By Kim Reynolds & Hayden Jones
Despite the ongoing COVID-19 crisis and the very real concerns that this virus brings for businesses, it is important for you and / or your clients to manage their ongoing tax obligations, including FBT. To assist you with this process, we have prepared a summary of some of the key FBT details including recent FBT developments, areas attracting ATO audit activity and issues to be aware of when assessing your exposure to FBT.
The FBT rates for the year ended 31 March 2020 are as follows:
- FBT rate: 47%
- Statutory benchmark interest rate: 5.37% (up from 5.20% in the 2019 FBT year).
- Gross-up rates:
- 2.0802 for Type 1 benefits;
- 1.8868 for Type 2 benefits; and
- 1.8868 for Reportable fringe benefits.
- Reportable fringe benefits threshold (employee income statements):
- Taxable value greater than $2,000
- Minimum grossed-up value of $3,773
The FBT caps for FBT-exempt and FBT-rebatable employers remain unchanged from the 2019 FBT year and are as follows:
- Grossed-up taxable value (generally):
- FBT-exempt employers: $17,000
- FBT-rebatable employers: $30,000
- Grossed-up taxable value (salary packaged meal entertainment and entertainment facility leasing expenses (EFLE)): $5,000
The ATO has recently released draft ruling TR 2019/D7 to assist employers with determining whether their employee transport expenses (such as travel by car, plane, train and buses) are deductible and therefore not taxable for FBT purposes. Importantly:
- This ruling only deals with transport expenses and does not consider related costs such as accommodation, meals and incidentals (these are still covered by TR 2017/D6).
- TR 2019/D7 reflects a change in the ATO’s view in respect of transport costs for employees posted on secondment as follows:
- Travel to and from the secondment location to the employee’s home (even where this involves interstate travel) is not deductible and is therefore subject to FBT.
- However, the section 58F exemption may potentially be applied to the first and last trips during the secondment period, but any trips in between will not be covered by this exemption.
Last year we highlighted the need for employers to be aware that they may have FBT liabilities where their employees received benefits from a third party such as a supplier or client. This continues to be the case, however, the ATO have provided some relief in this regard by confirming that:
- Contrary to the ATO’s earlier position, being merely aware of an employee receiving a benefit from a third party will not generally constitute an arrangement.
- Employers must have some level of involvement in the arrangement (i.e. participation, facilitation or promotion).
TIPS: To manage your FBT risk, employers should enforce a policy whereby employees are not allowed to accept third party benefits. For further information on the arranger provisions and third-party benefits provided to employees, please refer to our article posted 29 March 2019.
Where a vehicle is covered by the workhorse FBT exemption, this exemption does not automatically extend to tolls incurred during the use of such a vehicle, and would therefore ordinarily give rise to an expense payment or residual fringe benefit. However, the ATO have issued a new administrative concession whereby tolls will be exempt to the extent that they relate to a vehicle that is exempt from FBT and has limited private use.
While this concession may, in certain circumstances, be applied to salary sacrificed workhorse vehicles with limited private use, doing so poses increased audit risks and administrative obligations for employers.
With the rise in the number of employees working from home, the ATO has increased its focus on employers who pay or reimburse an employee’s internet costs.
The taxable value of these benefits may be reduced to an extent via the operation of the otherwise deductible rule. (Note that the minor benefits exemption is unlikely to be available due to the regularity of this expense).
However, determining the work-related portion of home internet costs can be onerous and requires that the employee maintains a four-week representative diary of home internet time and / or data usage.
TIP: Consider paying an allowance to employees for their home internet costs rather than paying for or reimbursing the actual expense. This moves the tax liability to the employee and it is therefore the employee’s responsibility to keep reasonable records to support their business use.
It is commonplace for employers to incorrectly assume that lucky door prizes and raffles provided at employee functions such as Christmas parties are exempt from FBT because they are a ‘game of chance’. However, the ATO’s position continues to be that despite the element of chance, these prizes are fringe benefits. As such, it is important for employers to be aware that:
- Prizes and raffles are fringe benefits because they are provided to employees in respect of their employment (i.e. the employee is only able to win the prize because they are an employee).
- Where an employee or their associate wins such a prize, the attendance of clients or suppliers at the event does not change the employer’s liability for FBT.
