Written by: Accounting Team
Would you believe Fringe Benefits Tax has been around since 1986? Whilst originally conceived to target cars, travel and restaurant meals for executives, business owners should be of the obligations, opportunities, and the risks that FBT poses.
As a business owner, you could be liable for Fringe Benefits Tax by providing benefits to your employees, or even to yourself. Rewarding your team for their contribution is one thing, but when that constitutes a fringe benefit, there’s some vital information that you need to know about your tax obligations.
The A, B, C’s of FBT
The Detail – What is a Fringe Benefit?
A fringe benefit is a form of remuneration paid to the employee (or their associate) in addition to their salary and wage.
Suppose you’re a director of a company and pay yourself as an employee. If that is the case, then any benefits you incur, in addition to your salary, will be considered fringe benefits.
Examples of fringe benefits include:
- Allowing an employee to use a work car for private purposes
- Giving an employee a discounted loan
- Paying an employee’s gym membership
- Providing entertainment by way of free tickets to concerts
- Reimbursing an expense incurred by an employee, such as school fees
- Giving benefits under a salary sacrifice arrangement with an employee
The following are examples of what is not considered fringe benefits:
- Salary and wages
- Shares purchases under approved employee share acquisition schemes
- Employer contributions to complying super funds
- Employment termination payments (including, for example, the gift or sale at a discount of a company car to an employee on termination)
- Benefits provided to volunteers and contractors
How Is A Fringe Benefit Taxed?
The Obligation – When Does the Tax Hit?
Fringe Benefits Tax (FBT) is paid by employers on certain benefits they provide to their employees or their employees’ families or other associates. FBT applies even if the benefit is provided by a third party under an arrangement with the employer.
Fringe Benefits Tax is separate from income tax and is calculated on the taxable value of the fringe benefit. The employer must self-assess their FBT liability for the FBT year (that is, 1 April to 31 March) and lodge an FBT return.
Employers can generally claim an income tax deduction on the cost of providing fringe benefits and for the FBT they pay. Employers can also generally claim GST credits for items provided as fringe benefits.
Bypass DIY “Cost Accounting”
The Risk – Why Might I Be At Risk?
Fringe Benefits Tax is an issue for all businesses as many are not aware that they are providing fringe benefits, for example: driving a work car for personal use or taking an employee or client out for lunch. Importantly, many small business owners can fall foul of the legislation without realising it!
With improved data matching, the ATO now has access to all new car purchases. A company or trust that buys a new car and does not lodge an FBT return or include an employee FBT contribution in its income tax return may attract an ATO Audit.
Any Financial Benefits?
Why should my business lodge an FBT return when I have not paid before and my accountants calculate no FBT is payable?
For the simple reason that it turns on a three-year deadline for the ATO to commence audit activities. Without an FBT return being lodged, the ATO has the discretion to launch an audit into activities as far back as a business has had employees.
Without the evidence (e.g. signed declaration, logbooks, meal entertainment records etc.) that FBT was not payable in each year, the ATO is likely to raise FBT liabilities, even where the employee who enjoyed the benefit no longer works for the business. Thereby making it impossible for the business to recoup anything.
If your business does not have FBT payable (for example, there have been sufficient employee contributions to reduce the taxable value of benefits to nil), they may not be required to lodge an FBT return. However, you should always consider whether it is prudent to still lodge an FBT return to commence the “audit clock”.
Is Fringe Benefits Tax Deductible?
Some Opportunities – Reduce Tax Impact
You can reduce your Fringe Benefits Tax liability by having your employees contribute towards the cost of any fringe benefits. The contribution is usually a cash payment made to you or the person who provided the benefit. In the case of many small businesses, an adjustment is made to the directors’ loan account to reduce the FBT liability.
Salary Packaging Concessions for Better Cash Flows
A salary sacrifice arrangement is also commonly referred to as salary packaging or total remuneration packaging. It is an arrangement between an employer (your business) and an employee, where the employee agrees to forgo part of their future entertainment to salary or wages. This is in return for your business providing them with benefits of a similar value.
There is no restriction on the types of benefits that can be sacrificed. The important thing is that these benefits form part of the employee’s remuneration. They replace what otherwise could have been paid as salary.
If there is any FBT payable on the benefits an employee receives, the employer (that is, your business) is liable to pay the tax. You can agree to reduce your employee’s salary by the amount of FBT paid by you as part of a salary sacrifice agreement.
Financial Information For Often Overlooked Opportunities – FBT Exemptions + Concessions
Some benefits are exempt from Fringe Benefits Tax (FBT) or receive concessional treatment (for example living-away-from-home allowances). Specific exemptions and concessions apply to some not-for-profit organisations.
Subject to the limitations below, the following work-related items are exempt from Fringe Benefits Tax (FBT):
- Portable electronic devices such as mobile phones, laptops, tablets, portable printers and GPS navigation receivers
- Computer software
- Protective clothing
- Briefcases
- Tools of trade
The FBT exemption is limited to:
- Items primarily for use in the employee’s employment
- One item per FBT year for those that have a substantially identical function, unless it is a replacement item – except that small businesses can provide employees with more than one work-related portable electronic device in an FBT year – even if the devices have substantially identical functions.
A minor benefit is exempt from FBT where it is both:
- Less than $300 in notional taxable value (that is, the value if it was taxable); and
- Unreasonable to be treated as a fringe benefit
Superannuation paid on behalf of an employee subject to normal concessional limits can be a way of pushing “pre-tax” salary into superannuation.
Specific concessions apply to some not-for-profit organisations, including:
- Eligible charities, such as
- Charitable institutions
- Public benevolent institutions
- Health promotion charities
- Religious institutions
- Public and not-for-profit hospitals and public ambulance services
The Wrap on Taxation Services at Canny Group
Fringe benefits may be a crucial part of how you deal with your team and can be an effective way of attracting dedicated employees. However, if you decide to incentivise your employees by providing fringe benefits, you should ensure that you understand your Fringe Benefits Tax obligations.
Small businesses also need to be aware of the fringe benefits they may be receiving. Using company-owned vehicles for private travel or letting a family member use a vehicle, providing meals and entertainment or paying for personal expenses out of company funds can all be considered fringe benefits. Whilst many business owners think that such activity is harmless it could result in an ATO audit and a significant FBT liability.
Trust the Accountants Geelong Trust for Fringe Benefits Tax
Fringe Benefits Tax is an important part of business and can be an extremely attractive tool to attract the quality staff that you need on your team. Our team are here to help you, no matter the number of employees that you have or have had in the past. We want to make sure that you’re not staring down the barrel of an ATO Audit and to give our business the best chance at ongoing success. Get in touch with our team today to find out more on how Fringe Benefits Tax can impact your business and let us take care of the nitty-gritty.
