Is your business at risk of a nasty Fringe Benefits Tax surprise?
We’ve outlined the ATO’s ‘red flags’ for employers and employees.
FBT updates and problem areas:
- Working From Home
- Motor vehicle problem areas
- ATO ‘red flags’:
- Where deductions claimed don’t match what is reported for FBT purposes
- Mismatched FBT and income tax amounts
- When business assets are used personally by owners and staff
- Not lodging FBT returns
- Salary sacrifice problem areas
- Car parking under scrutiny
- Housekeeping essentials – get those odometer readings!
Working from home
The COVID-19 work from home arrangements have remained popular and many employees continue to work from home. Employers often provide work-related items such as computer monitors, printers and other equipment to assist with productivity.
In general, minor benefits should be FBT exempt where:
- Their individual cost is under $300, and
- It is reasonable to treat the benefit as minor (for example, it is provided infrequently).
Where common work related items such as laptops and mobile phones have been provided to team members, it’s unlikely an FBT liability will be triggered as long as the equipment is primarily used for work purposes. The situation gets more complex however if multiple similar items have been provided during the FBT year.
For arrangements where office equipment may be loaned to employees, there needs to be clear and consistently enforced policies that there is no private use and ensure any “no private use” declaration covers all equipment.
Don’t forget – for those that work from home, the fixed rate calculation to claim a deduction for individuals has been revised – and is significantly stricter!
Motor Vehicle problem areas
FBT Exemption for Electronic Vehicles and Plug-In Hybrid Vehicles
With the new FBT exemption for zero and low emission vehicles, we are expecting significant interest from the ATO on people claiming these costs. Key areas will be ensuring the eligibility of the car, ensuring amounts are still reported on employees payment summaries correctly and the calculation of running costs – i.e. electricity at home to charge the vehicle! Guidance is still on the way in relation to this but contact our office to be kept up to date with the current expectations.
Private use of work vehicles
On the way out of COVID-19 the ATO is focussing on business use percentages, out of date logbooks and incorrect classified vehicles. We remind you that logbooks need to be less than 5 years old, and still relevant to current use. Any significant change (10%) or more should result in a new logbook being undertaken.
Just because your business buys a motor vehicle and it is used almost exclusively for work, 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.
New FBT Exemption for electric vehicles
The ATO will be on the lookout on the take up of this new exemption. Items to be considered is that it only applies to zero or low emissions vehicles under the luxury car tax threshold with plug-in hybrids available under the concession until 1 April 2025. We also note that this doesn’t remove the reporting requirement for employees Reportable Fringe Benefits and remind you to remember this detail.
Importantly, the capital costs to including charging equipment at home is not an exempt benefit, although the ongoing costs (Electricity) would usually be considered car expenses and exempt.
Private use of work vehicles is firmly in the sights of the ATO – and has been for some time.
Private use is when you use a car provided by your employer (this includes directors) outside of simply travelling for work related purposes.
While there are two methods to calculate the FBT liability on the private use of a car, the choice of method can result in very different FBT liabilities. For example, using the logbook method may provide a better result especially this year if the work vehicle has not been used at all and garaged at or near the employee’s home. This is because if your business keeps a valid logbook/odometer records and is eligible to use the logbook method, the ATO will accept that a FBT liability won’t arise if the car:
- Has not been driven at all during the period even if it has been garaged at home; or
- Has only been driven briefly to maintain the car.
In comparison, if the statutory method is used, the FBT liability could be much higher. This is because the FBT calculation under this method will include the days that the car has been garaged at home and is taken to be available for private use of the employee (regardless of whether or not the employee has 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.
ATO ‘red flags’
One of the easiest ways for the ATO to pick up on problem areas is where there are mismatches.
Where deductions claimed don’t match what is reported for FBT purposes
When it comes to entertainment, employers are often keen to claim a deduction but often this is not then recognised as a fringe benefit provided to employees.
