FBT Season is here

With the start of a new Fringe Benefits Tax (FBT) year now’s the perfect time to ensure that your affairs are in order.

The last year has seen the introduction of a number of important changes relating to FBT which if left unchecked could have a substantial effect on your business and the amount of tax you pay in the coming FBT year.

We’ve highlighted some of the keys areas to look out for.

1. Cars

2. Utes and commercial vehicles

3. Living away from home allowances

4. Entertainment

1. Cars

As outlined in our Holiday Edition of Be Informed, the 2011 – 12 Federal Budget included important changes to the FBT treatment of motor vehicles.

What to look out for

As Treasurer, Wayne Swan, announced the statutory formula method which uses progressive rates for calculating car fringe benefits will be replaced with a flat statutory rate of 20% regardless of the distance the vehicle travelled.

This flat statutory rate will apply for cars acquired (or committed to) after 10 May 2011 and will be phased in over a number of FBT years, as set out in the following table.

Distance travelled during the FBT year (1 April – 31 March)
Statutory rate (multiplied by the cost of the car to determine the taxable value of a person’s car fringe benefit)
Existing contracts
New contracts entered into after
7:30pm (AEST) on 10 May 2011
From 10 May 2011
From 1 April 2012
From 1 April 2013
From 1 April 2014
0 – 15,000 km
0.26
0.20
0.20
0.20
0.20
15,000 – 25,000 km
0.20
0.20
0.20
0.20
0.20
25,000 – 40,000 km
0.11
0.14
0.17
0.20
0.20
40,000 km
0.07
0.10
0.13
0.17
0.20

 

Importantly, while the changes in the FBT treatment are intended to apply only to new commitments to purchase a car, an alteration to a commitment that was entered into prior to May 2011 may also trigger the new rules to apply.  This could happen, for instance, where:

  • The car is refinanced;
  • An existing finance contract is altered; or
  • An employee changes employers and the car is held under a novated lease arrangement.

What to do

If a car is to be subject to the new 20% statutory fraction, it may be prudent to review the employee’s salary packaging calculations in order to determine whether the employee is actually receiving a benefit from packaging the car.

In some cases, especially where there is substantial business use of the car, a better outcome may be attained if the operating cost method is used.  However, this method requires a valid log book to be maintained in respect of the car, which can cause an administrative burden.

In other cases, the best option may be to stop providing a car benefit to the employee.  This would need to be determined on a case-by-case basis in line with the company’s strategic direction.

2. Utes and commercial vehicles

A common misconception is that utes, panel vans and other commercial vehicles are exempt from FBT.  This is not always the case and many Employers have attracted an unexpected FBT liability in respect to a commercial vehicle.

What to look out for

For these types of vehicles to be exempt from FBT, there must be no private use of the vehicle other than:

  • Home to work travel;
  • Travel that is incidental to  the course of performing employment duties; and
  • Other private use that is minor, infrequent and irregular.

The Australian Taxation Office (ATO) has indicated that it will be increasing its scrutiny on the level of compliance with this part of the law, in the upcoming FBT year.

What to do

Employers should review the use of any vehicles that are currently treated as being exempt from FBT to confirm whether they would satisfy the above requirements.

In doing so, it is important to remember that it is the taxpayer (not the Commissioner of Taxation) who must prove the manner in which the vehicle has been used.  In this regard:

  • If the employee’s only vehicle is the commercial vehicle provided by the employer, it is likely to be more difficult to substantiate the employee’s private use of the vehicle as being minor and infrequent
  • If arm’s length employees are involved, it may be worthwhile implementing a policy that restricts the private use of vehicles to being minor and infrequent.  Of course, to be effective, such a policy would have to be enforced once implemented
  • You may consider requiring employees to maintain a log book for their vehicle, confirming that the private use is minor and infrequent.

If the ATO is not satisfied that the vehicle’s private use satisfies the requirements of the law, they would be likely to treat the vehicle as being taxable.  This could result in a substantial FBT liability for the employer.  As such, care should be had in taking all steps possible to comply with the law.

3. Living Away From Home Allowances

The treatment of Living Away From Home Allowance (“LAFHA”) is proposed to change substantially from 1 July 2012, as discussed in our Holiday Edition of Be Informed.

A LAFHA fringe benefit occurs when an allowance is paid by an employer to an employee for additional expenses incurred because the employee is required to live away from their usual residence for work.  LAFHAs usually include rent and food costs.

What to look out for

Under the existing rules, a LAFHA is treated as a Fringe Benefit.  Therefore, the employer is required to deal with the LAFHA as part of preparing their annual FBT return and the amount is not disclosed on the employee’s payment summary as a taxable amount.

From 1 July 2012, the way in which LAFHAs are taxed is proposed to change substantially:

  • LAFHAs will be treated, in effect, as an ordinary allowance to an employee
  • Any LAFHA will be shown as a taxable allowance on the employee’s payment summary, and it will need to be included as assessable income in their personal tax return
  • A new specific deduction will be created for living away from home expenses
  • Employees will be required to claim a deduction for living away from home expenses in their tax return.
  • It is expected that this will be a new item in the individual tax return
  • Employees will need to substantiate their accommodation expenses (for example, by showing a lease agreement or rent receipts)
  • Food expenses will be deductible, without receipts, up to an amount specified by the ATO on an annual basis.  If expenses are to be claimed above the specified amount, the entire amount of the deduction (not just the excess) will need to be substantiated.

Additionally, the eligibility to claim living away from home expenses will be restricted for temporary residents.  Temporary residents will now only qualify for the LAFHA tax exemption if they maintain a home in Australia from which they travel to another place for work purposes, such as ‘fly-in fly-out’ workers.

As a result most expatriate temporary residents, such as those on 457 visas, look set to lose their entitlements.

What to do?

For employees who are Australian residents, the eligibility conditions should not change.  The main point for employers will be to communicate that they need to be able to substantiate their accommodation costs from 1 July 2012.

Most temporary residents will lose the tax-free status of their LAFHA from 1 July 2012.  These employees will, in effect, have a reduction in the amount of their take-home pay.  It will be important to communicate this to employees as soon as possible so that any ‘surprises’ are avoided.

We do not expect that there will be any transitional arrangements for temporary residents.

4. Entertainment

The most common ways of calculating the taxable value of ‘entertainment’ benefits are:

  • The 50/50 method – where it is deemed that 50% of the entertainment is provided to clients and 50% to employees
  • The actual method – where records of who receives the entertainment benefits provided are kept for the full FBT year.

What to look out for

Many employers use the 50/50 method of calculating entertainment benefits because of its simplicity. In many cases, however, the actual method will provide a lower taxable value.  This is because:

The ‘minor and infrequent benefit’ rule can be applied to exempt benefits with a taxable value of less than $300 and which are provided on an irregular and infrequent basis; and

The ‘on business premises’ rule can provide an exemption for food and drink provided to employees on the business premises on a working day.

Neither of these exemptions is available for ‘entertainment’ benefits if the 50/50 method is chosen.

What to do?

Importantly, to use the actual method, you must keep sufficient records to track the number of employees, associates of employees, clients and other persons receiving benefits.  This can be quite burdensome and can be one of the main reasons why employers don’t use the actual method.

To review your FBT situation for the year ahead please contact your local advisor.