FBT hot spots for 2020
With the start of the Fringe Benefits Tax year looming on 1 April, businesses are being urged to review their Fringe Benefits Tax (FBT) position.
The ATO’s top FBT problem areas
FBT liabilities can trap unwary businesses, some of whom don’t recognise that there can be a tax consequence from providing benefits to staff such as entertainment.
It is important to understand there can be implications from seemingly straight-forward business activities across income tax and GST, as well as FBT.
For some smaller businesses, it can come as a surprise that business-related activities can fall within the FBT system. While there are some exemptions in place, businesses need a clear understanding that many benefits could come under the scrutiny of the Australian Taxation Office (ATO).
A small business owner might think it appropriate to take a good customer or supplier to lunch. It might also seem natural to take along a staff member to that lunch. But there could be an FBT liability that arises depending on the value of the food and drink on a per head basis and how frequently staff members receive similar benefits.
Excellent record-keeping is fundamental. It is crucial at lunches, for example, to note who was there because the portion relating to staff members might be subject to FBT while the portion relating to clients would not generally trigger FBT.
In addition to determining whether there is an FBT issue, these records will also generally be used to check whether the business can claim a deduction and GST credits for the expenses. The ATO’s approach is very evidence-based, there needs to be documentation to back up whatever the business is claiming.
That record-keeping can be difficult, especially if they do not have a dedicated internal accountant.
Motor vehicles are another key FBT issue. Many businesses provide cars to staff or allow them to take vehicles home but this can easily trigger an FBT liability – although again, some businesses may be unaware of that.
While there are some exemptions that can apply to these benefits and it may be possible to reduce or eliminate the FBT liability completely, it is crucial that there is detailed record-keeping. For example, a car that is used solely for business purposes could still potentially trigger a significant FBT liability unless there is a valid log-book in place.
There can be questions raised by the ATO if for example a business has substantial motor vehicle expenses, yet they do not lodge an FBT return.
You cannot avoid the FBT system by simply not claiming a deduction for expenses relating to a vehicle.
The Fringe Benefits Tax (FBT) year ends on 31 March.
Important FBT Issues below
- Crackdown on salary sacrifice calculations
- Exempt fringe benefits during emergencies
- Employee contributions by journal entry
- Motor vehicles – using the company car outside of work
- Safe harbour for utes and commercial vehicles
- Car parking – are you really declaring the true cost of parking?
- The living away from home allowance – the common errors
- Salary sacrifice or employee contribution – where employers are getting it wrong
- Housekeeping essentials – obtaining odometer readings
- Not registered for FBT – the areas where the ATO’s view might differ
Important FBT issues
Crackdown on salary sacrifice calculations
A loophole in the superannuation guarantee legislation enables salary sacrifice contributions made by an employee to reduce the employer’s minimum superannuation guarantee (SG) obligations. Currently, the minimum amount of SG an employer is required to pay is based on an employee’s ordinary time earnings. As entering into a salary sacrifice arrangement reduces the employee’s ordinary time earnings, it reduces the amount of SG that an employer is required to pay.
Legislation before Parliament prevents superannuation contributions made as part of a salary sacrifice arrangement from satisfying an employer’s SG obligations.
If your business assists employees during an emergency, for example, floods, bushfires etc., then fringe benefits tax is unlikely to apply to the assistance you provide. While we doubt anyone would be thinking about FBT during a crisis, it’s good to know that the tax system does not disadvantage your generosity.
Examples of the kinds of benefits exempt from FBT include immediate relief you provide to an employee in the form of:
- emergency meals or food supplies
- clothing, accommodation, transport or use of household goods
- temporary repairs, for example on the employee’s home or car. Long-term benefits are not exempt from FBT, such as providing a new house or car to replace one destroyed in the emergency event.
First aid or other emergency health care you provide to an employee is also exempt if it is provided by an employee (or a related company employee), or is provided at your premises (or those of a related company), or at or near an employee’s worksite.
The exemption applies in a range of scenarios including natural disasters, accidents, serious illness, armed conflict, or civil disturbances.
Employee contributions by journal entry
If you are audited by the ATO, one of the areas they will look at is employee contributions 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 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.
For an employee contribution made by way of the journal entry to be effective in reducing the taxable value of a benefit, all of the following conditions must be met:
- The employee must have an obligation to make a contribution to the employer towards a fringe benefit (i.e., under the employee’s remuneration agreement);
- The employer has an obligation to make a payment to the employee. For example, the parties may agree that the employer will lend an amount to the employee or the employee might be entitled to a bonus that hasn’t been paid yet. If a loan is made by the employer then this could trigger further tax issues that need to be managed;
- The employee and employer agree to set-off the employee’s obligation to the employer against the employer’s obligation to the employee; and
- The journal entries are made no later than the time the financial accounts are prepared for the current year (i.e., for income tax purposes).
Failure to ensure that arrangements involving fringe benefits and employee contributions are documented can lead to problems. For example, the ATO may ask to see evidence of the fact that the employer is actually under an obligation to make contributions towards a fringe benefit. If there is no evidence of this then significant FBT liabilities could arise.
