Submissions close on 5 May 2025 and we expect that final proposals will make their way into this year’s annual taxing bill with implementation from 1 April 2026. Here, we cover the key proposals, including a significant change to the treatment of entertainment expenses, and provide our comments.

Introduction and background

FBT has just turned 40 and has been going through something resembling a mid-life crisis. The FBT regulatory stewardship review undertaken in 2022 indicated that FBT is seen as complex, creating a high administrative and compliance burden, and goes too far with its intention to be an anti-avoidance mechanism. The proposals aim to realign FBT with its original policy intent, reduce compliance costs and make the system fairer. 

Motor vehicles

Some of the most significant proposals relate to motor vehicles. The weight component used for defining a car for FBT purposes would increase from the current 3,500 kilograms to at least 4,500 kilograms, given the weight of electric cars and passenger vehicles is generally higher than when the rules were introduced. Vehicles that are inherently used for emergency purposes (for instance, police cars and ambulances) would be exempt from FBT instead of being subject to the current rules around emergency vehicles. 

The option to use tax book value for valuing vehicles would be removed, and new taxable fringe benefit rates based on fuel type (that is, internal combustion engine, hybrid and electric) would be introduced. The proposal is to review these rates every four years. 

Three categories of vehicle use would be introduced. Perk vehicles would be subject to full FBT and based on full availability for private use. Tool-of-trade vehicles would be subject to FBT at 35% of the full value and based on limited availability for private use, primarily focused on travel from work to home, where home is not a workplace. Business-use-only vehicles would not be subject to FBT and would be based on no availability for private use, consistent with the present rules. Exceptions would be available for incidental travel to ensure one-off non-remunerative use of a vehicle is ignored for FBT purposes, for example, an employee borrowing a company van for the weekend while they move house.

In addition, shareholder employees would only be permitted to have tool-of-trade and business-use-only vehicles where the value is less than $80,000. This would mean that while the likes of Corollas and Mitsubishi L300s would be available to shareholder employees as tool-of-trade or business-use-only vehicles, executive motor vehicles provided to shareholder employees would be subject to full FBT regardless of the rules imposed by the company.

Unclassified benefits

At present, unclassified benefits are exempt from FBT provided the benefits do not exceed $300 per employee per quarter and do not exceed an annual total of $22,500 for the business and its associates. The proposals would scrap these thresholds and instead treat all benefits under $200 and not in lieu of remuneration as exempt from FBT, or provide a list of non-remunerative benefits.

Either option should mean FBT exemption for flowers given to an employee in congratulations or sympathy, or a gift voucher given as an acknowledgement of an employee working overtime, but gym memberships would continue to be subject to FBT.

Should the de minimis exemption be adopted, connected benefits would be grouped together (for example, a Christmas basket containing a ham, bottle of wine and a gift voucher would be connected). 

Entertainment

The current 50% entertainment limitation would be scrapped and instead entertainment expenditure would be subject to the modified FBT rules. Several options are being explored, being:

1. Application of a de minimis, whether the existing rule or the new rules proposed.
2. Not applying the standard de minimis but making food and beverages exempt unless they are incurred at a party, social function or celebration.

If a de minimis were applicable, expenditure incurred below set limits would be fully deductible and not subject to FBT. For example, if the unclassified benefit of $200 per person de minimis is adopted, then Friday night drinks would likely be fully deductible and exempt from FBT, whereas a Christmas function with expenditure above the de minimis would be fully deductible, but subject to FBT with potential compliance issues.

Most of the current entertainment exemptions would no longer be required, with retention applying only to promotion of the business and its products, entertainment as a business, entertainment for charitable purposes and entertainment outside New Zealand.

Other changes

Other proposed changes include:

• Points accrual schemes: Points accrued in employer-arranged schemes would be deemed as remuneration and taxed accordingly.
• On-premises exemption: Retains the exemption for benefits provided on the employer’s premises.
• Subsidised transport: Change the valuation from the highest fare to the average fare for the month.
• Market value for employer-provided benefits: Benefits provided at no cost to the employer would be valued at market value.
• Stored value cards: Treat open- and closed-loop gift or pre-paid cards as subject to FBT, not PAYE.
• Global insurance schemes: Mandate a treatment for calculating FBT on global insurance policies.
• Detailed reporting: Require future FBT returns to include a breakdown into categories and sub-categories of fringe benefits.
• Electronic filing: Allow taxpayers to file FBT returns directly through software.
• Income tax declaration: Require taxpayers to declare compliance with FBT obligations in their income tax return.

Comment

We are concerned that far from modernising and making FBT simpler, the proposals will make FBT more complex and, by removal of the entertainment deduction limitation, bring many more businesses into the FBT net. 

Some of the proposals will also require a degree of judgement – for instance, what would count as “one-off non-remunerative use of a vehicle”? We find from experience that motor vehicles are among the least troublesome benefits provided, with concerns being less about accounting for FBT and more about providing an attractive remuneration package to employees, with a car as a useful work tool. Given this, we consider that only minimal change is necessary and the introduction of the “Tool of Trade” option would go some way to addressing the blunt impact of the “all or nothing” approach taken by the present rules, which is the main cause of gripes.

We welcome the proposal to change the de minimis threshold rules. This is clearly designed to ensure that employers are not penalised for kind acts, such as providing hospitalised employees with a bunch of flowers or rewarding an employee with a voucher for going above and beyond. On the other hand, this rule also ensures integrity by ensuring more substantial perks, such as gym memberships, are still subject to FBT.

We are concerned about the proposals to remove the entertainment limitation and instead treat entertainment as subject to FBT. This again has the risk of increasing compliance costs as businesses that don’t provide employee benefits often engage in activities such as team-building, which might result in significant compliance costs, especially if the de minimis threshold is applicable and is above this level. This might mean such a business would need to register and account for FBT on its once-a-year team-building or tighten up the scope of team-building with negative effects on employee morale.

We are also concerned about the requirements for detailed reporting, as this again would result in an increase in compliance costs – subject to how detailed the reporting would need to be.

As indicated earlier, it is likely these proposals, subject to any proposed amendments, will form part of this year’s annual tax bill, with implementation from 1 April 2026. Given the impact FBT has on the small-medium business market in New Zealand, we will be submitting on these proposals and will be keen to hear your views. In addition, if you want to submit on the proposals and would like to discuss further, please contact your Baker Tilly Staples Rodway advisor.