FBT year-end reminders & strategies 2016

One of the main changes for this 2016 FBT year is the increase in the FBT rate to 49% (it was only 47% in 2015).

Since this is a big jump in your tax liability from the previous year (i.e. 2%), please contact us so that we can have a conversation with you about what FBT strategy would be most suitable for your specific business, as well as show you how to practically implement such a FBT strategy.

What is FBT?

• Employer provides non-cash benefit in lieu of salary / wages

• BT payable by employer

• 49% for 2016 (was 47% for 2015)

As you are aware, an employer must pay fringe benefits tax (FBT) when it provides certain non-cash benefits (called fringe benefits) to their employees¹ (or associates of the employees) in lieu of paying salary or wages.

A benefit that was not provided to an employee in respect of the employee’s employment (e.g. providing a hire car to an employee based on a commercial arrangement and not because of the employee’s employment), will not qualify as a fringe benefit.

For the 2016 FBT year (which runs from 1 April 2015 to 31 March 2016), employers will have to pay FBT at a rate of 49%² on the grossed-up taxable value of fringe benefits provided in this way. The 2016 FBT returns need to be lodged by 21 May 2016 (if lodging by paper) or by 25 June 2016 (if lodging electronically through a tax agent) and payment is due by 28 May 2016³.

What about records?

The FBT system places a very big reliance on records and therefore proper record-keeping is a must to work out your FBT liability.

For example, an employer using the log book / operating cost method to provide car fringe benefits must maintain a log book for a continuous period of 12 weeks to calculate the percentage of private use.

Generally, records must be kept for 5 years from when you lodged your FBT return.

What are common examples of fringe benefits?

• Various categories of fringe benefits with own valuation rules & exemptions

Since there are various categories of fringe benefits each with its own valuation rules4, exemptions and reductions, the trick when working out your FBT liability is to correctly classify each kind of benefit in the correct category – a daunting task considering the number of FBT categories.

Some of the most common examples of fringe benefits include where an employer:

• allows an employee to use a work car for private purposes – car fringe benefit;

• allows an employee to use a work motorcycle for private purposes – residual fringe benefit (because does not fall into any other category);

• provides car parking for an employee at / near work – car parking fringe benefit;

• provides food and drinks to employees at staff parties (i.e. not just for sustenance) – entertainment fringe benefit;

• provides entertainment by providing free tickets to concerts – entertainment fringe benefit;

• reimburses / pays for employee’s health insurance premiums– expense payment fringe benefit;

• provides employees with goods at lower prices than they are normally sold to the public – property fringe benefit;

• provides cheap loans to employees – loan fringe benefit;

• provides a house / unit of accommodation to an employee at a reduced rent – housing fringe benefit;

• provides an employee with an allowance to compensate for additional expenses & disadvantages suffered for having to live away from their normal residence - living-away-from-home-allowance (LAFHA fringe benefit); or

• provides benefits under a salary sacrifice agreement (SSA) where an employee receives a benefit for a reduction in salary⁵.

To complicate matters further, the provision of one kind of benefit can give rise to different categories of fringe benefits, depending on the circumstances under which the benefit was provided.

Take for example the provision of food, drink or recreation to employees. This can give rise to either:

• meal entertainment fringe benefits (i.e. the food and drinks were provided for entertainment and not just for sustenance);

• expense payment fringe benefits (i.e. if the employer reimburses the bill);

• property fringe benefits(i.e. the food and drinks were not meal entertainment as they were only provided as sustenance); or

• residual fringe benefits (i.e. the employer provides accommodation and transport in connection with the entertainment).

What are some strategies to reduce an employer’s FBT liability?

• Do not provide fringe benefits

• Provide exempt benefits

• Use “otherwise deductible rule”

• Know your reductions

• Use employee contributions

1. Try to not provide fringe benefits

The easiest way to avoid an FBT liability is to not provide fringe benefits to employees but rather provide the employee with a cash bonus or cash salary which the employee can use to buy the desired product / service. However, an employee will have to pay income tax on this receipt and therefore there may be a preference for an employee to rather receive fringe benefits (as the employer – as opposed to the employee – will pay FBT on that).

