Building and maintaining a clean FBT history is crucial for Compliance, and valuable in a business sale context.
Maintaining good FBT records is essential for IRD compliance, especially as the IRD increases its focus on FBT and motor vehicle use. Clear, accurate records on the private use of vehicles and employee benefits reduce the risk of audits, penalties or reassessments. Good compliance ensures you pay the right tax – avoiding underpayment penalties and interest.
For businesses preparing for sale, especially share sales, strong FBT practices protect value and give buyers confidence. Overall, good FBT management reflects financial discipline, strengthens your reputation with IRD and reduces the risk of costly surprises.
In a business sale, particularly a share sale where the buyer inherits the company’s history, a clean and consistent Fringe Benefit Tax (FBT) record is not just good practice – it’s a valuable asset. It signals robust financial management and minimises risks for potential buyers. While less direct in an asset sale, a poor FBT history can still negatively affect buyer confidence and valuation.
Key Reasons a Good FBT History Matters:
- Mitigating Buyer Risk in Share Sales: In a share sale, the buyer assumes all historical tax liabilities. Undisclosed or underpaid FBT on company vehicles with private use (utes, vans, cars taken home) or employee benefits (gym memberships, loans, gifts) directly impacts the buyer post-acquisition. If the IRD audits and finds FBT deficiencies, the buyer bears the financial burden. A clean FBT history eliminates this significant risk.
- Signalling Broader Compliance and Good Governance: Consistent FBT handling signals robust financial management and internal controls. Negligence or inconsistency in FBT often raises concerns about wider non-compliance in areas like PAYE, GST and income tax – suggesting potential poor governance and under-declared remuneration. A clean FBT record gives comfort about overall regulatory adherence.
- Enhancing Due Diligence Value: Buyers will scrutinise FBT records during due diligence, requesting returns and workings to assess the treatment of vehicles and benefits. Discrepancies between payroll and vehicle logs will be investigated. Well-maintained, accurate FBT documentation streamlines this process and may reduce demands for warranties or indemnities. Key due diligence areas include verifying FBT registration and filing history, reviewing vehicle lists and private use evidence (such as restriction letters and logbooks), examining other fringe benefits (gym memberships, gifts, loans, meals), confirming valuation and attribution methods comply with IRD guidelines and disclosing any past IRD engagement or disputes.
- ·voiding Post-Sale Disputes: Issues arising after the sale, such as IRD reassessments, can lead to disputes, warranty claims, purchase price holdbacks or even litigation if the buyer believes there were inadequate disclosures. A clean FBT record minimises these risks for the seller.
- Considerations in Asset Sales: Although tax liabilities do not directly transfer in an asset sale, a poor FBT history can still impact the business valuation (suggesting weak payroll or benefit controls) and reduce buyer confidence in staff or asset use disclosures. It might also complicate staff transfers if benefit treatments are unclear or changing post-sale.
In summary, a diligent approach to FBT is not just about tax compliance, it’s a crucial aspect of demonstrating a well-managed, transparent and low-risk business – especially when selling shares. It directly influences buyer confidence, streamlines due diligence and reduces the potential for post-sale complications and financial repercussions.
Disclaimer – While all care has been taken, Johnston Associates Chartered Accountants Ltd and its staff accept no liability for the content of this article; always see your professional advisor before taking any action that you are unsure about.
JOHNSTON ASSOCIATES, Level 1, One Jervois Road, Ponsonby, T: 09 361 6701, www.johnstonassociates.co.nz
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