The end of the fringe benefits tax (“FBT”) year is fast approaching.
Do you have your head around the most common FBT issues that SME businesses face?
Here is our quick guide:
Portable electronic items
Do you know the difference between a phablet and a tablet pc? Do you know the difference between an iPad, iPad mini, iPhone and an iPod? Functionality is key for FBT. Provide two devices in the one FBT year with different functionality and both can be exempt. But if they both have the same functionality, the second one is subject to FBT. An iPad and iPhone may be okay, but giving a laptop and a tablet pc may not be.
Don’t forget that for the benefit to be FBT exempt, the item must be primarily for use in the employee’s employment. Giving all staff an iPad as a bonus may be generous, but it will also attract FBT unless the iPad can be shown to be primarily for use in the employee’s employment (which may be a challenge to prove for some members of staff).
From the 2017 FBT year, the exemption for providing one work-related portable electronic device to employees is extended for eligible small businesses. Small businesses can provide their employees with more than one qualifying work-related portable electronic device and still be able to access the existing FBT exemption for additional items. This is even if they do not have substantially different functions as to the first device.
Most of the time, utes and similar vehicles provided by an employer are exempt from FBT. The exemption can be quite valuable as it allows the home-to-work trip to be considered, in effect, as a business trip.
However, the exemption will only apply where other private use of the vehicle is minor, infrequent and irregular. How do you prove this if the ATO asks?
As with all taxes, the burden of proof rests with the taxpayer. As an example, if the employee has no vehicle other than the ute provided by their employer (for example they don’t also own a ‘family car’) it is likely to be a challenge to prove that private use would have been minor, infrequent and irregular as the ute will have been used for all their personal travel.
A mistake on this point can be expensive – it can mean all the home/work trips are subject to FBT, not just the other private use.
If you want to use the operating cost (logbook) method to determine the FBT liability on a ‘company car’, the logbook has to meet all the requirements under the tax laws. Often logbooks do not contain a sufficiently detailed description of the use of the vehicle and so the logbook is not treated as meeting the FBT requirements.
If sufficient records to apply the operating cost method are not maintained, the benefit is likely to be taxed under the statutory formula.
Under the statutory formula, if a vehicle is kept ‘near’ the employee’s home overnight it will be considered available for private use. Where the employee’s home and workplace are in close proximity, proving that the vehicle is not available for private use overnight can often be a challenge, with the ATO in recent years having won cases on this point.
Christmas parties (or other parties and functions for that matter) are not a separate type of fringe benefit. Due to the nature of a Christmas party, it may fall under a number of different categories of fringe benefit (for example meal entertainment, property fringe benefit etc).
A tax deduction for a party is generally only available if the party is subject to FBT. Hence, if you are treating the party as an exempt minor benefit or an exempt property benefit, it is unlikely to be tax deductible. This will also affect your ability to claim GST input tax credits.
Gifts to employees may still be tax deductible even if they are treated as an exempt minor benefit.
Otherwise deductible rule
The otherwise deductible rule allows the taxable value of a fringe benefit to be reduced to the extent that the recipient of the benefit would have been entitled to a tax deduction for the expense.
A key part of this is that the tax deduction must be a once only deduction – a deduction spread over a number of years won’t qualify. This means that if an employee would claim a deduction for depreciation, the otherwise deductible rule won’t be available.
As an example, if an employer reimburses an employee for the cost of a desktop computer, even if the employee uses the computer 100% for business purposes, any deductions the employee would otherwise claim for the cost of the computer would be in the form of depreciation, hence the otherwise deductible rule cannot apply.
Also, the otherwise deductible rule generally only applies where the recipient of the benefit is an employee (and not their spouse or other associate).
Small business car parking
An exemption from FBT applies to eligible small business car parking benefits. In order for the exemption to be available, the employer must firstly be either a small business entity or have income of less than $10 million in the income year before the current FBT year started. In addition, the car parking cannot be provided at a commercial parking station. This can be a valuable exemption for smaller businesses.
If you have to apply the car parking benefit rules, remember to look at whether there is a commercial parking station located within 1km. This 1km is a radius – as the crow flies – not 1km driving distance or nearest practical walking route.
Problems with not lodging an FBT return
If an entity doesn’t have an amount of 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.
By not lodging an FBT return the taxpayer will have an unlimited amendment period for FBT matters relating to that particular year. This is because the lodgement of an FBT return is required to start the amendment timeframe.
Unlimited amendment periods can cause problems in later years as the ATO could conduct an FBT audit even when the standard amendment period has expired.
Should you require assistance in relation to FBT matters, please contact your William Buck advisor.