2. Provide exempt benefits

If the employer provides exempt benefits, the benefit will be exempt from FBT.

Some of the most common examples of exempt benefits include:

• Minor & infrequent benefits⁶ valued at less than $300 per head (e.g. Christmas gifts, flowers to an employee in hospital or staff vouchers under an employee recognition scheme);

• Work related items such as portable electronic devices (e.g. laptop computers, mobile phones and portable printers) primarily used in the employee’s employment – currently limited to one item per FBT year⁷ - unless it is a replacement item; and

• Property provided & consumed on the employer’s premises (e.g. Friday night drinks at the office).

3. Provide fringe benefits that are tax deductible

Likewise, if the employer provides tax deductible benefits pursuant to the “otherwise deductible rule” (i.e. provide benefits an employee would otherwise have been able to claim as a tax deduction had the employee incurred the cost directly – for example sending employees on a business course⁸), the employer’s FBT liability will be reduced. Furthermore, there are also some specific reductions available depending on the type of fringe benefit provided.

4. Certain reductions in FBT value depending on the type of benefit

Provided the otherwise deductible rule does not apply, the value of certain types of fringe benefits can be reduced. For example, the taxable value of in-house fringe benefits (e.g. when an employee purchases goods or services usually sold by the employer) is reduced by $1,000⁹ and you can reduce the taxable value of a LAFHA fringe benefit by certain amounts for food.

5. Use employee contributions

Another strategy to lower an employer’s FBT liability is to use employee contributions (i.e. where the employee pays from post tax salary for the cost of providing the benefit). An example of this would be in the case of a novated car lease where an employee pays a 3rd party for the operating costs such as fuel and this is not reimbursed by the employer.

How can Nexia help you?

We hope that this brief overview gave you an adequate insight into the complexities of FBT and that working out your FBT liability is not always that straightforward – especially in light of the many different categories of FBT benefits each containing their own valuation, deduction, exemption and reporting rules.

However, Nexia can assist you through this whole process as we have considerable FBT experience and can offer you a business-wide view to get the best outcome for you.

Please contact your Nexia Advisor if you would like to discuss how any of the issues mentioned above may affect your organisation so that we can help you identify potential FBT risks and opportunities for you.

1 - The employee can be a current, past or future employee.
2 - The FBT rate from 1 April 2015 (i.e. the 2016 FBT year) is increased to 49% to account for the 3 year temporary budget repair levy (i.e. in the 2015 FBT year the rate was only 47%). 
3 - The payment date of 28 May 2016 is a fixed date regardless of when lodgement is (i.e. payment must generally be made by 28 May 2016 even if electronic lodgement using a tax agent only occurs after this date).
4 - For example, entertainment benefits can be valued under the actual method (i.e. actual amount paid for entertainment to staff only); the 50/50 split method (i.e. 50% of GST inclusive cost of entertainment to staff and clients); or the 12-week register method (i.e. register kept for 12 weeks to determine the percentage of total meal entertainment provided to staff and clients subject to FBT).
5 - Currently, employees of not-for-profit organisations can salary sacrifice meal entertainment & entertainment facility leasing benefits with no FBT payable and no need to report such benefits. However, from 1 April 2016, FBT concessions for such benefits will be capped at $5,000 and such salary sacrificed benefits will also have to be reported.
6 - This $300 minor & infrequent benefits exemption is not available for in-house benefits, entertainment benefits using the 50:50 split method or benefits received under a salary sacrifice agreement (SSA).
7 - From 1 April 2016, small businesses (e.g. with an aggregated turnover of less than $2 million) will also qualify for an exemption if they provide more than one of these portable electronic devices to their employees. 
8 - In the recent John Holland case ([2015] FCAF 82), the Full Federal Court held that costs incurred in flying employees from Perth to Geraldton and back for a rail upgrade construction project would be subject to the otherwise deductible rule – meaning the employer could reduce their FBT liability on the flight costs to nil.
9 - Limit not relevant for benefits received under a salary sacrifice arrangement.