Having made the decision to provide a subsidised employee benefit programme (savings benefits and/or insurances), the next decision for an employer is, “what is the appropriate vehicle to deliver the benefits?”

If an employer superannuation or retirement subsidy is provided through a “workplace savings scheme under the Financial Markets Conducts Act 2013”, it is subject to employer superannuation contribution tax (ESCT).  If the same contribution is provided through a “superannuation fund”, it is subject to the Fringe Benefit Tax (FBT) regime.  Likewise, if the same amount is provided as “pay” for the individual to be able to invest directly themselves, it is subject to the standard PAYE tax regime.

The same regimes apply to insurances provided through a workplace savings scheme under the Finanacial Markets Conducts Act 2013 as part of the employer’s superannuation arrangements, or provided through a contract direct with the insurer (FBT).

While in many cases there will be reasons other than tax differences, and therefore cost considerations that will make one vehicle better than another, understanding the differences between the two tax regimes will assist the decision process.

Understanding FBT

When the FBT regime applies, the employer pays FBT on top of the value of the benefit. 

GST of 3/23rds of the value (13.04%) of the benefit is then added to the FBT tax, unless the benefit is exempt GST.  In most cases, premiums for life insurance policies or contributions to superannuation are exempt GST.  Medical insurance is subject to GST.

The rate of FBT depends on the value of the benefit provided and the current level of taxable income paid to the employee. The rates are set out in Table 1.  The rates apply from 1 April 2014. For benefits unallocated to specific employees, the general standard rate of 49.25% can also apply.

Table 1

Level of income plus the value of the benefit FBT rate (From 1April 2014)
0 to $14,000 11.73%
$14,001 to $48,000 21.21%
$48,001 to $70,000 42.86%
Above $70,001 49.25%
Note: GST may also be payable on the value of the benefit. 

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Understanding ESCT

When the ESCT regime applies, the employer pays ESCT, also on top of the value of the benefit to the employee.  Like FBT, the rate of ESCT depends on the level of taxable income paid to the employee and the value of the benefit, but is at a lower rate.  Also, the level of taxable income that applies is generally the income paid in the previous income year, not the current year.  The previous year’s calculation applies for all employees except those employees not employed for that full income year.  In this later case, it is the estimate of the current year’s income that applies.

Table 2

Level of relevant taxable income ESCT rate
If applied to gross benefit If applied to net benefit
$0 to $16,800 10.5% 11.73%
$16,801 to $57,600 17.5% 21.21%
$57,601 to $84,000 30% 42.86%
$84,001 plus 33% 49.25%
Note:
1. GST is not payable.
2. The “if applied to net benefit” percentages are comparable to the FBT rates.

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Comparing FBT with ESCT

On the surface, ESCT is less expensive because:

  • it is capped at 33% (equivalent to 49.25% for FBT);
  • it has bands that are slightly higher than FBT;
  • GST doesn’t apply.  Though for savings and insurance benefits, GST doesn’t apply on FBT either;
  • it benefits by timing in terms of the income definition.

To understand the magnitude of the differences, two examples may help.  

 

Example 1

An employee earns more than $70,000 and has done so for several years.  The employer wishes to provide a benefit (the cost of which is subject to GST) worth $5,000. The comparison is:

 
FBT
ESCT

Value of benefit

5,000

5,000

FBT/ESCT

@49.25% 2,463

@42.86% 2,143

GST

                 652

                    0

Total cost

8,115

7,143

Effective rate

62.3%

42.9%

 

Example 2

An employee earns $50,000 and has done so for several years.  The employer wishes to provide a benefit worth $2,000 (that is exempt GST). The comparison is:

 
FBT
ESCT
Value of benefit

2,000

2,000

FBT/ESCT

@42.86% 857

@21.21% 424

GST

                   0

                    0

Total cost

2,857

2,532

Effective rate

42.9%

21.21%

Notes:

    1. FBT at 42.86% applies, as the $50,000 income plus the $2,000 benefit (i.e. $52,000) is above $48,001. The total is what matters.
    2. ESCT at 21.21% applies as the relevant income level (i.e. $52,000) is between $16,800 and $57,600.
    3. If GST was payable the total FBT cost is $3,118 or 55.9% of the value of the benefit.

 

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Other issues

In addition to the cost issues associated with tax, other considerations include:

Administration:  The ESCT regime is generally easier to administer than the FBT regime in terms of records and calculations.  Also, if the benefit is part of an overall employee benefit programme, it can be administered as part of that programme and not separately. Because of KiwiSaver, employers must understand ESCT.

Relevant salary:  Because ESCT relates to the previous year’s taxable income, and not the current annual income level, for higher paid employees, in their first year of employment, the tax rate is lower.  For example a $100,000 a year employee employed with 3 months of the financial year to go, has a “relevant income” of $25,000 in the first year and an ESCT rate of 21.21% in that year.  The FBT rate is still 49.25%.

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Summarised differences

The differences in the two regimes can be summarised as:

 

FBT

ESCT

Value of benefit

Included as “income” in calculating FBT rate.

Included as “income” when calculating ESCT rate.

GST on value of benefit

Generally exempt for superannuation and life insurance.  Otherwise added to tax payable.

Not added to tax payable.

Income definition

Current year’s income.

Previous year’s income, except for new employees.

Maximum rate

49.25% i.e. 33% PAYE from $70,000

49.25% i.e. 33% PAYE from $84,000

 

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This article has been prepared based on our understanding of the FBT and ESCT tax regimes.  We are not tax experts.