Some timely FBT year-end reminders and strategies
The FBT rate is 47% for the 2018 FBT year ending 31 March 2018 (the 2017 rate was 49%).
Main changes affecting the 2018 FBT year include:
- businesses with a turnover of less than $10 million in the 2017 income tax year will now be able to provide exempt car parking fringe benefits for employees in the 2018 FBT year;
- use of a new simplified method to calculate car fringe benefits on fleet cars;
- use of a new proposed simplified method to determine if car related exemptions will apply (i.e. easier to determine allowable private use of certain utes, panel vans etc.).
Please contact us to help you to implement strategies to minimise your exposure to FBT.
What is FBT?
Employers must pay fringe benefits tax (FBT) on the value of certain non-cash benefits (called fringe benefits) supplied to their employees1 (or associates of the employees) in lieu of paying salary or wages.
A benefit that was not provided to an employee in respect of the employee’s employment (e.g. providing a hire car to an employee based on a commercial arrangement and not because of the employee’s employment), will not qualify as a fringe benefit.
For the 2018 FBT year (from 1 April 2017 to 31 March 2018), employers must pay FBT at a rate of 47%2 on the grossed-up taxable value of fringe benefits. The 2018 FBT returns must be lodged by 21 May 2018 (if lodging by paper) or by 25 June 2018 (if lodging electronically through a tax agent) and payment is due by 28 May 20183.
What about records?
The FBT law places importance on record keeping in order to calculate FBT4. Records must be kept for five years after the end of the FBT year in which the benefit was provided5.
However, an employer using the log book / operating cost method to provide car fringe benefits must maintain a log book or e-log book for a continuous period of 12 weeks to calculate the percentage of private use (but see new developments relating to car related exemptions below).
What are common examples of fringe benefits?
The FBT law specifies various categories of fringe benefits each with its own valuation rules6, exemptions and reductions. The first task is to correctly classify each kind of benefit into the correct category – a daunting task considering the number of FBT categories.
Some of the most common examples of fringe benefits include where an employer:
- allows an employee to use a work car for private purposes – car fringe benefit;
- allows an employee to use a work motorcycle for private purposes – residual fringe benefit (because this benefit does not fall into any other category);
- provides car parking for an employee at / near work – car parking fringe benefit;
- provides food and drinks to employees at staff parties (i.e. not just for sustenance) – meal entertainment fringe benefit;
- provides entertainment by providing free tickets to concerts – property fringe benefit;
- reimburses / pays for employee’s health insurance premiums – expense payment fringe benefit;
- provides employees with goods at lower prices than they are normally sold to the public – property fringe benefit;
- provides cheap loans to employees – loan fringe benefit;
- provides a house / unit of accommodation to an employee at a reduced rent – housing fringe benefit;
- provides an employee with an allowance to compensate for additional expenses and disadvantages suffered for having to live away from their normal residence - living-away-from-home-allowance (LAFHA fringe benefit); or
- provides benefits under a salary sacrifice agreement (SSA) where an employee receives a benefit for a reduction in salary7.
To complicate matters further, the provision of one kind of benefit can give rise to different categories of fringe benefits, depending on the circumstances under which the benefit was provided.
Take for example the provision of food, drink or recreation to employees. This can give rise to either:
- meal entertainment fringe benefits (i.e. the food and drinks were provided for entertainment and not just for sustenance);
- expense payment fringe benefits (i.e. if the employer reimburses the bill);
- property fringe benefits (i.e. the food and drinks were not meal entertainment because they were only provided as sustenance); or
- residual or meal entertainment fringe benefits (i.e. the employer provides accommodation and transport in connection with the entertainment).
What are some examples of new developments relevant for the 2018 FBT year?