Expenses related to entertainment – such as a meal in a restaurant are:
- Generally not deductible, and
- No GST credits can be claimed unless the expenses are subject to FBT.
Let’s say you have taken a client out to lunch and the amount per head is less than $300. If your business uses the ‘actual’ method for FBT purposes, then there should not be any FBT implications. This is because benefits provided to client are not subject to FBT and minor benefits (i.e., value of less than $300) provided to employees on an infrequent and irregular basis are generally exempt from FBT. However, no deductions should be claimed for the entertainment and no GST credits would normally be available either.
If the business uses the 50/50 method, then 50% of the meal entertainment expenses would be subject to FBT (the minor benefits exemption would not apply). As a result, 50% of the expenses would be deductible and the company would be able to claim 50% of the GST credits.
Mismatched FBT and income tax amounts
Another area where the ATO is picking up errors is when the amount reported as an employee contribution on an FBT return does not match the income amounts on the employer’s tax return. In particular, what concerns the ATO is where an employer overstates employee contributions received on their FBT return to reduce the taxable value of the fringe benefits provided (and thereby, the employer’s FBT liability).
The ATO is also noticing the reverse – reporting a contribution amount on the tax return but not lodging an FBT return. By lodging an FBT return you are effectively setting a line in the sand and putting a time limit on the ATO to undertake any review or audit activities.
The ATO’s approach is very evidence-based; there needs to be documentation to back-up what the business is claiming.
When business assets are used personally by owners and staff
Private use of business assets is an area that crosses across a whole series of tax areas; FBT, GST, Division 7A, and income tax.
ATO example –property company claims deductions for a boat used for ‘marketing’
- Deductions claimed deductions on the basis that it was used for marketing the company.
- Large deductions were claimed for the upkeep and running of the boat.
On review, the ATO discovered the boat was used by the director and other employees for private trips, and to host parties for people who had paid to attend the company’s property seminars.
When looking at the activities of the business overall, the ATO determined that the director had purchased the boat primarily for their own private use. As a result, they disallowed the deductions and the private use of the boat was a fringe benefit for the employees of the company. The company had to lodge an FBT return and pay the resulting FBT liability, as well as the income tax shortfall, interest and penalties.
Not lodging FBT returns
The ATO is concerned that some employers are not lodging FBT returns or lodging them late to avoid paying tax. While we hope the ATO understands that this was a difficult year for many businesses, it’s likely the ATO will still pay close attention to any employer that:
- Is registered for FBT but lodges late – If your business is likely to face delays lodging the FBT return, it’s a good idea to contact us as early as possible and we will get in touch with the ATO to request an extension.
- Is not registered for FBT but employs staff (even closely held staff such as family members), and is not registered for FBT – it’s essential you have reviewed your position and are certain that you do not have an FBT liability. If your business provides cars, car spaces, reimburses private (not business) expenses, provides entertainment (food and drink), employee discounts etc., then it’s likely you are providing a fringe benefit. Make sure you have reviewed the FBT client questionnaire we sent you!
Employee contributions for FBT purposes and salary sacrifice
An 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.
To be an effective salary sacrifice arrangement (SSA), the agreement must be entered into before the employee becomes entitled to the income (i.e., 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 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.
Declarations will need to be provided confirming the business use and where necessary these may need to be supported by consistently enforceable policies.
Car parking under scrutiny
Where an employer provides:
- Car parking facilities for employees within 1km of a commercial parking station, and
- That commercial car park charges more than the car parking threshold ($9.72 for the year ended 31 March 2023)
A taxable car parking fringe benefit will arise unless the employer is a small business and able to access the car parking exemption. The ruling was updated from 1 April 2022 to include parking facilities that charge penalty day rates higher than commercial rates (i.e. shopping centres, hospitals). If you provide car parking facilities to team members, it is important you ensure you class as a small business and understand the implications of the ruling to the car park facilities you provide.
It can be difficult to ensure 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.