Tips and Traps of FBT

Fringe Benefit Tax (FBT) is a critical component shaping the financial landscape for businesses and individuals. Businesses should be aware that this is an ongoing area of focus for the ATO. FBT is a tax paid by employers on certain benefits provided to their employees or associates and is separate from income tax. A fringe benefit is akin to a payment to an employee but differs from a salary or wage.

For FBT purposes, an employee includes:

Current, future, or past third party employee
Director of a company who receives a salary or wage
Beneficiary of a trust who works in the business and receives a salary or wage

However, if you are a sole trader or partner in a partnership, you are not considered an employee, and the benefits you provide to yourself are not subject to FBT. Additionally, clients are not employees, so benefits provided to them are not subject to FBT.

FBT aims to ensure fairness and equity within the taxation system, preventing employers from circumventing income tax obligations by providing non-cash benefits to employees. The FBT year runs from 1 April to 31 March, during which all fringe benefits provided to employees need to be assessed to determine if they are taxable or eligible for an exemption or reduction. These can range from company cars for private use, entertainment by way of food, drink, or recreation, to business travel and training.

How to Register for FBT

You must register for FBT once you have determined that you are providing fringe benefits such as those mentioned above. You can register for FBT by contacting MJJ Accounting and Business Solutions or your registered tax agent.

Common FBT

Refer to the ATO Quick Reference for Benefits. Below is a summary of a few common benefits that frequently apply to small and medium businesses:

Motor Vehicle

Is there a car held by the company?

If a car is held by an employer and provided to an employee for their private use, then there is a car fringe benefit. For FBT purposes, a car is defined as any of the following:

a sedan or station wagon
any other goods-carrying vehicle with a carrying capacity of less than one tonne, such as a panel van or utility (including many 4-wheel drives and some utes)
any other passenger-carrying vehicle designed to carry fewer than nine passengers

Does it matter if the car is owned or leased by the company?

It doesn’t matter if the car is owned or leased (bona fide lease) when considering if FBT applies, but there are differences in the amount of FBT paid. You are not considered to hold a car if you hire it.

Is the car provided to employees for private use?

FBT commonly arises when the car is actually used for private purposes or is available for private use by the employee. This includes:

Home garaging
Doing work tasks on the way to or from work
A car in a workshop for minor repairs and maintenance
Hiring a car

Is the car an electric car?

Benefits provided for electric cars are exempt from FBT if all the following criteria are met:

The car is a zero or low emissions vehicle
The first time the car is both held and used is on or after 1 July 2022
The car is used by a current employee or their associates (such as family members)
Luxury car tax (LCT) has never been payable on the importation or sale of the car

Calculating FBT

There are two methods of calculating FBT that your accountant will use:

Statutory Formula Method: Applies a 20% statutory rate to the car’s base value.
Operating Cost Method: Is based on operating costs and the percentage of private use for the car over the year.

Records to Keep

Purchase: Date the Motor Vehicle was first held, Purchase Price of Motor Vehicle, Odometer Reading at the Date of Purchase

Sale: Date the Motor Vehicle was last held, Odometer Reading at the Date of Sale

Operating costs: Repairs and Maintenance, Fuel, Registration, and Insurance

A Logbook detailing Business Use Percentage (12 consecutive weeks) needed every 5 years

Entertainment

Are you providing a Fringe Benefit?

As an employer, you are providing a fringe benefit if all the following apply:

You provide food, drink, or recreation to your employees or their associates (family)
The food, drink, or recreation is considered entertainment
The entertainment is not an exempt benefit

Food and Drink Entertainment

Food and drink are considered more likely to be entertainment when the following questions are answered with these statements:

Why are you providing the food or drink for employees? In a social situation where the purpose is for employees to enjoy themselves
What type of food or drink are you providing? Elaborate food or meals, alcohol
When are you providing the food or drink? Outside work time
Where are you providing the food or drink? Off your business premises, such as at a function room, hotel, or restaurant, or consumed with other forms of entertainment

FBT does not apply to food or drink if it is provided to, and consumed by, current employees on your business premises on a working day.

Recreation Entertainment

Recreation is considered to be entertainment when it includes amusement, sports, and similar leisure activities. You may be providing entertainment in situations such as:

Business lunches and drinks
Parties and staff social functions
Product release functions, reward and recognition functions
Sporting or theatrical events
Gym or sporting club memberships
Sightseeing tours and holidays

Christmas parties and gifts

You don’t need to pay FBT if the following applies:

On a working day, on your business premises, and only for current employees
If there is a minor benefit, the cost per person is less than $300 when the party is off-premises and includes associates of employees (similarly with gifts also)
Costs relating to clients if the party includes clients as well

If the Christmas party is not subject to FBT, you can’t claim income tax deductions for the cost of the party.

Records to Keep:

For entertainment, please keep a detailed register or add a reference relating to each event when reconciling accounts. Details should include:

Who is attending (+number)? Staff, associates, or clients
Where is the entertainment occurring? In-office or out of office

Travel

Are you providing a Fringe Benefit?

Employees often undertake travel for business purposes where a fringe benefit arises when the travel expenses are either:

Reimbursed by an employer: the benefit is generally an expense payment fringe benefit.
Incurred and paid directly by the employer: the benefit is generally a residual fringe benefit.

The taxable value of travel can be reduced (potentially to nil) under the ‘otherwise deductible’ rule.

Records to Keep:

For business-related travel, keep records that prove all your business travel expenses. It is highly recommended that your employees keep a travel diary to determine the portion of travel that was for private purposes and should include:

The nature of each business activity
The date and approximate time the business activity began
How long the business activity lasted
The name of the place where you engaged in the business activity.

Home Mortgage Payment

An expense payment fringe benefit may arise when an employee incurs an expense for their own benefit and you, as their employer:

Reimburse them for the expense, or
Directly pay a third party for the expense

Payments you make to an employee’s mortgage account are an expense payment fringe benefit.

NIL Liability

Recently, the ATO has advised that they will be targeting tax returns that include motor vehicle deductions without an FBT Return, even if the business use is 100%. If you do not lodge an FBT Return, the ATO has no time limit on reviewing your motor vehicle use.

If you have included motor vehicle expenses on your tax return, we recommend that you register for FBT and prepare a NIL return where there is no private use. This will show the ATO that you have reviewed your motor vehicle use and are staying compliant. This will also trigger a review period, meaning the ATO has 4 years to review your FBT only.

If you would like to register for FBT, please contact our office and we can make the necessary arrangements.