Fringe Benefits Tax (FBT) is not something you should discuss with your hairdresser! It is, however, an extremely important and commonly overlooked aspect of our tax system that most small business owners don’t really understand. A fringe benefit is a payment to an employee that is not made in the form of a salary/wage. In fact, a fringe benefit is a “non-cash” benefit which means that wages, employee shares, and employer contributions to superannuation funds aren’t included.
I’m a small business owner. Why is it so important that I have a basic understanding of FBT?
FBT liabilities are renowned for trapping unwary small business owners who don’t understand that there is often a tax ramification for providing such benefits to staff. It is important to understand there can be implications from seemingly straightforward business activities across income tax and GST, as well as FBT. While there are some exemptions in place, small business owners should have a clear, basic understanding that many benefits could come under the investigation of the Australian Taxation Office.
Examples of common fringe benefits:
allowing an employee to use a work car for private purposes.
giving an employee a discounted loan.
paying an employee’s gym membership.
providing entertainment by way of free tickets to concerts.
reimbursing an expense incurred by an employee, such as school fees.
giving benefits under a salary sacrifice arrangement with an employee.
The ATO’s top FBT problem & audit areas:
1. Failing to report motor vehicle fringe benefits.
2. Claiming entertainment expenses as a deduction but not correctly reporting them as a fringe benefit.
3. Incorrectly claiming entertainment expenses such as sponsorship or advertising.
4. Incorrectly calculating the value of a car parking fringe benefit provided to an employee.
5. Not reporting fringe benefits on business assets that are provided for the personal enjoyment of employees.
6. Not lodging FBT returns/lodging these late.
7. Incorrectly reporting employee contributions by journal entry.
8. Incorrectly reporting/paying FBT on Living Away from Home Allowances (LAFHA).
What isn’t a fringe benefit?
Items provided by your employer in order to perform your job such as a mobile phone, IPAD, or perhaps a uniform aren’t usually taxed as a fringe benefit. If you pay for these items yourself, you may be able to claim a tax deduction for them in your personal tax return. (Though it’s important to remember that you cannot claim a deduction for these if your employer has/will reimburse you).
What is fringe benefits tax?
Firstly, think about this: any income that you receive as a result of the course of your employment is considered taxable income. In the case of a wage, your employer withholds your annual tax on your behalf. “On your behalf” – meaning that actually, you are the person who is paying that tax. If your employer did not withhold that tax on your behalf, you’d receive a much higher wage initially but in that case, you’d be responsible for paying the ATO your tax through your annual tax return. With me so far? In summary – individuals pay taxes on their wages. This is withheld from their wage by their employers throughout the year FOR the ATO, and any balance is calculated through the annual tax return in the form of a tax refund or tax payable.
So, in the case of a non-cash benefit (fringe benefit) – which is also a form of taxable income – someone has to pay tax on that. In this case, it’s the EMPLOYER who actually pays the tax. (Rather than YOU being the person paying this tax like you are a standard wage).
FBT is a tax payable by an employer to the ATO as a result of a non-cash benefit being provided to the employee. Why? Because (for example) if you pay school fees for your employee’s child in replacement of some of their salary, essentially that employee is receiving a “non-cash” income which would not be taxed if it wasn’t for FBT laws. What I mean by this is that if that employee received their full salary (and paid the school fees themselves) they’d be taxed on the higher salary. Basically, FBT is the ATO’s way of ensuring that all forms of income are taxed (cash AND non-cash income).
Should my business be registered for FBT?
If you have employees (including directors of a company) it is quite possible that your business should be registered for GST. Generally speaking, your business needs to register for FBT if you are providing any benefits to employees that are not exempt from FBT. So, if you provide cars, and car spaces, reimburse private (not business) expenses, provide entertainment (food and drink), employee discounts, etc., then you are likely to be providing a fringe benefit. There is a list of exemptions that are considered exempt from FBT, such as portable electronic devices like laptops and iPads (please note that there are rules around how many), protective clothing, tools of the trade, etc. If your business only provides these exempt items or items that are infrequent and valued under $300, then you are unlikely to have to worry about FBT.
I receive a fringe benefit. Will my tax be reduced?
Often, fringe benefits are offered to you through salary sacrifice as part of a salary packaging arrangement. To explain, you might be offered some non-cash benefits (e.g., a car) in place of an additional salary. Depending on your personal circumstances, this might push you down into a lower tax bracket which as you can imagine is a great bonus if you’re a higher-income earner.
If the total taxable value of the fringe benefits provided to you in an FBT year* exceeds $2,000, you’ll have a reportable fringe benefits amount in your end-of-financial-year income statement (formerly called a payment summary). Some fringe benefits, like meals, entertainment, and employer-provided car parking, aren’t included in the reportable amount.
While a reportable fringe benefits amount is not considered to be taxable income, depending on your personal circumstances, it will be used to determine whether you’re entitled to, or liable for, a number of benefits and obligations. These include Family Tax Benefits, Medicare levy surcharge, private health insurance rebate, child support payments, superannuation co-contributions, Higher Education Loan Program (HELP), tax offsets, and Financial Supplement repayments.
Why do companies offer fringe benefits?
Fringe benefits are a fantastic way to help employers attract, retain and motivate employees! Additional incentives such as free lunches or coffees, free or reduced fitness memberships or programs, cars, and entertainment help employees feel happy and valued within their workplace. If you’re a company owner with a car in your company name that you also use privately, then essentially you are in receipt of a fringe benefit.
How is FBT calculated?
FBT is calculated by looking at the cost to the employer of providing this benefit to the staff member. This is called the ‘taxable value.’ In some cases (for some benefits), the taxable value can be calculated using a simplified method (“statutory formula”) which might not necessarily reflect the actual cost to the employer.
