You may have just received a template letter from your accountant asking you to tell them if you’ve been paying fringe benefits along with a long list of questions. You may be wondering to yourself what on earth they are talking about. If this is you, then this post is for you and I’ll do my best to keep you from falling asleep.
Fringe benefits are non-cash benefits provided to your employees in the course of their employment. Notable examples include motor vehicles, paying the employee’s personal bills and providing entertainment. The rules consider these to be part of the employees remuneration and therefore should be taxed as such, enter Fringe Benefits Tax (or FBT).
If you’re providing fringe benefits for your team it’s likely you’ll have an obligation to lodge an FBT return with the ATO and pay any resulting FBT. Here are the basic mechanics of the system:
- If the expense is subject to FBT you can claim a tax deduction for the expense and a credit for any GST paid.
- The FBT year runs 1 April to 31 March with the return being due 21 May (technically it’s 25 June, but you the payment is due on 21 May so why you’d pay but not lodge I’ve no idea).
- FBT is tax deductible when paid.
- The FBT calculation is fiddly, but basically the expense is doubled then subject to a 47% tax rate. Spent $10 at the pub? Then you’ll have a FBT of around $9.
What kinds of benefits do we commonly see?
- Entertainment. This is the #1 thing we see clients providing for their team which is great to see from a morale perspective, less great from a tax perspective. Entertainment includes meals out of the office (ignoring travel), after work drinks at the local, going to laser tag, and almost anything else that constitutes “entertainment” in the eyes of the tax man. Please note that entertainment provided to clients is non-deductible and not subject to FBT. We often lump all entertainment into a single expense account – both clients and staff – so there are a two methods of calculating how much FBT to pay on entertainment. You can pick through the costs and allocate them precisely (actuals method) or you can split it 50/50 (this is the preferred method for many).
- Motor vehicles. If the company has a car that employees can use for private purposes then the car will be subject to FBT. There are two methods for calculating the amount that will be taxed. The operating cost method looks at the actual cost of running the car and applies your logbook percentage to figure out how much is private and therefore subject to FBT. The statutory method simply takes 20% of the price of the car and makes that subject to FBT.
- Expense payments. If the company is paying for costs on behalf of the employee (e.g. the employee packages in health insurance or daycare fees) then those costs will be subject to FBT.
Can I get out of this?
Perhaps. If the benefit being provided is considered to be minor and ‘unreasonable to treat as a fringe benefit’ (the ‘minor benefits’ exemption) then you can simply make the expense non-deductible (and not claim any GST credits) and avoid any FBT obligations. What is ‘minor and infrequent’?
- Minor. Easy enough, minor means less than $300 per person per occasion.
- Unreasonable to treat as a fringe benefit? Less easy to define. For most of us you’ll need to examine the frequency (i.e. is it a weekly occurrence or does it only happen a few times a year?) and the total value of the benefits provided over the year in order to make a determination.
The details of the FBT regime can be difficult to get your head around, like most of the Australian tax system, but the basics are easy enough – if you provide benefits outside of wages to your team then you’ll likely have an FBT issue. The ATO have recently announced they’ll be on the hunt for businesses not complying the with FBT rules, specifically going after motor vehicles being provided for employees but not declared as well as entertainment costs that are being claimed as a deduction but not having any FBT paid on them.
If you’re unsure about how FBT might apply to your business, or you simply want someone to take care of your company’s compliance obligations, why not get in touch today? We’ve helped countless business sort out their tax compliance obligations and we’d love to help you too. Get in contact here.