BYD's plug-in hybrid Shark 6 was one of many utes on show at Fieldays. Photo / NZME
The Government’s new Investment Boost scheme has provided an incentive for businesses to buy a dual-cab ute, just as a new wave of plug-in hybrid models are tempting buyers.
But some fear possible changes to the Fringe Benefit Tax (FBT) rules will undercut the gains.
Announced in the May Budget, the Investment Boost scheme means if a business buys a new (or new to New Zealand) vehicle, or other productive business asset, it can claim a tax deduction of 20% in the year of purchase.
And that’s on top of existing depreciation options – meaning a $100,000 vehicle would have a year-one book value of $63,200 (with straight-line depreciation) or $56,000 (with the diminishing value method).
A vehicle is still depreciated over five years, but the option to immediately deduct 20% of a business item from taxable income means a lower tax bill in the first year of ownership.
But the tax incentive comes as the Inland Revenue Department (IRD) is weighing up changes to the FBT – the levy designed to prevent perks being used to bolster an employee’s remuneration, at least in an untaxed form.
In April, Inland Revenue released an FBT consultation paper which suggested a shift from days-of-availability to use-of-vehicle definitions – divided into three categories:
– Category 1: a work vehicle that an employee is allowed to use for unrestricted private use. This would be subject to FBT on 100% of its taxable value.
– Category 2: a vehicle used predominantly for work use but with some “restricted personal use” allowed. Subject to FBT on 35% of its taxable value.
– Category 3: a vehicle that’s always used for work, which attracts no FBT. A current requirement for signage would be eased.
The FBT changes are designed to simplify, not bring in more tax revenue.
Yet many business owners with company vehicles – used for both work and personal reasons – have never paid FBT, thanks to a pervasive myth that utes are exempt.
The changes could see many paying the 49.25% to 63.93% levy for the first time.
Fieldays saw Christchurch electric vehicle (EV) charger Evnex – teaming with Ford – spruiking the Government’s new Investment Boost scheme, introduced May 22.
For Evnex chief executive Ed Harvey, it was a lure for punters to buy one of the new generation plug-in hybrid utes on show at Mystery Creek from Ford, BYD and others (check out Driven’s round-up here) and one of his company’s employee-at-home or workplace smart chargers.
Unlike another scheme in Harvey’s low-emission universe, the $8625 Clean Car Discount (RIP from January 1, 2024) – which was subject to an $80,000 ceiling – Investment Boost is uncapped and can be applied to almost any business asset.
Deloitte tax partner Robyn Walker said a media report about a “tax grenade” had been incorrect when it stated that $21,060 in FBT would be paid on a $70,000 ute.
There were two key steps, Walker said, using the example of an $80,000 vehicle.
The first was the taxable value of the vehicle, which was calculated by the cost of the vehicle multiplied by a percentage based on its fuel type – which, in a new development, is now broken out into petrol/diesel (26% – for a taxable value of $20,800 in our $80,000 vehicle example), hybrid (22% – for a taxable value of $17,920) and EV (19% – for a taxable value of $15,360) options.
Fringe Benefit Tax is then applied to that taxable value. The FBT rate depends on the employee’s income. The most common rate – 49.25% – is applicable for remuneration of between $78,100 and $180,000. Over $180,000, a 63.93% rate applies.
The amount of fringe benefit tax paid would range from $2647.68 for a Category 2 EV to $10,244 for a petrol or diesel-powered Category 1 vehicle.
Federated Farmers said the proposed FBT changes – which it dubbed Ute Tax 2.0 – would “cost every farmer thousands of dollars each year” as it added to their annual tax bills.
Inland Revenue said its proposals were not about increasing the Crown revenue from FBT or extending the tax net.
“Some people might pay a little more, others might pay less so the proposals are broadly fiscally neutral,” the agency said in a Q&A released with its policy proposal document.
And deputy Inland Revenue commissioner David Carrigan added yesterday: “The idea is to simplify FBT, not create additional obligations. If a business – including a farm – is not currently liable for FBT on a vehicle then it’s unlikely they would become liable for FBT under any proposals taken forward."
The proposed changes remove a bias toward purchasing utes and open up the 0% FBT category to other vehicles such as small cars and EVs, Walker said.
