Exemptions from paying Fringe Benefit Tax for double cab utes could clash with the Government’s intentions to cut transport emissions, Marc Daalder reports
New Zealand’s favourite cars – double cab utes – are largely exempt from a tax on employer-provided benefits like company cars. Even when they would be subject to the Fringe Benefit Tax, the fee is rarely paid, tax policy experts say.
This means New Zealand is effectively subsidising the purchase of high-emitting passenger vehicles by companies, even after the Government scrapped a plan to exempt electric vehicles from the same tax. Now, environmental advocates are calling for the Government to reconsider an FBT exemption for the purchase of electric vehicles and the provision of public transport services.
“I think most New Zealanders would agree that the Government should discourage pollution and support solutions. Subsidising some of the most polluting cars on the market through the Fringe Benefit Tax is completely the wrong way around,” Greenpeace New Zealand’s Amanda Larsson told Newsroom.
What is the Fringe Benefit Tax?
Providing benefits for an employee, like the use of a company car or carpark, resembles another form of salary, according to IRD. In order to tax this, the Government uses the Fringe Benefit Tax, which is paid by employers on any fringe benefit (usually the provision of motor vehicles, discounts on goods or services, low-interest loans and contributions to non-Kiwisaver retirement schemes).
Employers must pay FBT on all company vehicles that are used outside the direct facilitation of work duties. That generally means that employees cannot take a company vehicle home without triggering FBT, even if it’s to make sure the vehicle is stored safely at night or the employee is stopping somewhere work-related on their way home.
However, recognising that some company vehicles, like a van, have little feasible personal use, IRD allows employees to drive these home and use them for emergency work-related calls, with a couple of conditions. First, the vehicle must not be primarily designed or intended to carry passengers. Second, company branding must be prominently and permanently affixed. Third, if the vehicle is used privately in ways other than driving home or for emergency calls, then FBT must be paid for that day.
How utes are exempted
IRD has decided that most double cab utes satisfy the requirement that the vehicle was not primarily designed or intended to carry passengers. Therefore, companies are incentivised to purchase utes as employee vehicles, even if another type of vehicle would suit the work better.
Moreover, although the requirement that FBT be paid when the employee uses the vehicle privately – to tow their boat out to the lake over the weekend, for example – this is rarely enforced, tax experts say.
“We suspect there is a large amount of non-compliance in the area,” Terry Baucher, a long-time tax consultant and expert on tax policy, told Newsroom. Baucher cites the case of a tax conference in the South Island at which a participant told Revenue Minister Stuart Nash: “Welcome to the South Island, where we don’t pay FBT on company vehicles.”
Baucher also points to the significant number of work-related vehicles reported to IRD and says the amount of FBT gathered by the Government doesn’t reflect this. “If you look at the level of FBT that’s being paid, it hasn’t been rising at the same rate as the other taxes. That points to me that something isn’t being dealt with,” he said.
In a statement, an IRD spokesperson told Newsroom, “as part of a wider investigation or audit, Inland Revenue regularly reviews whether fringe benefit tax rules are being complied with, for vehicles in general. But we don’t break that down to work-related vehicles specifically, or indeed to look specifically at double-cabbed utes.”
Utes prevalent on roads as transport emissions rise
This means companies would rather put salary money – which would be taxed by the Government and have Kiwisaver deducted from it – towards FBT-exempted company vehicles that will be privately used by employees with no repercussions, and many employees are happy to take the ute over a pay rise.
This is part of the reason that utes make some of New Zealand’s most popular vehicles. In 2019, five of the top eight models sold new in New Zealand were double cab utes. The Ford Ranger and Toyota Hilux were the top two models in the country, selling 16,611 vehicles between the two and making up almost 11 percent of all new vehicles sold in the country.
Utes made up more than 22 percent of the 154,479 motor vehicles sold new in New Zealand last year. More than 65 percent of all commercial-style vehicles sold new in the country last year were double cab utes.
Meanwhile, for the same period, just 1,881 electric vehicles were sold new – 1.2 percent of the total.
At the same time, New Zealand’s transport emissions are skyrocketing. In 2017, they represented almost a fifth of New Zealand’s total emissions and had risen by two million tonnes over the previous three years.
Government ditched EV subsidy
At the same time as the Government is, perhaps unintentionally, subsidising the purchase of high-emitting double cab utes, it has scrapped a plan to subsidise the purchase of electric vehicles via the same measures. Documents released to Newsroom under the Official Information Act show that the Government considered in late 2018 and early 2019 a proposal to exempt electric vehicles from paying FBT.
A tax policy report drafted by the Treasury and sent to Revenue Minister Stuart Nash noted that “one possible reason to target a tax concession only at companies is if the Government’s goal is to encourage more brand new EVs into the fleet. Companies typically purchase new vehicles and new EVs may have better range and safety features than used EVs.”
Since companies purchase about 28 percent of new imports into New Zealand and tend to retain them for about three years, this could help filter electric vehicles into New Zealand’s used car market without diverting used imports from the private market.
However, in the end, the Treasury report concluded: “if the Government wished to accelerate the growth of EVs in the New Zealand fleet, in order to reduce greenhouse gas emissions, we note that an FBT exemption is quite narrowly focused. For example, an FBT exemption would not encourage EV purchases by: individuals; companies that mainly purchase vehicles for business use, eg car rental companies; or companies where employees prefer, for lifestyle reasons, an [internal combustion engine] vehicle, or salary and wages over a company provided EV.”
Calls for green FBT exemptions
Greenpeace’s Larsson disagrees. “It’s common sense to support people to make more climate-friendly choices. I think many people would get behind the idea of extending the Fringe Benefit Tax [exemption] to electric vehicles at the same time as removing subsidies for heavily polluting cars,” she said.
Tax experts have also backed this call for climate-friendly FBT exemptions. However, they have spoken more cautiously on the idea of an FBT exemption for electric vehicles.
“In the UK, the FBT rules do tax more heavily higher emitters. There’s something to be said for greener FBT policy,” Baucher said.
Baucher commended the specific idea of an FBT exemption for electric vehicles as “an incentive to do something positive.” However, he said he thought emissions could be cut more quickly by incentivising owners of high-emitting, decades-old vehicles to scrap their car in favour of a newer, more fuel efficient fossil fuel car.
Public transport a particular area of opportunity
Tax policy specialist Jim Gordon noted that the Tax Working Group called for the Government to introduce an FBT exemption on public transport.
“The single best thing that Government could do would be to allow employers to subsidise public transport, free of FBT,” Gordon told Newsroom. “Electric vehicles, I am very 50-50 on. If Government want to subsidise electric vehicles, then they should do so directly. Why should an electric vehicle only be subsidised if its subject to FBT?”
However, public transport exemptions could make a big difference, Gordon thinks. While this could lead to employers purchasing public transport vouchers for their employees instead of company cars, “it’s a wider idea than that. It’s an employer encouraging their employee not to bring their vehicles in, whether it’s their vehicle or an employer-provided vehicle.”
“There’s a heck of a lot of people who own their own cars and bring them into town, with no employer subsidy involved. They might be encouraged to get out of those cars if the employer started providing public transport tickets,” Gordon said.