareholder is relieved of their obligation to repay an overdrawn loan balance, this typically results in taxable debt remission income for the shareholder. For this reason, the company cannot simply forgive the loan or overdrawn balance. Importantly, the company should never be wound up with the shareholders owing the company funds, as this could also trigger taxable debt remission income. Beyond the scope of the Interpretation Statement, there are additional potential tax issues to consider with Shareholder Current Accounts: 8. Salary: If the shareholder is taking regular drawings to meet their living costs, there is support for the Inland Revenue to reconstitute these drawings as taxable salary or personal services income in some circumstances. This is particularly where the company has not paid the shareholder a reasonable market salary or met the personal services or attribution rules. 9. Documentation: There is caselaw in which loan repayments have been reconstituted as taxable income to the shareholder, however those are extreme examples involving an absence of documentation. It is always important to document all loans to the company. Any transactions between the company and the shareholder should include clear narrations e.g. on the bank transfer. Take care in those narrations, if something is labelled “salary”, chances are the IRD would argue it should be taxed as such. Understanding these tax implications is crucial for both companies and shareholders to ensure compliance and optimize their tax positions. *This publication contains generic information only. NZ Tax Desk Ltd is not responsible for any loss sustained by anyone relying on the contents of this publication. We recommend you obtain specific taxation advice for your circumstances.
