FBT and Company Cars

We regularly get questions from clients about the FBT impact of a company car and we thought it would be helpful to provide you with a few comments regarding this complicated topic.

Company car

Any car available for the private use and enjoyment of an employee or one of their relatives or associated persons is subject to Fringe Benefit Tax. So, if the company buys a car and makes it available to a shareholder who is also an employee of a company, a Fringe Benefit Tax liability arises. It is calculated based on the cost of the car, and sometimes the depreciated book value of the car. A low cost car generates a low tax.

Therefore, it makes no difference how much the car is used. The tax is the same whether the car travels 3000 km a year or 30,000 km per year. The more the car is used privately, the better deal you get.

If a company owns a car, which is available for the private use of an employee, Fringe Benefit Tax (FBT) is payable. The term employee includes you, if you are a working shareholder. Note the use of the word “available”. The vehicle does not have to be used privately for you to incur the tax.

The tax is calculated on 20 per cent of the original cost of the vehicle (including GST) or 36 per cent of the depreciated book value. If you or an associated person/close relative have owned the car within the last two years and it is sold to the company at its current market value, the original amount the vehicle cost you or the associated person/close relative is still used for the FBT calculation. This is to stop people transferring ownership of their private car to their company at today’s value to reduce this tax.

The cost of a vehicle for FBT purposes includes the following (all figures are GST inclusive):

• Purchase price of vehicle.

• Initial registration and licence plates.

• Accessories, components and equipment (other than business accessories) fitted to the vehicle.

• Sign writing.

• Painting the vehicle in company colours.

• Cost of transporting vehicle to place where it will be first used.

Cost does not include the annual vehicle re-licensing fee.

How do you minimise FBT?

The vehicle is a car, so the law assumes taking it home is private use. If you run your business from your home then you could argue you are garaging it at the company’s premises. You are not really taking it home. Now you have to prove, to IRD’s satisfaction, this is true. You can assist with this by getting another director/officer of the company to write a letter to you telling you, you cannot use the car privately. If there is only one officer of the company you will need to write the letter to yourself. As this doesn’t look good, you could consider getting your accountant to write the letter. IRD has set out the letter for you in its FBT booklet. Then you must go and check on your fellow director/yourself at least once a quarter to see they/you are not using the vehicle privately. Go out your front door, look in your carport or garage and then go back into your house and make a written note you have checked and ensured your vehicle is not available to be used for private purposes.

Nonsense? You may think so, but this procedure may satisfy the IRD.

If you want to use the car say at weekends, you can give yourself written permission to do so and pay two-sevenths of the FBT. Similarly, you can apply to the fellow officer or yourself to use the car for your holiday and pay the FBT. IRD does not like you picking odd days here and there. For example, you choose either all weekends or none.

The law assumes we all need cars. If you say you will not use the car for private running, you had better have access to another vehicle. No one will believe you remain a hermit until the weekend!

Some people as an alternative to paying FBT pay their company for the value of the benefit, which we usually attend to by means of a book entry when preparing the company accounts.

There are other options. You can own the car yourself and charge your company mileage at IRD specified rates or you can use the AA rates, which are usually a better choice. An overall 5000 km limit can apply to mileage rates. Consult us for details.

Generally, FBT is not such a bad tax. It often works out to favour the taxpayer. The best deal is a low-cost car used for plenty of private running.