“The proposed changes to vehicles are designed to significantly reduce compliance costs that employers face in tracing cars,” she said.
An employer would no longer have to track every instance of non-work vehicle use.
She quoted an example from an IRD Q&A, where a farm employee, “Sue”, would attract Fringe Benefit Tax today for her use of a work vehicle for incidental personal shopping during trips to town and “hunting on rare occasions”.
Under the IRD’s proposed changes such incidental (rather than regular) private use would not attract any FBT.
The IRD’s Q&A also uses the example of “Steve”, an employee of the fictional Dan’s Doors who drives a double-cab ute provided by his employer, Dan.
He uses it most days to take his kids to school, and most weekends to take his boat to the marina. Dan’s Door’s pays no FBT because Dan has incorrectly been told by a friend that Fringe Benefits Tax does not apply to utes.
Under the current set-up, Dan’s Doors would have to pay FBT on the days Steve uses the ute for personal use. Under the proposed changes, Dan would have to pay full (Category 1) FBT because of the regular nature of Steve’s personal use.
But here’s the rub: the change of methodology, which will include a requirement for businesses to supply more information, could see some businesses paying FBT for the first time.
Walker said the genesis of the proposed changes was an IRD “stewardship review” of FBT, released in 2022.
“This review essentially concluded that a lack of compliance with the existing laws – and lack of compliance by Inland Revenue – had the potential to erode the integrity of the tax system.
“Essentially, if taxpayers think it is okay to not comply with FBT rules, they’ll also start not complying with other tax laws.”
The IRD had collected anecdotal evidence that many were not paying FBT.
“One of the major areas of concern was the taxation of vehicles. In particular, there has been a long-held, incorrect view that utes are completely exempt from FBT. This has never been the case,” Walker said.
Following early media coverage, and some social media scrapping, Inland Revenue’s Carrigan released a statement saying “it’s a myth that utes have always been FBT-free”.
Federated Farmers highlighted that any vehicle priced above $80,000 would be automatically Category One and pay 100% FBT under the IRD’s proposed changes, with no chance of a Category Two or Category One exemption.
Walker said this was correct, but countered that “most utes cost well under $80,000″.
Some social media discussions had held that a vehicle could cost below that mark, but easily trip over the threshold as bull bars and other farming accessories were added.
Not according to Walker.
“There is a false narrative that if a ute is purchased and it is fitted with work-related gadgets that increase the total cost to above $80,000 that the vehicle is automatically subject to full FBT. This is incorrect,” the Deloitte partner said.
The IRD backed her account.
“This proposed rule is designed to prevent shareholder employees from trying to manipulate how a vehicle is used to have ‘luxury’ vehicles exempted from tax,” Walker said.
“Farmers and utes were never a target of this proposal,” Walker said.
“For close-companies [a business with five or fewer employees], which most farms may fall into, there has always been an option to follow other rules rather than pay FBT on vehicle use if this is the only benefit being provided. An option exists to allow businesses to only claim tax deductions to the extent a vehicle is used for business purposes – this option remains under the proposals."
On Herald NOW, Angela Hodges, a director of tax advisory firm NZ Tax Desk, said many would be paying “thousands more”.
If a fleet vehicle was available for private use on the weekends, as many were, it would almost certainly fall into Category One – as opposed to the current regime, where FBT would only be paid for the two days a week of personal use.
That was not disputed by Inland Revenue.
But the agency emphasised that the FBT changes are a work in progress and subject to change before it sends its advice – after digesting submissions received during April and May – to Finance Minister Nicola Willis and Revenue Minister Simon Watts.
A source inside the IRD told the Herald that changes were probable.
Walker said she expected tweaks. There had been many submissions around the use of private vehicles on the weekend, which was one area where modifications were possible.
The ministers will discuss the final suggested IRD proposals with Cabinet. FBT changes could then potentially be included in a tax bill scheduled for August, with provisions that would come into effect from April 1, 2026.
It will be up to the ministers whether they make the IRD’s final advice public before the legislation is drafted.
As with any bill, the tax changes will also be subject to submissions and possible changes as they go through the select committee process. In short, the bunfight will continue for months before the shape of the new FBT is finalised.
Chris Keall is an Auckland-based member of the Herald’s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.
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