FBT Year End Update

 
The Fringe Benefits Tax (FBT) year ends on 31 March. We’ve outlined the hot spots for employers and employees.

Contents:

• Car Parking Under Scrutiny.
• Motor Vehicle Problem Areas.
• Mismatched FBT and Income Tax Amounts.
• Mismatched Information for Entertainment Claimed as a Deduction and What Is Reported for FBT Purposes.
• Business Assets Personally Used by Owners and Staff.
• Not Lodging FBT Returns.
• Salary Sacrifice Problem Areas.
• Did You Provide Assistance to Employees During a Crisis?
• Housekeeping Essentials.

Important FBT Issues

Car parking under scrutiny.

Important impending changes.

A controversial draft ruling from the ATO could expand the scope of the FBT rules dealing with car parking benefits. This is because the draft ruling changes the ATO’s view on what constitutes a commercial parking station. 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 ($8.95 for year ended 31 March 2020)

 
A taxable car parking fringe benefit will arise unless the employer is a small business and able to access the car parking exemption.

The Government hasn’t finalised the draft ruling yet. But the ATO has stated it intends to apply the new definitions from 1 April 2021. If you provide car parking facilities to team members, it is important that you either:

• Have certainty that you are able to access the small business exemption, or
• Understand the implications of the ruling to the car park facilities you provide.

Common errors.

The ATO has noticed that when you declare car parking benefits (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.

Motor Vehicle Problem Areas

Private use of work vehicles.

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, FBT is likely to apply. 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.

f you garage the work vehicle at or near your home, even for security, it counts as being available for private use, whether or not you have permission to use it privately. Likewise, if you live and work at the same location, the car is considered available for your private use.

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.

When is the motor vehicle exempt from FBT?

A motor vehicle is exempt from FBT when:

• The vehicle is a taxi, panel van, utility or other commercial vehicle that is not designed principally to carry passengers; and
• The private use of the vehicle is limited to:
• Travel between home and work;
• Travel that is incidental to travelling in the course of performing employment‑related duties; and
• Non‑work related use is minor, infrequent and irregular.

The ATO also provides a ‘safe harbour’ for employers to help overcome the issues of deciding when private use is minor, infrequent and irregular.

To qualify for 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 and guidance on this is published on the ATO website.
• The employer takes reasonable steps to limit private use and they have measures in place to monitor this – this might be a policy on the private use of vehicles that is monitored using odometer readings to compare business kilometres and home to work kilometres travelled by the employee against the total kilometres travelled.
• The vehicle has no non-business accessories, for example a child safety seat.
• The value of the vehicle when it was acquired was less than the luxury car tax threshold ($75,526 for fuel efficient vehicles in 2019-20 and $67,525 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. If there is some purely private travel using the vehicle, the total distance for the FBT year must be no more than 1,000 km and no single return journey for a wholly private purpose can 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. They will also 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.

Mismatched FBT and income tax amounts.

The ATO is targeting mismatches between employee contributions reported on FBT returns and the income amounts on employers’ tax returns.

They focus on discrepancies where employers report employee contributions on their fringe benefits tax return but fail to include them as income on the employee’s tax return, or where employers overstate contributions to reduce the taxable value of fringe benefits and their FBT liability.

The ATO requires businesses to provide documentation to support their claims.

Mismatched information for entertainment claimed as a deduction and what is reported for FBT purposes.

One of the easiest ways for the ATO to pick up on problem areas is where there are mismatches. When it comes to entertainment, employers are keen to claim a deduction but this is not a fringe benefit provided to employees.

Employer expenses related to entertainment such as a meal in a restaurant are generally not deductible and you can’t claim GST credits unless the expenses are subject to FBT.

Let’s say you 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. 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. The company would be able to claim 50% of the GST credits.

Business assets personally used 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.

Take the ATO’s example of the property company that claimed deductions for a boat on the basis that it was used for marketing the company. Large deductions were claimed relating to running the boat. This attracted the ATO’s attention and a review was carried out.

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 overall business activities, the ATO determined 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. Given late FBT returns are a problem, it’s likely the ATO will place close attention to any employer that:

• Is registered for FBT but lodges late; or
• Is not registered for FBT. If your business 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 the business provides cars, car spaces, reimburses private (not business) expenses, provides entertainment (food and drink), employee discounts etc., then you are likely to be providing a fringe benefit. Make sure you have reviewed the FBT client questionnaire we sent you!

Salary sacrifice Problem Areas

Calculating superannuation guarantee on salary sacrifice.

From 1 July 2020, the Government will enforce new rules to prevent employees from using salary sacrifice contributions to reduce the employer’s Superannuation Guarantee (SG) payments.

Under current rules, some employers are paying SG on the salary less any salary sacrificed contributions of the employee. Currently, employers must contribute 9.5% of an employee’s Ordinary Time Earnings (OTE). They choose whether or not to include the salary sacrificed amounts in OTE.

Under the new rules, the SG contribution is 9.5% of the employee’s ‘ordinary time earnings (OTE) base’. The OTE base will be an employee’s OTE and any amounts sacrificed into superannuation that would have been OTE, but for the salary sacrifice arrangement.

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 create an effective Salary Sacrifice Arrangement (SSA), the employee must enter into the agreement before they become entitled to the income. For example, before they begin the work that earns the salary.

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 ATO says the taxable value of the fringe benefit is the full value of the expense that the employer pays. 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’. This 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. 

Did you provide assistance to employees during a crisis?

Does your business assist employees during an emergency? Then fringe benefits tax is unlikely to apply to the assistance you provide. We doubt anyone would be thinking about FBT during a crisis. But 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. But only if it is:

• Provided by an employee (or a related company employee), or
• 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. 

You need to check that your region is on the list as one of the affected areas before assuming the exemption applies.

Housekeeping

You might find it difficult to ensure your employees maintain the required records in relation to fringe benefits. Especially as this may depend on employees producing records at a certain time.

Does your business have cars? You need to record odometer readings at the first and last days of the FBT year. Also, remind your team to take a photo and email it through to a central contact person. It will save running around to every car, or missing records where employees forget.

Looking for the 2021 FBT Guide? Click here.

This is general advice only and has not been prepared with your situation and needs in mind. For individual and personalised advice, we highly recommend that you seek out proper professional advice from your accountant.