By Randall Bryson, Partner BDO Automotive.
The end of Fringe Benefits Tax (FBT) year (31 March 2015) is fast approaching, and it’s now appropriate to address compliance in terms of the tax liability and the substantiation we have kept.
The Australian Taxation Office (ATO) has specifically identified FBT as an area in which it intends to increase its level of compliance activity.
FBT is a tax that almost every dealership has an exposure to and is no doubt one of the more complex taxes to manage. A further complexity with FBT is its impact on other taxes, that is, the FBT status of a particular benefit often determines if a taxpayer can claim income tax deductions and GST input tax credits.
Other taxes like Pay-As-You-Go Withholding (PAYG W) and payroll tax are also impacted by FBT. Therefore, if you are non-compliant in FBT you potentially have a compliance risk in a number of other taxes… a ‘perfect storm’ for the ATO you might say.
Unfortunately, the nature of this tax means many taxpayers will only focus on it once a year, unlike income tax and GST that are constantly ‘in the frame’. It is therefore appropriate that we review a few of the principles.
What is a Fringe Benefit?
- It’s a benefit which is provided to an employee (or an associate of an employee) in respect of their employment by either:
The employee’s employer,
- An associate of the employer, or
- A third party under an arrangement with the employer or an associate of the employer (e.g. factory and financier benefits)
How is the Fringe Benefit Valued?
a) The taxable value must be calculated. This is the GST inclusive cost of the benefit less any reductions e.g. private use, statutory fraction, employee contributions, otherwise deductible rule
b) Calculate the grossed-up taxable value, by multiplying the taxable value by the FBT gross-up rate (either Type 1 @ 2.0802 or Type 2 @ 1.8868 from 1 April 2014)
c) Calculate the FBT expense, by multiplying the grossed up taxable value by 47.0 per cent (FBT rate).
What do I need to Know about the more Significant and Common Fringe Benefits Provided?
Car benefits – the most common type of benefit, accounting for approximately 80 per cent of FBT revenue
– Do not assume that if the vehicle does not meet the definition of a ‘car’ that it will be exempt for FBT purposes. The exemption will only apply where the work-related use tests are met or the benefit is minor and infrequent (e.g. parts delivery utes and vans)
– You can elect to value the benefit by either the operating cost method or the statutory formula method (which includes pooling for motor dealers)
– Contain your liability by tracking days not available, collecting employee contributions from after tax dollars, tracking un-reimbursed expenses, and restricting access to vehicles of higher values.
Entertainment – the most difficult benefit to value
- Where the 50/50 method of valuation is used, the benefit is recorded as meal entertainment. Where the actual method is elected, the benefit is recorded as either a property, expense or residual benefit
- The method used to value entertainment is normally elected at the end of the FBT year, however the method determines the eligibility for GST input tax credits and also income tax deductions.
Some other Points to Remember:
- GST inclusive amounts are used to calculate the taxable value
- Remit 1/11th of employee contributions as GST
- Keep accurate log books, odometer readings, and days not available
- The minor benefits exemption is useful for benefits that are less than $300 including GST and provided infrequently
- Reportable fringe benefits should be recorded on an employee’s payment summaries where the taxable value of the benefits provided for a particular employee are $2,000 or greater
- Substantiation, substantiation, substantiation is the key!
BDO Automotive FBT Compliance Review – Reduce your Exposure to the ‘Perfect Storm’
We have developed a FBT Compliance Review designed to target the risk areas for a dealership. The review can be performed in conjunction with the FBT year end return preparation or in isolation and will be performed by BDO Automotive specialists at the dealership. The key deliverables of this review will be the identification of FBT compliance risk areas and recommendations to minimise FBT compliance risk and liability.
If you have any questions in regard to your FBT compliance or the FBT Compliance Review, please contact the BDO Automotive team.