For many employers, March means fringe benefits tax (FBT) time. As the tax is levied on employers, the compliance headache largely falls on them and they need to have all their paperwork in order to have their FBT returns completed and then lodged on time.
If a fringe benefit is paid to an employee, and it is subject to FBT, its value must be determined so the correct amount of tax to pay can be calculated. That’s where the complexity and compliance costs become an issue. The process is essentially a fairly complex number-crunch, so it’s important to have good records and a good accountant.
And don’t forget that all States impose payroll tax on fringe benefits, so that’s another business cost to consider. The compensation is that FBT (and FBT instalments) are tax deductible to employers.
A fringe benefit to an employee could be the provision of a company car, a loan, etc in respect of their employment.
There are now a broad range of benefits that are exempt from FBT which employers should note. If you are in doubt as to whether a benefit is exempt, ask your accountant. I’ll cover some of the more common exemptions later.
Cars and FBT
The most common fringe benefit provided by employers to their employees is the car. As information for 2010 FBT returns is now being put together, employers should be particularly careful when it comes to how they record car fringe benefits.
In basic terms, a car fringe benefit arises where an employer provides a car (owned or leased by the employer) to an employee for the employee’s private use. It’s the “private use” of the car that is important here and it is that issue that often causes problems.
“Private use” is defined in the FBT law to mean any use of the car that is not exclusively in the course of producing assessable income of the employee. Home to work travel is normally regarded as private use.
The Tax Office regularly checks FBT returns concerning motor vehicles and it is an ongoing compliance issue. In fact, the Tax Office says that its recent checks of so-called “luxury” cars (ie. cars costing above $57,180) found that many company owned or leased cars used by employees did not account for FBT – and some large tax bills for employers were the result.
There are two methods that can be used to work out the taxable value of the car – the “statutory formula” method or the “operating costs” method. The most commonly used method is the statutory formula method because it is the much simpler method to use. The FBT is worked out by multiplying the base value of the car by a percentage determined by how many kilometres the car is driven in a year, remembering that the FBT year runs from April 1 to March 31.
So, the further the car is driven, the less FBT is payable. Under this method, it doesn’t matter if the car is driven totally for business use, totally for private use, or somewhere in between.
The operating costs method requires working out the total operating costs of the car (fuel, oil, servicing, etc) and reducing that total amount by the portion of private kilometres travelled as compared to the total kilometres. It is most often used where business kilometres travelled are high, but is more complicated and requires more records (log books) to be kept and calculations to be made.
Where car log books are used, Tax Office research shows that many logbooks do not provide sufficient information on the use of the car. Log books are valid for five years, but must be kept for a continuous period of 12 weeks (which may straddle two FBT years). The tax rules here are strict and require that a log book entry must be made for each journey undertaken in the car during the 12-week period. Each entry must set out:
- The date on which the journey began and ended;
- Odometer readings at the beginning and end of the journey;
- The number of kilometres travelled by the car in the course of the journey; and
- The purpose or purposes of the journey. These entries must be in enough detail to establish to the satisfaction of the Tax Office that they are business journeys. SMEs should be aware that the Tax Office will not accept general descriptions such as “business” or “miscellaneous business”. Entries must be more specific, eg. state the name of the client, their address and specific purpose of the journey.
An entry in a log book does not have to include the driver’s name or be signed by the person making the entry.
Another mistake employers sometimes make concerns recording the private travel of cars. Where a car travels a large proportion of its kilometres for business purposes, using the operating costs method (ie. recording fuel, oil, etc) can reduce its taxable value for FBT purposes and, hence, the FBT itself to be paid. Where the car is garaged at the employee’s home, the kilometres travelled for private purposes must be recorded so they can effectively be excluded from the total kilometres travelled in working out the taxable value for FBT purposes. In past years, the Tax Office has found that this was not always being done, and employers must note they need to record private travel details.
If the statutory formula is used, there are a number of traps to be wary of, and the ATO warns that it regularly comes across these errors.
- While the cost price (which includes GST and dealer delivery) is obviously part of a car’s base value for FBT purposes, registration and stamp duty are not included.
- The base value of the car also includes accessories fitted at the time of purchase such as air-conditioning, tinted windows and rust-proofing. However, the cost base does not include accessories fitted to meet the special needs of a business, eg. a two-way radio in a salesperson’s car.
- When, for example, an employee is on holidays, the FBT on the car can be reduced provided the car is garaged at the employer’s premises while the employee is away.
If the employer has owned the car for more than four years, there is an FBT saving because its base value is reduced by one-third. This is a once-only reduction and applies only to the original base value of the car.
- Actual kilometres travelled (not an estimate) must be recorded on March 31 each year in order to work out how many kilometres were travelled in the FBT year.
Some fringe benefits are exempt from FBT
It’s important to note that SMEs can provide their employees with a number of work-related items that are not subject to FBT, ie. they are exempt from FBT. These include:
- car phones
- mobile phones (where used primarily for use in the employee’s employment)
- protective clothing required for employment
- laptop computers – printers designed for use with laptops are also exempt from FBT
- subscriptions to trade or professional journals
Other benefits exempt from FBT include:
- travel costs associated with relocating an employee
- taxi trips beginning or ending at work or taxi trips between work, home or hospital where the employee is sick or injured
- newspapers for business use
- contributions by an employer to an eligible childcare centre
- certain child-minding facilities provided on an employer’s premises
- the costs of outplacement services provided to current or former employees
- “in-house” benefits (eg free or discounted goods) up to a maximum of $1,000 per employee per year.
SMEs have been telling governments for years that FBT is a compliance headache for them. That’s why so many use tax agents to prepare and lodge their FBT returns.
Now is the time to talk to your tax agent or accountant about properly complying with the FBT laws, but paying no more FBT than the law requires. It’s also worth remembering that the ATO has reviewed and updated its Fringe benefits tax – a guide for employers publication on its website.
Source: Smart Company E-Newsletter Thursday, 25 March 2010