Many businesses offer their employees fringe benefits but these perks come with their own set of rules and tax treatments. The Fringe Benefits Tax (FBT) year runs differently to the financial year, it is based on 1 April through to the 31st March.
Do you know what is tax-exempt and what is not? A fringe benefit is a benefit provided to employees only. The benefit may be in addition to, or part of, their salary or wages package. The FBT is separate from income tax and is calculated on the taxable value of the fringe benefits provided. The current FBT rate for 2021 financial year is 47%.
Here are the most common employer misconceptions and mistakes regarding FBT.
1. Motor Vehicles
Station wagons, panel vans and utility trucks/single cab utes are considered eligible vehicles for FBT purposes. Generally, cars are subject to FBT and are designed to carry a load less than one tonne or fewer than 9 passengers.
A car does not include an electric bicycle (e-bike) (Class Ruling CR 2015/80). A hearse is not a car (Taxation Determination TD2006/39) but a stretched limousine is a car (Case Z25, 92 ATC 247).
A business vehicle garaged at an employee’s residence or near a place of residence of the employee or an associate of the employee may be deemed a car fringe benefit, especially if the employee cannot prove minor, infrequent or irregular use of vehicle or has no other private means of transport. However, not all business vehicles are work-related vehicles for FBT purposes.
Under the statutory formula, if a vehicle is kept 'near' the employee's home overnight, it will be considered available for private use. Where the employee's home and workplace are in close proximity, providing that the vehicle is not available for private use overnight can often be a challenge, with the ATO in recent years having won cases on this point.
If your business owns cars, a logbook is required to be kept for calculating vehicle benefits for each vehicle. The logbook must be maintained for a continuous period of at least 12 weeks. Unless circumstances materially change, or the vehicle is replaced, the same logbook may be relied upon for five years before another 12-week period must be recorded. If employees have incurred any fuel and oil expenses, they need to provide the employer with a declaration to substantiate these expenses. You must also ensure to record the opening and closing odometers of the vehicle at the start and end of each FBT year. This is also important in calculating an employee contributions to minimise the fringe benefit tax liability.
If the logbook is not accurate, or fuel receipts aren’t available at tax time, the vehicle expenses will not be covered by FBT and the expenses would not be allowed for tax deductions.
Important note. Ensure you take an odometer reading at the beginning and end of the FBT year!
2. Meals and entertainment
There is no actual category of ‘entertainment fringe benefit’. There is one of ‘meal entertainment’ that refers to entertainment by way of food or drink, and the payment or reimbursement of expenses incurred in providing meals and entertainment.
For instance, when an employer provides morning or afternoon tea or light meals, that particular food or drink does not usually confer entertainment on the employee and would therefore not attract FBT. However, a three-course meal provided to an employee during a working lunch does have the characteristics of entertainment and so could be considered a legitimate fringe benefit.
The location of the meal provided also has a bearing. Food or drink provided in a function room, hotel, restaurant, cafe, coffee shop or consumed with other forms of entertainment is more likely to be characterised as entertainment as the provision of this food or drink is less likely to have a work-related purpose. FBT would not apply and these expenses would not be tax deductible.
A practical example is when an employer holds a Christmas party for employees and families. The cost of gifts such as bottles of wine and hampers may not be exempt from FBT, whereas the food and drink at the party will be exempt but only that consumed by the employees, not their family members or guests. A benefit with a notional tax value of $300 or less per employee is an exempt fringe benefit providing it is considered minor and infrequent. FBT may not apply and these expenses would not be tax deductible.
It is important to consider how you process your business accounts for meal and entertainment expenses. You must keep adequate records and separate client from employee costs so as to enable you to apply the actual method and the associated exemptions and reductions for all entertainment, from awards dinners to sporting club sponsorships. Otherwise, FBT will apply.
3. Portable Electronic devices
A business may decide to supply its employees with electronic devices such as iPads or mobile phones but they are not necessarily an eligible exemption. If you provide two devices that have the substantially identical function the second one shall be subject to FBT. For example, an iPad and iPhone are likely not considered substantially identical, but a laptop and a tablet may otherwise attract FBT.
Gifts provided to employees or their associates that are not considered meal and entertainment are generally considered tax deductible. This is providing that they are considered minor and infrequent and less than $300 per employee. However, a business may have arrangements with its suppliers to provide free goods to that business’ employees – this may attract FBT’. Gifts provided to suppliers and clients are not subject to FBT and not tax deductible.
- Director or employee?
Directors running their business through a company may be regarded as employees. This may mean that fringe benefits provided to directors will result in the company having FBT obligations.
5. Car Parking
A business with turnover less than $10.0m is not subject to FBT on car parking benefits provided to their employees, provided the parking is not in a commercial car park.
Common errors are often made in respect to the calculation and inclusion of car parking fringe benefits and determining the correct market valuation of public carparks within one kilometre radius of business premises. It is important to ensure that the carpark is identifiable as a commercial car parking station. Often businesses have insufficient evidence to support the rate used to calculate the taxable value of the benefit provided.
When do you need to file an FBT return?
When a business provides benefits that are not exempted or includes reportable fringe benefits on an employee’s payment summary, the business will be expected to lodge an FBT return.
FBT can be complicated, and because it is self-assessed you may find that you become unstuck at the time of audit. As such we highly recommend seeking advice from an expert around some of the benefits that you currently offer your staff and what you may want to offer in the future (and anything else that you might not be aware of that may attract corporate fringe benefits).
Have you noticed our #FridayExpertTips... here's one that relates to #Taxation
“March 31 is FBT year-end: Providing your employees with perks can be a great way to show how much you value them. It's important to understand that these perks, also known as fringe benefits, come with their own set of rules and tax treatments. Get in touch to find out more."