- Applying the minor benefits exemption by dividing the cost of each prize by the number of attendees to get a taxable value under the $300 minor benefits threshold is not correct. Rather, the minor benefits exemption can apply, but it must be applied to the total cost of each prize.
- Where the prize constitutes entertainment, employers must carefully consider the associated income tax and GST implications as these will differ to prizes that are not entertainment.
TIP: Consider whether the minor benefits exemption may apply, particularly where the employer only offers prizes once or twice during the year. Employers should also consider having work-related items as prizes as these items may qualify for the s58X FBT exemption where an employee (not their associate) wins the prize.
Many CPD events now feature entertainment components, such as a gala dinner or golf day, as part of their all-inclusive event programs. Despite this, many employers incorrectly assume that all CPD events are automatically fully deductible under the otherwise deductible rule, and therefore FBT exempt. As a result, the ATO are increasingly focusing audit resources on CPD events as an FBT compliance risk area. Some key steps that employers can take to reduce their audit risk are:
- Obtaining an itemised receipt from the CPD provider showing the break-down of costs included in the total event price so that any fringe benefits can be identified and classified.
- In the absence of an itemised receipt, an event itinerary may assist the employer with determining a reasonable allocation of the total cost across different event components.
- Where possible, only register employees for the CPD components of a program.
- Arrange for the employee to contribute to the cost of any entertainment components and / or reimburse you for the associated FBT cost.
TIP: Consider whether the eligible seminar exception is available, which may allow the employer to reduce the taxable value of meals and drinks immediately before, during and after an eligible CPD event to nil for FBT purposes. Also consider whether the minor benefits exemption is available.
- Unreported car fringe benefits, incorrect application of the workhorse vehicle exemption, undervalued car parking benefits and entertainment are some of the primary FBT areas in which the ATO are currently directing their audit resources.
- Employers cannot avoid FBT on entertainment simply by not claiming a tax deduction.
- Similarly, employers cannot escape their FBT liabilities and FBT exposure by not lodging a FBT return.
- Benefits with a value of less than $300 that are provided infrequently are exempt from FBT. This exemption does not extend to the provision of meal entertainment where the 50/50 split or 12-week register methods are used.
- Changes to the ATO’s interpretation of “commercial parking station” for car parking fringe benefit purposes has been deferred until 1 April 2021 (i.e. it will apply for the 2022 FBT onwards). This delay provides employers with the opportunity to review their current car parking arrangements and employee remuneration packages to determine whether this new interpretation will give rise to car parking fringe benefits in the future and whether these benefits can be avoided by instead paying a parking allowance.
- The ATO has confirmed it considers all government departments to be associates for the purposes of the Living-Away-From-Home-Allowance (LAFHA) 12 month rule. This is relevant where an employee is receiving (or has received) a LAFHA from two or more associated employers for the same location, as the combined aggregate period in which a LAFHA is (or has been) provided by both of these employers must not exceed 12 months in total. The ATO is of the opinion that all government departments (whether Federal, State or Territory) are associates of one another.
- Where the taxable value of the benefits provided to an employee in the 2020 FBT year exceeds $2,000, the grossed up taxable value of an employee’s fringe benefits must be shown on the employee’s income statement for the year ended 30 June 2020. Although this will not affect the amount of FBT payable, an allocation of reportable fringe benefits on an employee by employee basis is required. Note meal entertainment (not provided under a salary packaging arrangement), car parking and exempt benefits (such as minor benefits provided) are not reportable.
- You can report an employee’s reportable fringe benefit amount (RFBA) or a reportable employer superannuation contribution (RESC) through Single Touch Payroll (STP). If you cannot (or choose not to) provide RFBA or RESC through STP, you must provide this information on a payment summary and provide the ATO with a payment summary annual report. The payment summary must not include amounts reported through STP.
- Where the log book method is used in calculating car fringe benefits, the log book must not be more than 5 years old (i.e. a log book used in the 2020 FBT year must not have been completed before 1 April 2015). It is imperative that any variations in the pattern of use of a car be taken into consideration when determining an employee’s business use percentage.
Businesses impacted by Covid-19 may be able to defer amounts due to the ATO by up to four months from payment date.
In addition to this, please note that if benefits are provided by employers to employees to assist with Covid-19, FBT may still be subjected to these benefits unless an exemption applies. These exemptions relate to emergency accommodation, food, transport, emergency healthcare and other benefits.
For further information in relation to this, please refer to the ATO website.
An Important Message
While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.