What employers need to know about FBT 2020
We are living in difficult times, however the world keeps going and our businesses are still expected to meet their Fringe Benefit Tax (FBT) obligations for this year ended 31 March 2020.
The key issues for employers this FBT year and beyond are outlined below.
Should I be registered for FBT?
If your business has employees (including Directors of a company or trustees of a trust) then it's highly likely your business needs to register for FBT. Generally, your business needs to register for FBT if you are providing any benefits (not in the form of wages) to employees, that are not exempt from FBT. Examples of common fringe benefits are:
- Provision of motor vehicles for employee use;
- Provisions of car spaces for employee use;
- Entertainment expenses (including meals and recreation);
- Employee discounts on goods;
- Reimbursement of private expenses; or
- A myriad of other non-cash benefits.
The following benefits could be exempt from FBT:
- Portable electronic devices like laptops and iPads;
- Protective clothing;
- Tools of trade;
- Expenses that would be otherwise tax deductible to the employee; and
Further, simply forgoing a tax deduction and GST credit does not provide an exemption from FBT.
We recommend that, even if you only have exempt benefits or no fringe benefits, that your business still be registered for FBT and lodge a yearly FBT return. In completing and lodging a yearly FBT return, your business will limit its exposure to Australian Tax Office (ATO) review for a period of 4 years from the date of lodgement of the FBT return.
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.
Exempt fringe benefits during emergencies
If your business assists employees during an emergency, for example floods, bushfires, or a pandemic outbreak etc., then fringe benefits tax is unlikely to apply to the assistance you provide. While we doubt anyone would be thinking about FBT during a crisis, it's good to know that the tax system does not disadvantage your generosity.
Examples of the kinds of benefits exempt from FBT include immediate relief you provide to an employee in the form of:
• emergency meals or food supplies
• clothing, accommodation, transport or use of household goods
• temporary repairs, for example on the employee's home or car. Long-term benefits are not exempt from FBT, such as providing a new house or car to replace one destroyed in the emergency event.
First aid or other emergency health care you provide to an employee is also exempt if it is provided by an employee (or a related company employee), or is provided at your premises (or those of a related company), or at or near an employee's worksite.
The exemption applies in a range of scenarios including natural disasters, accidents, serious illness, armed conflict, or civil disturbances.
Motor Vehicles – using the company car outside of work
Just because your business buys a motor vehicle and it is used almost exclusively as a work vehicle, that alone does not mean that the car is exempt from FBT. If you use the car for private purposes - pick the kids up from school, do the shopping, use it freely on weekends, garage it at home, your spouse uses it - FBT is likely to apply. While we're sure the old, "what the ATO doesn't know won't hurt them" mentality often applies when the FBT returns are completed, it might not be enough. The private use of work vehicles is firmly in the sights of the ATO.
Private use is when you use a car provided by your employer (this includes directors) outside of simply travelling for work related purposes.
If the work vehicle is garaged at or near your home, even if only for security reasons, it is taken to be available for private use regardless of whether or not you 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 for 'workhorse' vehicles
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 recently released a compliance guide that spells out what the regulator will look for when reviewing the use of the exemption.
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.
The ATO's top FBT problem areas
The ATO have identified the following as being problem areas under review:
• Fringe Benefits Tax Return and Income Tax Return mismatch.
FBT contributions made by employees to reduce any FBT liability are considered income for income tax purposes. This income is required to report in the income tax return of the business in the appropriate label.
• Non-Lodgement of FBT Returns.
As discussed earlier, if your business employs staff, it is likely to be subject to FBT and be required to lodge a FBT return. Non-lodgement of returns, could lead to penalties and interest or additional tax payable.
• Business assets used personally.
The ATO are consistently reviewing business assets that may be used or available for use by directors, employees or associates.
• Entertainment expenses claimed as a tax deduction but not recognised for FBT.
The ATO have advised that a common area overlooked is where businesses claim a tax deduction for entertainment, but fail to complete the relevant FBT obligations to allow for the claim. The ATO have also advised that a common error made is the misclassification of entertainment expenses as sponsorship, advertising or donations
• Motor Vehicle Fringe Benefits.
The ATO will continue to monitor motor vehicle fringe benefits specifically in relation to business that own a vehicle but do not report or complete an FBT return for personal use of that vehicle. The ATO will also continue to review the incorrect application of FBT exemptions or reductions, especially around Eligible 'workhorse' vehicles such as Utes.
• Car Parking Fringe Benefits.
The ATO have acknowledged that there have been many instances of miscalculating car parking fringe benefits, especially around significant discounts on market values, non-commercial commercial parking rates and lack of supporting evidence. The ATO will continue to have a focus on these benefits.