Taxation

NEW ZEALAND TAXATION

SUGGESTED SOLUTIONS 2016

Chapter 21 Answers

[0001] Question 1

Solution

Prior to the introduction of the Fringe Benefit Tax (“FBT”) in 1985, the Government depended upon (the then) s 65(2)(b) of the ITA 1976 to tax employee benefits provided by employers. However, the effect of this general provision within the ITA 1976 was rendered nugatory by the court’s narrow interpretation of the term “allowances”. In addition, a 1982 report by the Task Force on Tax Reform (the “McCaw Report”) highlighted that non-taxed benefits were a significant factor in tax inequities (as illustrated in Example 21.1) and were encouraging the development of a tax avoidance climate in New Zealand. Taxpayers with high marginal tax rates benefited most from non-cash untaxed benefits.

Consequently in 1985, FBT was introduced to combat the provision of in-kind untaxed benefits in lieu of cash remuneration. This regime therefore ensures neutrality of tax treatment – that is irrespective of whether employees are remunerated in cash or in-kind, they are taxable.

[0002] Question 2

Solution

FBT is imposed on fringe benefits (usually non-cash) provided by an employer to an employee by virtue of the employment of the employee. Therefore, if a benefit is provided by someone other than an “employer” or if an employer who provides a benefit to an employee which is not in connection with their employment, no FBT is liable. An employer is a person who pays or is liable to pay a PAYE income payment (s YA 1 of the Income Tax Act 2007 (“ITA 2007”))).

The term “employer” is broadly defined for FBT purposes as it also includes non-cash benefits provided by past, present or future employers (ITA 2007, s CX 2(3)).

[0003] Question 3

Solution

Answers for the following scenarios are:

(a) False. The FBT rules also catch benefits provided to associates of an employee. Those within two degrees of relationship are associates (ITA 2007, s YA 4). Since the employee’s grandson...