Common FBT issues
Motor Vehicles – using the company car outside of work
Just because your business buys a motor vehicle and it is used almost exclusively as a work vehicle, that alone does not mean that the car is exempt from FBT. If you use the car for private purposes – pick the kids up from school, do the shopping, use it freely on weekends, garage it at home, your spouse uses it – FBT is likely to apply. While we’re sure the old, “what the Australian Tax Office (ATO) doesn’t know won’t hurt them” mentality often applies when the FBT returns are completed, it might not be enough. The private use of work vehicles is firmly in the sights of the ATO.
Private use is when you use a car provided by your employer (this includes directors) outside of simply travelling for work related purposes.
If the work vehicle is garaged at or near your home, even if only for security reasons, it is taken to be available for private use regardless of whether or not you have permission to use the car privately. Similarly, where the place of employment and residence are the same, the car is taken to be available for the private use of the employee.
Finding out that a car has been used for non-work-related purposes is not that difficult. Often, the odometer readings don’t match the work schedule of the business. These are areas the ATO will be looking at.
Utes and commercial vehicles –safe harbour rules to avoid FBT
When an employer provides an employee with the use of a car or other vehicle then this would generally be treated as a car fringe benefit or residual fringe benefit and could potentially trigger an FBT liability.
However, the FBT Act contains some exemptions which can apply in situations where certain vehicles (utes and other commercial vehicles for example) are provided and the private use of the vehicles is limited to work-related travel and other private use that is ‘minor, infrequent and irregular’.
One of the practical challenges when applying the exemption is how to determine if private use has been minor, infrequent and irregular. The ATO recently released a compliance guide that spells out what the regulator will look for when reviewing the use of the exemption.
The ATO has indicated that in general, private use by an employee will qualify for the exemption where:
- 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 and guidance on this is published on the ATO website.
- The employer has a policy in place which 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 ($75,526 for fuel-efficient vehicles in 2018-19 and $66,331 for other vehicles).
- 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 in checking whether the conditions have actually been met. Employers who do not take active steps to check the way commercial vehicles are being used are at high risk of significant FBT liabilities. There are some practical steps that can be taken to reduce risk in this area.
We all know how expensive commercial car parks can be. The ATO has noticed that where car parking benefits are being declared (that is, where an employer provides parking to an employee), the value of what is being declared is significantly less than what you would expect to pay.
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.
Exempt Car Benefits
1. There are certain circumstances in which private use of a vehicle may be exempt from FBT if the following conditions are satisfied:
- The vehicle is a taxi, panel van, utility or any other vehicle designed to carry less than one tonne and not designed principally to carry passengers; and
- The private use of the vehicle is limited to:
- Travel between home and work;
- Travel incidental to travelling in the course of performing employment‑related duties; and
- A Non-work related use is minor, infrequent and irregular.
- PCG 2017/D14 explains when the Commissioner will not apply compliance resources to determine if private use of the vehicle was limited for these purposes.
If the vehicle is used regularly for private purposes, such as grocery shopping etc., it would still give rise to a car fringe benefit.
Living away from home allowances
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.
As a starting point, FBT applies to the full amount of the allowance that has been paid. However, if certain strict conditions can be satisfied with the taxable value of the LAFHA fringe benefit can be reduced by the exempt accommodation and/or food component.
Common errors include:
- Mischaracterising an employee as living away from home when they are really just travelling in the course of their work. The ATO has released updated guidance in this area in TR 2017/D6.
- 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. Verifying accommodation expenses is important as the ATO will look closely for scenarios where employees are paid an allowance but go and stay with friends or relatives or stay somewhere cheaper and pocket the difference. The expense actually has to be incurred and substantiated.
Salary sacrifice or employee contribution?
One issue that frequently causes confusion is the difference between the employee salary sacrificing in order to receive a fringe benefit and making an employee contribution towards the value of that fringe benefit.
Salary sacrificing for a fringe benefit
To be an effective salary sacrifice arrangement (SSA), the agreement must be entered into before the employee becomes entitled to the income (e.g. before the period in which they start to perform the services that will result in the payment of salary etc.).
Where an employee has salary sacrificed on a pre-tax basis towards the fringe benefit provided – laptop, car, etc., they have agreed to give up a portion of their gross salary on a pre-tax basis and receive the relevant fringe benefit instead.
As a starting point, the taxable value of the fringe benefit is the full value of the expense paid by the employer. The salary sacrifice arrangement doesn’t actually reduce the FBT liability for the employer.
The employer recognises a lower cost of salary and wages provided to the employee as their ‘cost saving’, which results in lower PAYG withholding and superannuation contribution obligations, but they still recognise the full value of the fringe benefit as part of their taxable fringe benefit which is subject to FBT.
The employee recognises that they have a reduced amount of salary and wages, and a non-cash benefit in the form of the fringe benefit.
It can be difficult to ensure the required records are maintained in relation to fringe benefits – especially as this may depend on employees producing records at a certain time. If your business has cars and you need to record odometer readings at the first and last days of the FBT year (31 March and 1 April), remember to have your team take a photo on their phone and email it through to a central contact person – it will save running around to every car, or missing records where employees forget.
Should I be registered for FBT?
If you have employees (including Directors of a company) then it’s possible your business needs to register for FBT. Generally, 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, 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 (although there are rules around how many), protective clothing, tools of 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.
If you need help or looking for guidance, contact us and see if we can help resolve your FBT issues.