Many Australian employers offer their employees some fringe benefits that may reduce those employees’ taxable incomes while still letting them enjoy some lucrative job perks. Fringe benefits refer to any other benefits provided by the employer other than the salary, wages or cash.
The fringe benefits can be given to the employee, their spouse or their kids. While the employee does not pay tax on the fringe benefits, as an employer, you still have to pay a tax on these benefits. This is the Fringe Benefits Tax (FBT).
Why Companies Offer their Employees Fringe Benefits
Companies use fringe benefits as an enticement to motivate and retain their employees. They are a response to the highly competitive nature of the skills marketplace. The companies are in stiff competition for the best talent and the cost of hiring is quite high. To reduce the attrition rate and retain employees and productivity for the long haul, employers use various enticements such as:-
- Discount gym memberships
- Entertainment benefits including free food, coffee bars, affordable cinema tickets and accommodation.
- Living-away-from-home allowance (LAFHA)
- The use of company car
- Health memberships
- School fees and childcare costs
- Private health insurance
Not only do these fringe benefits make employees feel appreciated but they also create an overall comfortable and enjoyable working environment that boosts productivity. Fringe benefits can be incorporated as part of the salary packaging or via the salary sacrifice route.
Where to maximize on FBT Exemptions with Portable Electronic Devices
Employers commonly provide their employees with various portable electronic devices such as iPads, iPhones, laptops or iPod. You can get FBT exemptions when it comes to these portable electronic devices but functionality will be key. If you offer your employees two portable electronic devices that have different functionality, they will both be exempt from FBT taxes. However, if the two devices have the same functionality, the second fringe benefit device will most likely be subject to a Fringe Benefit Tax. For a benefit to be exempt from a FBT, it must be used primarily in the employee’s work.
The use of company car
In case your employees incurred any costs during the use of the company car, make sure that they provide proof of these expenses such as receipts or a declaration that will substantiate these expenses.
If you will be using the operating cost method in the determination of FBT liabilities for the use of company car, make sure that you keep the logbooks and that it meets all the ATO requirements. The logbooks must provide a detailed description on the use of the vehicle to satisfy FBT filing requirements. Having sufficient records will allow the ATO to apply the operating cost method otherwise the Commissioner will use the statutory formula to apply taxes on the use of the vehicle.
Office Christmas Parties and Gifts to Employees
The employer can claim tax deductions on Christmas parties if the parties have been subjected to the Fringe Benefit Tax. However, if the employer treats Christmas parties as a minor FBT exemption, it is unlikely to be tax-deductible. The gifts that you issue to your employees may still be tax deductible even if you treat them as an exempt minor fringe benefit.
The otherwise deductible rule
A fringe benefit is considered as “Otherwise Deductible” if the employee would have qualified for an income deduction if the employer had not provided the benefit. In this case, the taxable value of the fringe benefit will be reduced to the extent to which you could have benefitted from the tax deduction for that particular expense.
The rule only applies for a once-only tax deduction for the expense. It won’t apply for a deduction that is staggered over several years. The otherwise deductible rule will only apply in cases where the recipient of the fringe benefit is an employee so family members such as spouse and kids won’t qualify for this.
Fringe benefits for directors
If directors in the business are running it via a holding company and they receive benefits from the business, they may be treated as company employees and the benefits will therefore attract an FBT tax for the company.
Errors in FBT Returns
Errors commonly occur during the filing of the FBT returns. These will be even more pronounced if you are using an Excel spreadsheet to document the fringe benefits issued by the company. They will mostly be systemic errors occurring due to an error in the underlying formula used in the spreadsheet, especially if the tax agent or the business is basing its FBT tax returns on underlying information that has been used in the past. If the spreadsheet is rolled over every quarter, then these errors will keep on recurring.
Some of the most common FBT Excel spreadsheet errors include the following:-
- The totals in the spreadsheet have not captured all the information that needs to be summed up.
- The FBT tax returns preparer is using outdated or incorrect formulas in calculating the taxable value of the fringe benefits.
- The adjustment for an exceptional fringe benefit is rolled over into the next quarter. This is often guaranteed to introduce an error in the calculations.
- Failing to perform sense-check on the benefit items that have been computed. This can help you identify some errors in the computation or items in the list that weren’t unexpected.
It is advisable to review your spreadsheets so as to establish that they are up to date. The fact that you have always computed your benefits in a certain way does not necessarily mean that is the right way of doing things. Talk to an accounting firm Melbourne practice to bring you up to date with the latest rules and regulations.
Failing to Lodge an FBT Tax Return
Some employers might treat fringe benefits as too minor to warrant lodgment but this could be a costly misjudgment. In 2017, the Commissioner of Taxation imposed 75% in administrative penalty for businesses that were found to have failed to lodge their FBT returns.
Need help with your FBT lodgment or some professional tax advice on the same? Contact an accounting firm Melbourne practice that specializes in tax matters to assist you in navigating some of the difficulties that you might encounter when accounting for your fringe benefits.