With the festive season approaching, it’s likely your business social calendar is rapidly filling up. At this time of year, understanding Fringe Benefits Tax (FBT) is crucial for small-to-medium-sized business owners – particularly if you have a Melbourne Cup event or Christmas party planned.
At Equil Advisory, we know how complex FBT can be, which is why we created the following guide to help you avoid costly compliance issues and a higher-than-expected tax bill this festive season.
Understanding Fringe Benefits
FBT is a tax employers pay on certain benefits provided to employees or their employees’ associates. It’s separate from income tax and based on the taxable value of the benefits provided.
Common examples include paying for an employee’s gym membership, providing a car for private use, offering food and drink at a social function (such as an offsite lunch), or gifting event tickets.
Earlier this year, the Australian Tax Office (ATO) announced it would be scrutinising employment tax compliance, including FBT, more closely. This was in response to the discovery of an FBT gap of over $1 billion. As a result, the ATO is utilising several channels, such as the Random Enquiry Program, to ensure employers who should be paying FBT are doing so, and the correct amount is being paid.
The upcoming festive season, coupled with the ATO’s increased focus on compliance, makes ensuring you’re up to speed with your obligations more important than ever.
Common Fringe Benefits Pitfalls
Motor Vehicles and Logbooks
Unknowingly misreporting the private use of vehicles is one of the most common mistakes we see employers making.
FBT arises when a vehicle is made available to an employee or their associates for private use. This can include an employee garaging a car at home or using it to collect children from school. It could also include using a company car as transport when on holiday this summer.
According to the ATO, a ‘car’ is any motor-powered road vehicle designed to carry a load of less than one tonne and fewer than nine passengers. Some vehicles, including emergency service vehicles, single-cab utes, and low and zero-emissions vehicles, may be exempt from FBT.
Exemptions may also apply in certain circumstances, like when vehicle use is limited to work-related travel or if the taxable benefit is below $300.
The ATO website lists which vehicles are subject to FBT, what constitutes private use, and provides guidance on calculating vehicle-related FBT obligations.
The ATO requires many businesses to maintain a logbook. This is a record of a vehicle’s usage over a 12-week period and is used to establish its usage pattern, including the ‘business’ versus ‘private’ percentage of its use.
To ensure your liability is calculated accurately, it’s helpful to keep a separate logbook for each vehicle detailing:
- The date each journey begins and ends,
- The odometer reading at the start and end of each journey,
- The number of kilometers traveled,
- The purpose of each journey.
Entertainment Expenses
Melbourne Cup outings, Christmas parties, and employee gifts could all incur FBT.
The ATO defines ‘entertainment’ as instances where a business provides food and drinks, or recreation to their employees and their associates.
Context is key in determining whether FBT applies. For example, if food and drinks are supplied to current employees and are consumed on the business premises during the workday, it’s unlikely FBT will apply. However, an offsite Christmas party with a bar tab is almost certainly subject to FBT.
When a benefit is ‘minor’ – that is, the taxable value is less than $300 (GST inclusive) per person, it’s more likely to be exempt.
Normally, entertainment expenses, like food and drink, aren’t tax deductible unless they’re a fringe benefit, meaning you’ll often be able to claim an income tax deduction and GST credits for the cost of providing entertainment-related fringe benefits. This doesn’t apply to the exempt benefits noted above, which aren’t treated as fringe benefits.
Detailed information on entertainment-related fringe benefits is available on the ATO website.
There are three different ways to calculate the taxable value of entertainment: the actual method, the 12-week method, and the 50/50 method.
Many business owners find the 50/50 method the simplest option, offering a straightforward way to ensure compliance. Under this method, all entertainment-related fringe benefits within the given FBT year are added up. 50% of this total is then subject to FBT and is deductible, while the other 50% is not deductible and not subject to FBT.
Fringe Benefits Compliance Tips
While navigating FBT can be tricky, below are some steps you can take to ensure you’re compliant:
- Know key dates. The FBT year is different from the income tax year, running from 1 April to 31 March.
- Register for FBT. Equil Advisory recommends registering for FBT, especially if you provide benefits to your employees beyond their salary or wages. Registering can help streamline compliance, particularly when using the 50/50 method for entertainment-related benefits.
- Maintain accurate records. Failing to keep proper records, such as vehicle logbooks or receipts for entertainment expenses, can lead to discrepancies which may trigger penalties or an ATO audit.
When it comes to fringe benefits, it’s not uncommon for business owners to be caught by surprise and confronted by costlier tax bills than expected. Understanding your FBT obligations and taking proactive steps to ensure compliance is critical to avoid audits and unanticipated penalties.
However, FBT can be complex, and you may find you need expert guidance. Our highly skilled team at Equil Advisory can help you make sense of your FBT obligations, supporting you to develop effective strategies so you’re not caught out.
Get in touch with us today to discuss how we can help you navigate fringe benefits this festive season.