1. More businesses can now provide exempt car parking fringe benefits to their employees
With the small business entity (SBE) threshold having increased to $10 million aggregated turnover for the 2017 income tax year (up from $2 million aggregated turnover the year before), small businesses can now provide exempt car parking fringe benefits to employees in the 2018 FBT year (i.e. from 1 April 2017 to 31 March 2018) if:
- Either the aggregated turnover or the gross income of the business is less than $10 million in the 2017 income tax year;
- The parking is not provided in a commercial car park; and
- The small business entity is not a government body, a listed public company (or a subsidiary of a listed public company).
2. Simpler to calculate car fringe benefits on fleet cars
The 2018 FBT year will be the second year where employers with a fleet of 20 or more cars will be able to use a simplified method (i.e. apply an average business use percentage that was extrapolated from log book figures from at least 75% of their fleet) to calculate the business use percentage (and therefor the taxable value of the car fringe benefit) of their vehicles.
This method requires that an employer has at least 20 cars that qualify as tools of trade (i.e. are not salary packaged and are considered basic equipment required for a particular occupation, such as a travelling salesperson’s vehicle).
There are a number of conditions that must be satisfied to adopt this method. Where this method is used, employers must use the same method for the purpose of working out an affected employee’s reportable fringe benefit amounts (RFBA).
3. Simpler to determine if car related exemptions will apply for eligible vehicles8 (i.e. easier to determine allowable private use of certain utes, panel vans etc.)
A fringe benefit will normally arise when an employer allows an employee to use a work vehicle for private purposes. However, such a fringe benefit will be exempt in respect of eligible vehicles (e.g. certain utes, panel vans etc.) where the private use (on a per eligible vehicle basis) is:
- limited to work related travel (i.e. travel between an employee’s place of residence and where employment duties are performed); or
- “minor, infrequent and irregular.”
Because it is record-keeping intensive to keep track of the amount and purpose of private use of a work vehicle to determine whether such private use will be exempt, the ATO proposes to automatically apply the car related exemption if certain conditions are met.
According to PCG 2017/D14, from the 2018 FBT year onwards it should no longer be necessary to keep records to claim this particular exemption if the private use of the vehicle is limited to travel between home and work, with any diversion adding no more than two kilometres to the ordinary length of that trip, where no single journey for a wholly private purpose exceeds 200 kilometres and where there is no more than 750 kilometres in an FBT year for multiple trips made for wholly private purposes.
Furthermore, employers are required to take all reasonable steps to limit private use of the vehicle and should have measures in place to monitor such use. Vehicles are not eligible for this concession if they were provided as part of a salary packaging arrangement, are fitted with non-business accessories or were acquired for a value more than the applicable luxury car threshold.
Because employers have to satisfy these conditions in respect of each eligible vehicle, it is possible for an employer to apply the safe harbour guidelines in relation to some eligible vehicles held in their fleet, whilst other vehicles will be ineligible for the concessions.
At the time of writing, these proposals have not yet been finalised. We hope these proposals become finalised soon to create certainty and hopefully save on compliance costs.
What are some strategies to reduce an employer’s FBT liability?
1. Try not to provide fringe benefits
The easiest way to avoid an FBT liability is to not provide fringe benefits to employees but rather provide the employee with a cash bonus or cash salary which the employee can use to buy the desired product / service. This also may result in less tax being paid if the employee’s tax rate is lower than the FBT rate of 47%. However, an employee will have to pay income tax on this receipt. If the employer pays the FBT without requiring the employee to reimburse the employer for the FBT, the employee will be better off by receiving the fringe benefit, but at the expense of the employer.
2. Provide exempt benefits
If the employer provides exempt benefits, the benefit will be exempt from FBT.
Some of the most common examples of exempt benefits include:
- Minor and infrequent benefits9 valued at less than $300 per employee (e.g. Christmas gifts, flowers to an employee in hospital or staff vouchers under an employee recognition scheme);
- Work related items such as portable electronic devices (e.g. laptop computers, mobile phones and portable printers) primarily used in the employee’s employment – for bigger businesses, there is a limit of only one such item per FBT year unless it is a replacement item. However, from 1 April 2016, small businesses (used to be businesses with an aggregated turnover of less than $2 million but from 1 July 2016 businesses with an aggregated turnover of less than $10 million) will also qualify for an exemption even if they provide more than one of these portable electronic devices to their employees; and
- Property provided and consumed on the employer’s premises (e.g. Friday night drinks at the office), but only where meal entertainment benefits are not valued using either the 50/50 or 12-week register methods.
