Inland Revenue put a cat amongst the pigeons in April this year when it released its view on open versus closed loop gift cards. Prior to this date, employers giving gift cards to employees generally treated these as subject to FBT. But Inland Revenue’s view was that this was not always correct.
Andrea Scatchard
If “open loop” cards, which are prepaid cards that are able to be used at any retailer, are given to employees, Inland Revenue’s view is that these are so close to being money that PAYE should apply not FBT.
While the core tax should be the same whether PAYE or FBT is paid, taxing such benefits via PAYE means increased compliance costs for the employer who must record these through the payroll system.
The need to gross up the face value of the card means additional real costs for the employer in the form of amounts determined by gross income such as KiwiSaver contributions and student loan deductions.
The logical reaction from many employers was to move to providing “closed loop” cards instead to ensure the benefit continued to be taxed under the FBT rules. However, this removed some flexibility from the process of providing benefits to employees.
So, employers will be pleased to know that the Taxation (Annual Rates for 2025−26, Compliance Simplification, and Remedial Measures) Bill, introduced to Parliament in August this year, proposes to put an end to the mindlessness of needing to understand whether a gift card is an open loop or closed loop card.
The proposal allows employers to pay FBT on all gift cards, unless they choose to pay PAYE instead. The one exclusion is that gift card benefits that are effectively a substitute for remuneration must continue to be taxed via PAYE.
The change will be backdated to 16 April 2025, the date of the previous IR statement. While this can’t be relied on until the Bill is actually passed, likely in March next year, Inland Revenue has brought some sense to the intervening period with a change in approach for open loop cards.
It has announced that provided FBT has been paid on open loop cards from 16 April 2025, it will not review the treatment and require PAYE to be paid.
There are some other compliance friendly employment tax related changes in the Bill, including one that in many scenarios will allow an employer the flexibility to pay either FBT or PAYE on cash reimbursement for amounts that would have been unclassified benefits if the benefit had been provided directly by the employer to the employee.
As usual, contact your usual tax advisor for more detailed information and tailored advice.
- Andrea Scatchard is a Tax Partner at Deloitte, based in the Bay of Plenty. She can be contacted on ascatchard@deloitte.co.nz
Gift cards
