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Technical tax area Ngā tūmomo whakataunga me ngā aratohu

GST on fringe benefits

Section 10 of the Goods and Services Tax Act 1985

A change to section 10(7) of the Goods and Services Tax Act 1985 extends the circumstances in which fringe benefits are not subject to GST. The change means that GST will not apply to fringe benefits if the GST-registered person providing the benefit is unable to deduct GST when the benefit is acquired. The purpose of the change is to remove the possibility of GST being imposed twice on the supply of certain fringe benefits.

Background

Fringe benefits are generally subject to GST because the employer is considered to be making a supply of goods and services to the employee. GST, being a tax on final consumption in New Zealand, must be charged on fringe benefits unless the benefit is an exempt or zero-rated supply, or the employer's activity is that of making exempt supplies. The GST treatment of fringe benefits assumes that the GST-registered person can deduct any GST paid.

An example is when gift vouchers are given to employees as a fringe benefit.

The rules relating to vouchers may prevent GSTregistered employers from deducting input tax if the initial supply by the issuer of the gift vouchers to the employer is disregarded. Instead, GST may be accounted for when the vouchers are redeemed for goods and services. Because GST is not charged by the issuer of the vouchers, the GST-registered employer cannot deduct GST when the vouchers are purchased. Section 21I(1) requires tax to be charged when the employer provides the vouchers to an employee. Before the rule change, GST could arguably be charged twice – once when the GST-registered employer provides the vouchers as a fringe benefit and again when the voucher is redeemed.

The rule change now treats the fringe benefit as having a nil value to address the fact that the GST-registered employer is unable to deduct input tax in connection with purchasing the vouchers. GST will still be imposed when the vouchers are redeemed for goods and services.

Key features

Section 10(7) has been amended to treat the supply of fringe benefits as having a nil value when a GST-registered employer is unable to deduct input tax in connection with purchasing the fringe benefit.

Application date

The change applies to fringe benefits provided on and after 18 December 2006.