*Unlike the financial tax year (1 July – 30 June), the FBT year is 1 April – 31 March.
Taking a client as well as a staff member to lunch?
Be mindful that the portion of the bill attributable to that staff member could give rise to an FBT liability depending on the value of the food/drink and how often that staff member receives similar kinds of benefits. It is absolutely crucial to keep detailed records. Not only for FBT purposes but also in order to determine if this kind of expense is tax deductible (entertainment is not deductible however basic sustenance is deemed a tax deduction generally) and then of course any GST credits relating to this expense.
Motor vehicles
It is very common for businesses to provide cars to employees who take these home for some private use. It is almost as common for business owners to be unaware that this private use can very easily trigger an FBT liability!
If your business has cars, it is safest to record the odometer readings on the first and last days of the FBT year (31 March and 1 April) no matter what. I suggest taking a photo of the reading and emailing this to your accountant. Even if your business almost totally uses a motor vehicle for work purposes, this does not alone mean that the car is exempt from FBT. Essentially a log book MUST be kept in order to prove that the car’s use is exempt. If your business has recorded large motor vehicle expenses each year and is not registered for FBT/lodging FBT returns, it is only a matter of time before the ATO will pick up on this. Having said this, you also can’t simply avoid the FBT system by not claiming any motor vehicle expenses either.
In short, the private use of work vehicles is firmly in the sights of the ATO. Just because your business purchases a car and that car is used almost exclusively as a work vehicle, does not mean that the car is exempt from FBT. If you use the car for private purposes: garage it at home, run errands, pick the kids up from school, or lend it to your spouse: FBT is likely to apply. It should be noted here that if the vehicle is kept at (or even near) your home (even if just for security reasons) – it is always taken to be available for private use.
What if my home and work are the same place?
Same again – the car is deemed to be available for private use.
My car was not kept at home. How can the ATO determine that it was still used privately?
The ATO will compare odometer readings to the work schedule. Another reason why detailed records must be maintained.
Motor vehicles: exemptions
The FBT Act contains some exemptions which can apply in certain situations.
The ATO recently released a compliance guide that outlines what they will look for when reviewing the use of the exemption.
- The employer provides an eligible vehicle to the employee to perform their work duties. An eligible vehicle is generally a commercial vehicle or one that is not designed mainly for carrying passengers. The requirements are very strict.
- The employer has a policy in place that limits private use and obtains assurance from the employee that the vehicle has only been used for certain purposes.
- The value of the vehicle when it was acquired was less than the luxury car tax threshold.*
- The vehicle is not provided as part of a salary sacrifice arrangement; and
- The employee uses the vehicle to travel between their home and their place of work and any diversion adds no more than two kilometres to the ordinary length of that trip.
- Some private travel is allowed, but the total private travel in the FBT year must not exceed 1000 km and, no single, return journey for a wholly private purpose must exceed 200 km.
If you meet all these specifications, the ATO has stated that it will not investigate the use of the FBT exemption further. However, the employer will still need to keep records to prove that the conditions above have been satisfied and to show that private use is restricted and monitored.
If these conditions are not met then this doesn’t necessarily prevent the exemption from applying, but you can expect that the ATO would devote more time and resources to checking whether the conditions have actually been met.
Car parking
The ATO has been noticing that where car parking benefits are being declared to them, the value of what is being declared is significantly less than what you would expect to pay. Why? Because generally speaking the value of a car space in major cities is quite expensive!
Common errors include:
- Market valuations that are significantly less than the fees charged for parking within a one-kilometre radius of the premises on which the car is parked;
- Using parking rates or facilities not readily identifiable as a commercial parking station;
- Rates charged for monthly parking on properties purchased for future development that do not have any car parking infrastructure; and
- Insufficient evidence to support the rates used as the lowest fee charged for all-day parking by a commercial parking station.
Employee contributions by journal entry
If you are audited for FBT by the ATO, one of the areas they will look at is employee contributions (funds paid by an employee to his/her business) made to reduce the value of fringe benefits. It is reasonably common for these contributions to be made by journal entry, that is, they are made in the business accounting system only rather than actually being paid in cash. While this can be acceptable if managed correctly, the ATO has a number of concerns in this area, in particular, whether journal entries made after the end of the FBT year are valid employee contributions.
Living away from home allowances (LAFHA)
A LAFHA is an allowance paid to an employee by their employer to compensate for additional non-deductible expenses they incur, and any disadvantages suffered because the employee’s job requires them to live away from their normal residence. FBT applies to the full amount of the allowance that has been paid however if certain strict conditions can be satisfied, the taxable value of the LAFHA fringe benefit can be reduced by the exempt accommodation and/or food component.
Common errors include:
- Classing an employee as living away from home when they are really just travelling in the course of their work.
- Failing to obtain the declarations required from employees who have been provided with a LAFHA.
- Claiming a reduction in the taxable value of the LAFHA benefit for exempt accommodation and food components in circumstances that don’t meet the criteria.
- Failing to substantiate accommodation expenses and, where required, food or drink. (Confirming accommodation expenses is SUPER important as the ATO will look closely for common scenarios where employees are paid an allowance but go and stay with friends or relatives or stay somewhere cheaper and pocket the difference).
Conclusion
Fringe Benefits Tax is a vast and complicated area of Australian tax law. It is important that small business owners grasp the basics of this law and the point that tax might be payable as a result of providing non-cash benefits to employees. FBT is the ATO’s way of ensuring that all types of income in relation to employment are taxed, not just salaries & wages. Should you have any questions about this article or wish to discuss your situation in detail, don’t hesitate to get in touch with our team.
