With the end of the fringe benefits tax (FBT) year approaching, now is a good time to review your obligations and the valuation methods you use for benefits you provide.
Are you providing fringe benefits?
You can use this checklist to work out whether or not you have an FBT obligation. You may have an FBT obligation if you answer yes to any of the following questions:
- Do you make cars or other vehicles owned or leased by the business available to employees for private use?
- Do you provide employees with loans at reduced interest rates?
- Have you released an employee from an owed debt?
- Have you paid or reimbursed a non-business expense an employee incurred?
- Do you provide houses or units of accommodation to your employees?
- Do you provide employees with living-away-from-home allowances?
- Do you provide entertainment by way of food, drink or recreation to your employees?
- Have you provided property, either free or at a discount to your employees?
- Do any of your employees have a salary package arrangement in place?
We have identified some FBT obligations you may overlook. It is valuable to be aware of these obligations so you can recognize and value fringe benefits.
- A car garaged at an employee’s residence may be a car fringe benefit.
- You must keep logbooks when you use the operating cost method
- If you do use the operating cost method, the luxury car tax threshold does not apply when working out the deemed interest and depreciation
- You need to account for FBT instead of reducing company income tax deductions to the extent of your perceived private use of cars for FBT or applying employee contributions to eliminate the FBT liability.
- If you use employee contributions to reduce the taxable value of a fringe benefit to nil, you must also:
- Return the contribution as assessable income for income tax purposes
- Recognize a taxable supply for GST purposes
- You may need to substantiate employee paid costs for fuel and oil expenses with employee declarations
- Where you pay an employee’s contribution by journal entry, it must be correctly documented and made at the appropriate time.
If you are a director and run your business through a company, you may be regarded as an employee of that company. So, the fringe benefits you provide to yourselves as directors may mean the company has FBT obligations.
Reportable Fringe Benefits:
If you include reportable fringe benefits on your employees’ payment summaries, you must also lodge FBT returns.
Categorizing type 1 and type 2 benefits:
- You cannot use the type 2 gross-up rate just because you don’t claim a GST credit
- Entertainment expenses are not automatically type 2 benefits.
- Make sure you don’t incorrectly use the type 2 gross-up rate where vehicles are under hire purchase.
Otherwise deductible rule:
The otherwise deductible rule can be used only to reduce the taxable value of the benefit to nil when the expenditure would have been 100% deductible to the employee – otherwise you can only reduce the taxable value by the business percentage.
The ATO are cracking down on FBT Non-Compliance
FBT car benefits obligations can slip through the cracks – but not complying can be costly for you.
The Australian Taxation Office is paying close attention to FBT-related compliance and they have greatly increased their FBT compliance activities when compared to earlier years. They have refreshed the external data they use for data matching and have refined their computer programs to process the new and expanded information.
Through data matching and compliance verification, the ATO have found that seven out of every 10 taxpayers they investigate are non-compliant. On average it results in a liability of $77,380 and a general interest charge of $19,336. Where the ATO escalate the cases and issue assessments, average penalties are $38,006 per case. However, the ATO won’t apply those penalties to voluntary disclosures.
If you have made FBT mistakes, we recommend you make voluntary disclosures to minimize penalties and the general interest charge.
The most common areas of non-compliance are:
- Not recognizing that home garaging is being available for private use
- Not keeping log books and odometer readings
- Not identifying directors’ cars as a taxable benefit
- Not returning employee contributions as income in their tax returns.
We recommend you contact our office prior to 31 March if you need clarification on any of the above issues. For FBT advice, please contact Steve Lockwood.