Common Fringe Benefits Tax issues for Australian businesses
The Fringe benefits tax (FBT) year ends on 31st March. As we approach that year end, we’ve outlined here a few issues which employers often ask us about.
Fringe benefits tax 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.
Fringe benefits tax on company motor vehicles
Motor vehicles which a business purchases and which are used almost exclusively as a work vehicle are not always exempt from FBT. If the car is used for private purposes to any degree – that is to pick the kids up from school, do the shopping, used freely on the weekends, garaged at home, used by an associate (spouse or other family member), then FBT is likely to apply. While we’re sure some might think “what the Australian Tax Office (ATO) doesn’t know won’t hurt them” when they come to complete their FBT returns, it might not be enough. The private use of work vehicles is firmly in the sights of the ATO.
Private use is when employees use a car provided by their employer (this includes directors) outside of simply travelling for work-related purposes.
If the work vehicle is garaged at or near the employee’s home, even if only for security reasons, it is taken to be available for private use regardless of whether or not they have permission to use the car privately. Similarly, where the place of employment and residence are the same, the car is taken to be available for the private use of the employee.
Finding out that a car has been used for non work-related purposes is not that difficult. Often, the odometer readings don’t match the work schedule of the business. These are areas the ATO will be looking at.
Utes and commercial vehicles – safe harbour rules to avoid FBT
When an employer provides an employee with the use of a car or other vehicle then this would generally be treated as a car fringe benefit or residual fringe benefit and could potentially trigger an FBT liability.
However, the FBT Act contains some exemptions which can apply in situations where certain vehicles (utes and other commercial vehicles for example) are provided and the private use of the vehicles is limited to work-related travel, and other private use that is ‘minor, infrequent and irregular’.
One of the practical challenges when applying the exemption is how to determine if private use has been minor, infrequent and irregular.
The ATO has indicated that in general, private use by an employee will qualify for the exemption where:
- The employer provides an eligible vehicle to the employee to perform their work duties. An eligible vehicle is generally a commercial vehicle or one that is not designed mainly for carrying passengers. The requirements are very strict and guidance on this is published on the ATO website.
- The employer has a policy in place which limits private use and obtains assurance from the employee that the vehicle has only been used for certain purposes.
- The value of the vehicle when it was acquired was less than the luxury car tax threshold ($75,526 for fuel-efficient vehicles in 2018-19 and $66,331 for other vehicles).
- The vehicle is not provided as part of a salary sacrifice arrangement; and
- The employee uses the vehicle to travel between their home and their place of work and any diversion adds no more than two kilometres to the ordinary length of that trip
- Some private travel is allowed, but the total private travel in the FBT year must not exceed 1000 km and no single, return journey for a wholly private purpose must exceed 200 km.
If you meet all these specifications, the ATO has stated that it will not investigate the use of the FBT exemption further. However, the employer will still need to keep records to prove that the conditions above have been satisfied and to show that private use is restricted and monitored.
If these conditions are not met then this doesn’t necessarily prevent the exemption from applying, but you can expect that the ATO would devote more time and resources in checking whether the conditions have actually been met. Employers who do not take active steps to check the way commercial vehicles are being used are at high risk of significant FBT liabilities. There are some practical steps that can be taken to reduce risk in this area.
Fringe benefits tax on car parking
We all know how expensive commercial car parks can be. The ATO has noticed that where car parking benefits are being declared (that is, where an employer provides parking to an employee), the value of what is being declared is significantly less than what you would expect to pay.
Common errors include:
- Market valuations that are significantly less than the fees charged for parking within a one kilometre radius of the premises on which the car is parked;
- Using parking rates or facilities not readily identifiable as a commercial parking station;
- Rates charged for monthly parking on properties purchased for future development that do not have any car parking infrastructure; and
- Insufficient evidence to support the rates used as the lowest fee charged for all day parking by a commercial parking station.
Living away from home allowances and FBT
Living Away From Home Allowances (LAFHA) continue to cause confusion for both employers and employees.
A LAFHA is an allowance paid to an employee by their employer to compensate for additional non-deductible expenses they incur, and any disadvantages suffered, because the employee’s job requires them to live away from their normal residence.
As a starting point, FBT applies to the full amount of the allowance that has been paid. However, if certain strict conditions can be satisfied with the taxable value of the LAFHA fringe benefit can be reduced by the exempt accommodation and/or food component.
Common errors include:
- Mischaracterising an employee as living away from home when they are really just travelling in the course of their work.
- Failing to obtain the declarations required from employees who have been provided with a LAFHA.
- Claiming a reduction in the taxable value of the LAFHA benefit for exempt accommodation and food components in circumstances that don’t meet the criteria.
- Failing to substantiate accommodation expenses and, where required, food or drink. Verifying accommodation expenses is important as the ATO will look closely for scenarios where employees are paid an allowance but go and stay with friends or relatives or stay somewhere cheaper and pocket the difference. The expense actually has to be incurred and substantiated.
Salary sacrifice or employee contribution?
Another issue that frequently causes confusion is the difference between the employee salary sacrificing in order to receive a fringe benefit and making an employee contribution towards the value of that fringe benefit.
Salary sacrificing for a fringe benefit
To be an effective salary sacrifice arrangement (SSA), the agreement must be entered into before the employee becomes entitled to the income (e.g. before the period in which they start to perform the services that will result in the payment of salary etc.).
Where an employee has salary sacrificed on a pre-tax basis towards the fringe benefit provided – laptop, car, etc., they have agreed to give up a portion of their gross salary on a pre-tax basis and receive the relevant fringe benefit instead.
As a starting point, the taxable value of the fringe benefit is the full value of the expense paid by the employer. The salary sacrifice arrangement doesn’t actually reduce the FBT liability for the employer.
The employer recognises a lower cost of salary and wages provided to the employee as their ‘cost saving’, which results in lower PAYG withholding and superannuation contribution obligations, but they still recognise the full value of the fringe benefit as part of their taxable fringe benefit which is subject to FBT.
The employee recognises that they have a reduced amount of salary and wages, and a non-cash benefit in the form of the fringe benefit.
Fringe benefits tax record keeping
It can be difficult to ensure the required records are maintained in relation to fringe benefits – especially as this may depend on employees producing records at a certain time. If your business has cars and you need to record odometer readings at the first and last days of the FBT year (31 March and 1 April), remember to have your team take a photo on their phone and email it through to a central contact person – it will save running around to every car, or missing records where employees forget.
Should you be registered for FBT?
If you have employees (including Directors of a company) then it’s possible your business needs to register for FBT. Generally, your business needs to register for FBT if you are providing any benefits to employees that are not exempt from FBT. So, if you provide cars, car spaces, reimburse private (not business) expenses, provide entertainment (food and drink), employee discounts etc., then you are likely to be providing a fringe benefit.
There is a list of exemptions that are considered exempt from FBT, such as portable electronic devices like laptops and iPads (although there are rules around how many), protective clothing, tools of trade etc. If your business only provides these exempt items, or items that are infrequent and valued under $300, then you are unlikely to have to worry about FBT.
How can Greenwich & Co help you?
We encourage business owners to consider their FBT liabilities before 31st March and to ensure their business is compliant with its obligations.
Greenwich & Co can assist with strategies for minimising your FBT liability, reviewing your business’s FBT position and lodging FBT returns.
If you have any queries or concerns about the issues raised in this article, or about FBT in general, please just contact us. We would be happy to talk through the issues with you.