With March 31 just around the corner, many businesses are focusing on ways to reduce their 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 of common fringe benefits include cars, low-interest or interest-free loans and school fees. Fringe benefits are taxed differently to income, and business owners should be aware of the relevant compliance issues when negotiating salary packages.
Rami Brass, Director, RSM Bird Cameron, said, “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 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 when the arrangement with the employee was entered into:
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, including:
* refinancing a car
* alterations to existing lease contracts e.g. changing the duration of an existing lease contract or changes to 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. This FBT year (2014/2015) is the first year in which all Category 2 rates have been set at a flat 20%. However, for those still qualifying for Category 1 rates, the old law still applies with all the progressive rates. Therefore, leading up to 31 March, if the vehicle is nearing the 15,000, 25,000 or 40,000-kilometre thresholds, where possible, drive it a few extra kilometres so it crosses one of the above thresholds and therefore attracts a lower rate.
If the log book method is being used to calculate car fringe benefits, you will need a valid log book over 12 weeks to establish the business use percentage for the vehicle by 31 March.
2. Car parking
Car parking FBT only applies if employees are parking a car for a period or periods exceeding four hours in the day. In a lot of cases where employees use their cars for business, away on leave or business trips, they will not be using their parking bays for more than four hours. Therefore, if employers have records (e.g. employee declarations, log books etc.), which can substantiate that employees are not using the parking bay for more than four hours in the day, they can reduce their FBT on parking significantly.
Furthermore, car parking fringe benefits only apply to cars. Therefore employees parking vehicles that are not cars will not be subject to car parking FBT. Vehicles designed to carry loads of one tonne or more, nine passengers, or, in some cases, utes, dual cabs and vans may not be subject to car parking FBT. It may be a good idea for an employer to find out what type of vehicle the employee is driving as this may reduce the car parking fringe benefits.
In a lot of cases, employers include items such as meals while travelling on business, 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 would recommend that the entertainment account be scrutinised and this non-entertainment 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 $1,000 per year. The provision of in-house benefits (i.e. goods or services usually sold by the employer) may be a tax-effective way of rewarding employees. However, this $1,000 reduction is not available if the benefit is provided under a salary sacrifice arrangement.
Employers should ensure they have processes in place to capture employee declarations, log books, travel diaries etc., to enable them to reduce any FBT liability.