The way Fringe Benefit Tax (FBT) applies to work vehicles is set to change from 1 April 2027. Instead of counting the days a vehicle is available for private use, businesses will choose from six categories based on how the vehicle is used, each with a set rate.
The changes were first announced in Budget 2026 and are now part of the Taxation (Annual Rates for 2026–27, FBT Simplification, Foreign Investment Funds, and Remedial Measures) Bill, which was introduced to Parliament on 10 September 2026.
Here’s a summary of the proposed changes and what they could mean for your business.
What Is Changing?
Under the proposed rules:
- Day counting is removed. Employers will generally no longer need to count the days a vehicle is available for private use or maintain detailed logbooks.
- A “close enough is good enough” approach applies. You choose a category when the vehicle is allocated to an employee, based on a reasonable assessment of how it will be used. You only need to revisit it if the pattern of use changes materially.
- Incidental use is ignored. Infrequent or one-off private use, such as an employee borrowing a work van one weekend to move house, does not affect the category and is not subject to FBT.
- The work-related vehicle exemption is removed. These vehicles will fall into one of the new categories instead. Emergency service vehicles will have their own exemption.
- Both valuation methods remain. The cost price and tax book value methods both stay, with new lower rates for hybrid and electric vehicles.
The Six Vehicle Categories
Each category has an inclusion rate, which is the share of the vehicle’s value that FBT is calculated on.
| Category | How the vehicle is used | Branding | Inclusion rate |
|---|---|---|---|
| 1 – Mainly private use (default) | Unrestricted private use, such as a “perk” vehicle that’s part of a pay package. Also the default if a vehicle doesn’t clearly fit categories 2 to 6 | Not required | 100% |
| 2 – Mainly business use with partial private use | Private use on rostered days off, public holidays and statutory leave, plus travel between home and work | Required | 35% |
| 3 – Mainly business use on farmland | Supports farming on farmland, private use when not working. Owned or leased by a farming employer and used by a shareholder-employee or trust beneficiary | Not required | 35% |
| 4 – Mainly business use with minor private use | Only private use is travel between home and a single workplace | Required | 20% |
| 5 – Business use | Only private use is travel between home and work, where the work spans multiple sites or is a limited-duration project | Required | 0% |
| 6 – Pool car with no private use | Business use only, not allocated to any one employee | Not required | 0% |
Vehicles purchased or leased before 10 September 2026 do not need to meet the branding requirement.
Valuation Rates
There are two ways of working out the vehicle’s value for FBT, and the difference is which starting figure the percentage is applied to.
- Cost price: the rate is applied to what the vehicle originally cost, including GST. That figure never changes, so the FBT value stays the same every year you own the vehicle.
- Tax book value: the rate is applied to the vehicle’s depreciated value, meaning its cost less the depreciation claimed so far. That figure falls each year, so the FBT value falls with it.
The tax book value rate is much higher (41.4% against 20% for a standard vehicle) because it is usually applied to a smaller number. In broad terms, cost price is simpler and often gives a lower figure when a vehicle is new, while tax book value tends to work out lower for older vehicles that have been heavily depreciated.
The proposed cost price rates are:
| Vehicle type | Annual | Quarterly |
|---|---|---|
| Standard (petrol/diesel) | 20% | 5% |
| Hybrid | 19.6% | 4.9% |
| Electric | 17% | 4.25% |
The proposed tax book value rates are:
| Vehicle type | Annual | Quarterly |
|---|---|---|
| Standard (petrol/diesel) | 41.4% | 10.35% |
| Hybrid | 40.52% | 10.13% |
| Electric | 35% | 8.75% |
These rates assume Investment Boost has been claimed for the vehicle. Other rates apply if it has not.
Here is a $60,000 standard vehicle compared year by year, using the rates of 20% (cost price) and 41.4% (tax book value).
| Year | Value the rate applies to | Tax book value method (× 41.4%) | Cost price method ($60,000 × 20%) |
|---|---|---|---|
| Year 1 | $60,000 | $24,840 | $12,000 |
| Year 2 | $33,600 | $13,910 | $12,000 |
| Year 3 | $23,520 | $9,737 | $12,000 |
| Year 4 | $16,464 | $6,816 | $12,000 |
| Year 5 | $11,525 | $4,771 | $12,000 |
On these numbers, cost price gives the lower value for the first two years and tax book value is lower from year 3. Over the five years the totals are almost the same: $60,075 under tax book value and $60,000 under cost price.
Investment boost note: In the year a vehicle is bought, the tax book value method uses its cost price. From year 2 it uses the cost less Investment Boost (20%, or $12,000 here) and the depreciation claimed so far.
FBT Value Calculator
Enter your vehicle’s details below to see what the taxable value would look like under each valuation method.
Enter the vehicle cost price to see the yearly figures.
This calculator is a guide only and uses the proposed annual rates, which may change before becoming law. It shows the value FBT is calculated on, not the FBT payable. The tax book value method uses the cost price in year 1, then the cost less Investment Boost (20%) and depreciation of 30% a year, with a minimum of $7,317. GST is ignored.
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What Does This Mean for Business Owners?
For most employers, the changes should mean a significant reduction in compliance costs. Businesses with vehicles that are genuinely used for work may also pay less FBT. In Inland Revenue’s own example, a branded ute that an employee can use privately on weekends and public holidays moves from the equivalent of a 40% inclusion rate to 35%, with no logbook required.
However, the changes will not benefit everyone:
- Perk vehicles. Vehicles provided with unrestricted private use fall into Category 1, with a 100% inclusion rate.
- Work-related vehicles. If you currently rely on the work-related vehicle exemption, your vehicle will need to fit one of the new categories, and some of those carry FBT.
- Record keeping. You will still need to be able to show why you chose a category, so vehicle policies and employment agreements should be kept up to date.
Final Thoughts
These changes replace one of the more time-consuming areas of FBT compliance with a simpler, category-based system. The best time to review how your vehicles are used, and which category each one is likely to fall into, is before 1 April 2027, not after your first FBT return under the new rules is due.
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Disclaimer
This article is intended to provide general information only and does not constitute personalised financial or tax advice. Please note that these measures are proposals at this stage and are subject to change until passed into law. We recommend seeking tailored advice from a qualified accountant or tax advisor before making any financial decisions based on these announcements.