Fringe Benefits Tax tips for year end
With Q4 just around the corner, now is a good time to learn some ways to reduce your Fringe Benefits Tax (FBT) liability.
Fringe benefits are benefits that you provide to your staff that fall outside the categories of traditional wages and salaries. Examples include cars, low-interest or interest-free loans and school fees.
Fringe benefits are taxed differently to income and you should be aware of the relevant compliance issues when negotiating salary packages.
Fringe benefits are taxed differently to income and you should be aware of the relevant compliance issues when negotiating salary packages.
‘The benefits are not subject to income tax. However, the employer must pay FBT. Typically, the employer will reduce the employee’s salary by the amount equivalent to the FBT incurred,’ Rami Brass, Director of RSM Bird Cameron, said.
‘It is advisable to seek professional guidance before entering into a new salary-packaging agreement with an employee. The reason for this is that the calculations surrounding FBT are extremely complex, and you may end up inadvertently disadvantaging them in the process, thereby defeating the purpose of salary packaging.’
Strategies to help reduce FBT
1. Car fringe benefits
For employers using the statutory method to calculate car fringe benefits, the employer must use one of the following two sets of rates, depending on the timing of the arrangement.
Category 1 includes car fringe benefits where there was a pre-existing arrangement in place before 10 May 2011 and that commitment has not been materially altered. This includes:
- refinancing a car
- alterations to existing lease contracts – e.g. changing the duration or changing a lease to reflect a revised residual value
- change of car
- employer pays out a lease residual and continues to provide the car as a fringe benefit
Given how common these events are, the reality is that most car fringe benefits calculated under the statutory formula method will now use Category 2 rates.
However, for those still qualifying for Category 1 rates, the old law still applies with the progressive rates.
Therefore, leading up to 31 March, if vehicles are nearing the 15,000-, 25,000- or 40,000-kilometre thresholds, where possible, drive a few extra kilometres so they cross a threshold and thus attract a lower rate.
If the logbook method is being used to calculate car fringe benefits, you will need a valid logbook covering 12 weeks to establish the business use percentage for the vehicle by 31 March.
2. Car parking
Car-parking FBT only applies if employees park a car for longer than four hours in the day.
In a lot of cases where employees use their cars for business, away on leave or on business trips, they will not be using their parking bays for more than four hours. If employers have records – e.g. employee declarations, logbooks – you can significantly reduce your parking FBT.
Furthermore, car-parking fringe benefits only apply to cars. Employees parking vehicles other than cars will not be subject to car parking FBT. It’s a good idea to find out what type of vehicle your employees drive as this may reduce the car-parking fringe benefits.
3. Entertainment
Often employers include coffee with clients and working lunches as meal entertainment. In most cases these expenses do not qualify as meal entertainment and are not subject to FBT.
RSM Bird Cameron recommends that the entertainment account be scrutinised and this nonentertainment expenditure be removed, reducing the FBT liability.
4. Minor benefits
Work-related items such as portable computers, mobile phones and portable printers are exempt from benefits. However, this is limited to one item per FBT year.
5. In-house benefits
The taxable value of in-house benefits is reduced by $1000 per year. The provision of in-house benefits – goods or services usually sold by the employer – may be a tax-effective way of rewarding employees.
However, this $1000 reduction is not available if the benefit is provided under a salary-sacrifice arrangement.
6. Documentation
Employers should ensure they have processes in place to obtain employee declarations, logbooks, travel diaries etc, to enable them to reduce any FBT liability.
