So many small businesses mistakenly assume that FBT is just for big businesses. Sure, the ATO hit these businesses hard when they entertain in their corporate boxes or when they reward their staff with big Christmas bashes at swanky restaurants. But equally their eyes are also on any business that provides their staff and associates with fringe benefits including small to medium sized family businesses!
If you operate your business as a company or a trust, you are actually an employee and these rules apply to you and your other employees. If however you operate your business as a sole trader or partnership you may be providing fringe benefits to your employees. I have had many a client come to me saying that they had never had a discussion with their previous accountant about FBT. Unfortunately some accountants ignore it altogether or some accountants just deal with it at the end of the year when they complete your financial statements and tax return. Whatever the case may be, why not start to be a little more proactive which will hopefully help you minimise the damage caused by the ATO’s FBT legislation?
Each year I actually send out to my clients’ an FBT questionnaire for them to complete. This ensures that we capture all of the benefits provided and will assist us in the event that their business is subject to an ATO audit. To be honest, it’s not something they love doing but realise it is a necessary evil.
To be ‘forewarned is forearmed’, so here is a little bit of FBT 101 to get you started.
What is fringe benefits tax (FBT)?
FBT is a tax employers pay on certain benefits they provide to their employees, including their employees’ family or other associates. The benefit may be in addition to, or part of, their salary or wages package.
Is the FBT year the same as the financial year?
No, the FBT year runs from 1 April to 31 March.
What are the different types of fringe benefits?
- Car fringe benefits
- Car parking fringe benefits
- Entertainment and fringe benefits
- Expense payment fringe benefits
- Loan fringe benefits
- Debt waiver fringe benefits
- Housing fringe benefits
- Board fringe benefits
- Living away from home allowance fringe benefits
- Property fringe benefits (including property, goods or shares)
- Residual fringe benefits (benefits not covered by the above categories)
FBT exemptions and concessions
There are some benefits are either exempt from FBT or receive concessional treatment (for example, living away from home allowance). Specific exemptions and concessions apply to some non-profit organisations.
- Work-related items exempt from FBT
- Minor benefits exemption
- Taxi travel expenses exemption
- Small business car parking exemption
- Concessions, including specific concessions for non-profits
- Living away from home allowance fringe benefits
How much is fringe benefits tax?
The current FBT rate is 47%.
This rate is applied to the taxable value of the fringe benefits provided which is something your accountant will calculate for you and this is why it is important to provide your accountant with as much information as you can.
Reducing your FBT liability
You can reduce the amount of FBT you pay by:
- replacing fringe benefits with cash salary
- providing benefits that your employees would be entitled to claim as an income tax deduction if they had paid for the benefits themselves
- providing benefits that are exempt from FBT
- using employee contributions* – eg an employee receiving a car fringe benefit can pay for some of the operating costs (such as fuel) that you do not reimburse. Employee contributions may be assessable income to you and may be subject to GST.
*this is what many accountants will do at the end of the year and you may not even know that they do it. This “employee contribution” amount should be notated separately in your Profit & Loss statement and in your business’s tax return and effectively this reduces the deduction for the expense ie. If you have car expenses of $12,000 and your accountant calculates your private use or employee contribution is $4,000 – the net effect is that you are claiming $8,000 for car expenses. The ATO can cross reference RTA records to ascertain if you have business vehicle’s registered and will look for either payment of FBT or disclosure of an employee contribution in the business’s tax return.
An explanation of the most common fringe benefits and what information you need to give to your accountant
By far the most common fringe benefits provided by my clients relate to cars, utes and entertainment so this is what I am going to cover for you.
There are 2 ways to calculate the taxable value of a car benefit and your accountant will work out the most cost effective based on you providing them the following information for each of your business vehicles:
- odometer reading at 31 March
- a logbook which has been kept for a 12 week continuous period which is representative of regular business/private use patterns
The statutory formula is the only method your accountant can use if you have not provided them with a logbook.
Basically, it is the easiest method of calculating FBT as the base value of the car is multiplied by a flat 20%. This method may be very costly to you however if your vehicle was expensive, your business use is high or the ATO decide that the logbook your accountant was relying on was deemed invalid by the ATO in the event of an audit.
The other method that can be used is the operating cost method which relies on you having an accurate and valid logbook. The private % is applied to the vehicle’s costs for the year.
Please take care with utes as there is a misconception that these are exempt from FBT. This is not necessarily the case. The private use of a motor vehicle that is not a ‘car’ (eg a one tonne ute) won’t be considered a car benefit but it may be considered a residual fringe benefit.
A ute will only be considered an “exempt fringe benefit” if the employee’s private use of such a vehicle is limited to:
- travel between home and work
- travel that is incidental to travel in the course of duties of employment
- non-work related use that is minor, infrequent and irregular (eg: occasional use of the vehicle to remove domestic rubbish).
So if you use your business ute to run your child to weekly rugby or netball practice and perhaps a weekend game, this would not be considered “minor and infrequent”. Failure to produce a logbook may result in the ATO applying the 20% statutory method which would not be pretty!
If you are a business that provides a ute to your employees, you should get them to provide you with the odometer reading of the vehicle at 31 March and also get them to sign a declaration advising that the travel that they have done in the ute during the year was only between home and work and any private use was minor, infrequent and irregular. Your accountant will be able to provide you with such a declaration.
Entertainment is a real tricky one and you should try and get your head around what you can and can’t claim as there are FBT, income tax and GST implications associated with providing entertainment type benefits.
Because there are so many things to consider, I would suggest instead of getting too stressed out with knowing everything, just have a chat to your accountant about the types of things you provide in your business and get them to let you know how you should be treating them (especially in MYOB, Xero or Quickbooks file). Get your accountant to also help with setting up your bank rules so you are using the right account codes and GST codes or if you really don’t feel comfortable making the call, set up a separate account called “Entertainment – accountant to review” and don’t claim any GST on the expenses during the year.
When the ATO talk about providing entertainment they mean:
- providing entertainment by way of food, drink or recreation (a game of golf, a gym membership, theatre or movie tickets, a joy flight or a harbour cruise)
- providing accommodation or travel in connection with such entertainment, or
- paying or reimbursing expenses incurred in obtaining something covered by the above points.
Some examples of entertainment are:
- business lunches and drinks and staff social functions such as parties
- tickets to sporting or theatrical events, sightseeing tours or holidays, and
- accommodation and travel in connection with entertaining clients and/or employees over a weekend at a tourist resort.
To enable your accountant to give you the appropriate advice you should record the following information for each type of entertainment provided during the year:
- the date you provided the entertainment
- who was the recipient of the entertainment (are they an employee, associate of the employee or another person)
- the cost of the entertainment
- the kind of entertainment provided
- where the entertainment was provided.
You might like to keep a register or get into the habit of capturing this information and any extra things you want to share with your accountant in your MYOB, Xero or Quickbooks file.
Again, some of your accountants will deal with your business’s entertainment expenses at the end of the year but you know what, some of these expenses may end up not getting claimed as tax deductions just to avoid FBT. Wouldn’t you want to know this, so next time you might do things a little differently? Not spend so much? Provide something different that is tax deductible?
I hope this information has been useful and will hopefully get an FBT conversation started with your accountant.
PS. Don’t forget to write those odometer readings at close of business 31 March!