3. Provide fringe benefits that are tax deductible
Likewise, if the employer provides tax deductible benefits pursuant to the “otherwise deductible rule” (i.e. provide benefits an employee would otherwise have been able to claim a tax deduction for had the employee incurred the cost directly – for example sending employees on a business course), the employer’s FBT liability may be reduced to nil, provided a written declaration is provided to the employer in the approved form no later than the day on which the FBT return is due to be lodged. Furthermore, some specific reductions are available depending on the type of fringe benefit provided.
4. Certain reductions in FBT value depending on the type of benefit
Provided the otherwise deductible rule does not apply, the value of certain types of fringe benefits can be reduced. For example, the taxable value of in-house fringe benefits (e.g. when an employee purchases goods or services usually sold by the employer) is reduced by $1,00010 and you can reduce the taxable value of a LAFHA fringe benefit by certain amounts for food.
5. Use employee contributions
Another strategy to lower an employer’s FBT liability is to use employee contributions (i.e. where the employee, from post-tax salary, pays for the cost, or a part thereof, of providing the benefit). An example of this would be in the case of a novated car lease where an employee pays a 3rd party for the operating costs such as fuel and this is not reimbursed by the employer.
How can Nexia help you?
We hope that this brief overview gave you an insight into the complexities of FBT and that working out your FBT liability is not always straightforward – especially in light of the many different categories of FBT benefits each containing their own valuation, deduction, exemption and reporting rules.
It is unfortunate that FBT reporting places such a significant compliance burden on taxpayers. However, Nexia can assist you through this whole process as we have considerable FBT experience and can offer you a business-wide view to achieve the best outcome for you.
Please contact your Nexia Adviser if you would like to discuss how any of the issues mentioned above may affect your organisation so that we can help you identify potential FBT risks and opportunities for you.
1 - The employee can be a current, past or future employee.
2 - The FBT rate in the 2016 and 2017 FBT year was 49% to account for the temporary budget repair levy (that has since been abolished).
3 - The payment date of 28 May 2017 is a fixed date regardless of when lodgement is (i.e. payment must generally be made by 28 May 2017 even if electronic lodgement using a tax agent only occurs after this date).
4 - According to TD 2017/2 there is an exemption to keep such records in the 2018 FBT year for employers providing minimal fringe benefits (i.e. less than $8,393 in total fringe benefits) to their employees.
5 - Sections 132(1)(b) and 135F of the Fringe Benefits Tax Assessment Act 1986.
6 - For example, entertainment benefits can be valued under the actual method (i.e. actual amount paid for entertainment to staff only); the 50/50 split method (i.e. 50% of GST inclusive cost of entertainment to staff and clients); or the 12-week register method (i.e. register kept for 12 weeks to determine the percentage of total meal entertainment provided to staff and clients subject to FBT).
7 - From 1 April 2016, employees of not-for-profit organisations can only salary sacrifice meal entertainment and entertainment facility leasing benefits up to a grossed up cap of $5,000 with no FBT payable. Also, all meal entertainment benefits are now reportable for all entities.
8 - Eligible vehicles include taxis, panel vans, single cab utes, dual cab utes not designed principally for carrying passengers, four-wheel drives (other than utilities and dual cabs) designed to carry a load of one tonne or more, more than 8 passengers, or not designed principally for carrying passengers, certain permanently modified vehicles (e.g. hearses), and other road vehicles designed to carry a load of one or more tonnes or more than 8 passengers.
9 - This $300 minor and infrequent benefits exemption is not available for in-house benefits, entertainment benefits using the 50:50 split or benefits received under a salary sacrifice agreement (SSA).
10 - Reduction not relevant for benefits received under a salary sacrifice arrangement.