Is the car being supplied to an employee?
FBT applies to an LTC if the car is being supplied to an employee.
What is an employee then?
An employee is someone employed by the company, with an employment contract - just like any other employee. However, a "working owner" is not viewed as an employee for FBT purposes (as per the Taxation (Annual Rates, Returns Filing and Remedial Matters) Bill 2011.
So, if I'm a working owner, the LTC can buy me a car and I don't pay FBT? Woohoo!
Yes, if a look-through owner is not an "employee" there will be no FBT liability. But! Note that the cost of providing the fringe benefit is viewed as a distribution of profit to that owner, to the extent of the private use element. The "private" costs will be non-deductible to the other owners.
Um, I'm not getting this. Can you give me an example?
Sure. John and Mary each have a 50% shareholding in an LTC, which owns a rental investment property. The LTC buys John a car for $10,000. John is not an "employee" of the LTC. The car is available to John 90% of the time for private use. The LTC then depreciates this capital asset, but makes an adjustment for the 90% private use. This drastically reduces the amount of depreciation it can claim.
John's car costs $4,000 a year to run. As 90% of these costs are private, the company can only claim $400 as tax-deductible expenses (10%). The other $3,600 is non-deductible.
So, let's say the LTC had taxable income of $40,000 and total expenses of $24,000, including the car costs. However, you now minus the $3,600 non-deductible costs of the car from the total expenses, leaving claimable expenses of $20,400. Thus, John's share of the net profits will be $19,600 divided by two ($9,800) plus his private use of the vehicle ($3,600), equaling $13,400 taxable income from the LTC for him, and $9,800 taxable income for Mary.
I'm still not sure I understand!
Don't panic. Feel free to drop us a line or give us a call on 0800 890 132.
For definitions, see ss HB 1, DC 3B, YA 1 paragraph (db) of the definition of “employee”, paragraph
(b)(iib) of the definition of “employer”, definition of “working owner” and definition of “contract
of employment”. NZICA Commentary to the Taxation (Annual Rates, Returns Filing, and Remedial
Matters) Bill 2011, p 100