Make a payment
Technical tax area Ngā tūmomo whakataunga me ngā aratohu

Fringe benefit tax

Sections DB 45, ND 1A, ND 1C, ND 1G, ND 1U, ND 1V and Schedule 2 of the Income Tax Act 2004

The amendments make some remedial changes to the fringe benefit tax (FBT) rules.


Significant changes were made to the FBT rules in early 2006, including the methods that an employer can use to value the fringe benefit arising from an employee's private use of an employer-provided motor vehicle. Some aspects of those changes have since required further clarification by way of remedial amendments to assist in the interpretation and application of the changes.

Key features

The main features of the remedial amendments are:

  • Clarification that, in general, motor vehicles leased before 1 April 2006 should be subsequently valued at cost.
  • Clarification as to how the tax value of a vehicle is calculated when it is acquired from an associated person.
  • Confirmation that a party to a 9-to-5 or flip-flop lease may be able to deduct any depreciation loss they incur in relation to the leased vehicle even when the vehicle is being used privately.
  • Clarification that the market value that can be used as the cost price for a re-leased vehicle is the market value at the time the vehicle is first leased or rented to the employer.
  • A change to the valuation provisions for subsidised transport to ensure that the extension of the scope of those provisions made in early 2006 works correctly.
  • The reference to "the date on which the vehicle ceases to be leased" has been revised to make it clear that it relates to all leases of the vehicle by the employer.
  • Out-of-date cross-referencing has been rectified.

Application date

The amendments apply to a person's liability for FBT for a period beginning on or after 1 April 2006, apart from the revised Schedule 2, Part A, clause 3 which applies from the date of assent, and the change to ND 1G which applies from the 2005–06 income year.

Detailed analysis

Motor vehicles

Vehicles leased before 1 april 2006

Before 1 April 2006, leased vehicles were valued for FBT purposes at their market value at the beginning of the lease. This method is no longer available. Instead, the intent was that, from 1 April 2006 (or from the income year beginning on or after 1 April 2006 if the employer returns FBT on an income year basis) these vehicles should be valued at cost. However, the legislation was not clear on this point. Similarly, it was also the intention that vehicles that had been subject to 9-to-5 and flip-flop leases before 1 April 2006 should also be valued at cost. Accordingly, amendments to section ND 1A now clarify that, as intended, one FBT treatment applies to vehicles on hand at 1 April 2006, irrespective of whether they are leased or owned by the employer, that treatment being that they must be valued at their cost price.

There are two exceptions from this requirement to use cost:

  • When the initial return period for the vehicle begins on or after 1 April 006 and the vehicle is not subject to a 9-to-5 or flip-flop lease. This exception enables, for example, an employer who has acquired a vehicle that was previously subject to a 9-to-5 or flip-flop lease to value it at its tax value.
  • When the vehicle is owned by the employer or associated person and a period of five years has elapsed since the beginning of the period of the employer's initial return for the vehicle.

New subsections ND 1A(1E) and ND 1A(1F) apply retrospectively for a person's liability for fringe benefit tax for a period beginning on or after 1 April 2006. Taxpayers who have taken a reasonable interpretation of the law as it stood at the time should not in this instance incur penalties should these new provisions result in a revision in their FBT liability for returns made before the law change was made. This does not, however, extend to use-of-money interest, which reflects the time value of the underpaid tax rather than being a penalty. Also, the Commissioner of Inland Revenue has very limited ability to waive interest.

The Commissioner can remit interest when it is consistent with the collection of the highest net revenue over time. In this regard, the Commissioner will need to consider each case on its own merits but, as a general rule, interest will be remitted when an Inland Revenue officer has given incorrect advice (for example, if the taxpayer has directly been given an incorrect date or amount for tax payment) or when the taxpayer has relied on incorrect information contained in an Inland Revenue publication. Retrospective legislative change would not, however, qualify as general grounds for a waiver.

Switching valuation methods when there is a series of leases

A further change to section ND 1A(1C) replaces the words "ceases to be leased" with "ceases to be leased by the employer or an associated person without a consecutive or successive lease of the vehicle by the employer or an associated person". This change has been made to verify that when a series of leases has been entered into, switching between valuation methods can be done only when the last lease has expired.

Deductibility of depreciation when FBT applies

Nine-to-five and flip-flop leases were brought within the ambit of the FBT rules as a result of the changes in early 2006 (see section CX 6B). As a result, a new section DB 45 was added to ensure that the owner of a vehicle that was subject to a 9-to-5 or flip-flop lease could claim a deduction for the full amount, not just the business portion, of any expenses they incurred in relation to that vehicle. There was some question as to whether this deduction extended to depreciation. The amended section DB 45 now clarifies this position by referring to both expenditure and depreciation loss.

Tax value calculation when associated parties involved

Amendments to clause 3 in Part A of Schedule 2 clarify how the tax value of a vehicle is to be calculated when it is acquired either directly or indirectly from an associated person.

Like section GC 16, which outlines what cost price to use for the cost price method when a vehicle is acquired from an associated person, the new provisions in respect of the tax value cover not only direct transactions between associated parties but also situations when there are a series of transactions and parties involved. This includes the interspersing of an unassociated person between two associated persons. However, the underlying approach is that:

  • When the associated person has either used the cost price method or has not used any method at all, the new owner will need to use the higher of their cost price for the vehicle and the cost price to the associated person as the basis for their tax value.
  • When the associated person has used the tax value method, then the new owner will need to use the higher of their cost price and the tax value of the associated person as the basis for calculating their tax value.

Market value to be calculated at time vehicle first leased

Clause 7 of Schedule enables an employer who leases a vehicle that has been previously leased to another party to use its market value as its cost price provided the employer and any previous lessee are not associated. An amendment to clause 7 confirms that the market value referred to in that item is the market value at the time the vehicle is first leased or rented to the employer.

Transport benefits

Transport benefits provided by transport operators to their staff are valued at specified rates. One of the changes included in last year's package of FBT changes was to allow any similar benefits provided by transport operators to employees of the same group of companies as the transport operator to be valued on the same basis. While a change was made to the definition of "subsidised transport" at that time, a change to the associated valuation provisions in section ND 1C(3) was overlooked. This has now been rectified.

Remedial cross-reference changes

Remedial changes to sections ND 1U and ND 1V have been made to ensure that these sections correctly crossreference to the relevant parts of Schedule 2. A change to section ND 1G also ensures that this section is correctly cross-referenced.