Fringe benefits tax (FBT) is something most employers think of once a year around March, when compiling supporting information for their FBT return. Turning your mind to FBT only when the return is due can be a major challenge. In this regard, the source documentation and substantiating records may not be readily available and need to be found.
Arguably, FBT is an exercise in good record keeping and if the relevant records are not maintained throughout the year, then accessing them may be difficult when the return is due or they may lack the accuracy required. Whilst the ‘FBT season’ is still some weeks away, it is worthwhile thinking about records and documentation in advance to ensure they are readily available.
Declarations & records
Certain exemptions from FBT apply where the employer retains a declaration signed by the employee. However, a key requirement here is that a signed declaration must be obtained from the employee by the date of lodging the FBT return. This may be a problem where a former employee leaves in the year and the declaration cannot be obtained. Having declarations signed after the lodgment may also be challenged by the ATO.
The substantiation requirements mean that documentary evidence must be kept in relation to the provision of fringe benefits (including exempt benefits). These requirements are a major area of non-compliance and this remains an area of focus for ATO audits.
Problems with record keeping is a key area of focus for the ATO. A lack of substantiation for benefits provided or exemptions claimed, can be a ‘free-hit’ in the event of an audit or review. The ATO has recently highlighted areas that attract their attention and unsurprisingly, substantiation issues are a common feature, along with the following areas of concern:
Log books – incorrect record keeping
When using the ‘operating cost method’ to value a car benefit, a valid log book is required to substantiate the business usage of the car. The ATO have highlighted that many log books only have vague descriptions of trips which leave out important details such as the purposes of the trip.
Insufficient log book detail can result in the ATO not accepting the business usage you have determined and treating all travel as private, which will result in higher FBT. Upon audit or review, the ATO ask for log books which agree to the FBT return calculations and will check that the log book complies with the prescribed requirements. Merely obtaining declarations or statements from employees on the level of business usage without a log book is not sufficient.
A practical solution is to consider using a log book application or ‘App’, which can be used by employees in conjunction with their smartphones. There are many of these available which are fully compliant with the ATO’s requirements.
Classification of travel – business versus private
Generally, travel between home and work is private in nature (unless relevant exemptions apply). A common error is to record travel between home and work as business travel. For example, treating the ‘school drop-off’ as business travel.
Whilst there are certain exceptions to the above rule, such as travel on standby duty and business trips on the way to or from work, the key for employers is to ensure adequate records exist to support your position.
Directors and shareholders can also be employees of a company where they work in the business, so that payments and benefits provided to them are subject to FBT. The ATO have highlighted that many payments made do not have their purpose specified as ‘business’ or ‘private’. They found that many businesses have treated private expenditure incorrectly as business expenditure.
Again, it is important to have an effective recording system to ensure private expenses are appropriately treated as subject to FBT. Practically, many businesses introduce protocols that require expense payments to be ‘coded’ for FBT purposes, before the payment is processed.
Other areas of difficulty
In addition to the areas of focus highlighted by the ATO, other areas where errors are commonly made include:
Entertainment – Incorrect use of the ‘on-premises’ exemption and ‘minor benefit’ exemption for meal entertainment, where the 50:50-split method is used.
Property benefits – The provision of discounts to staff on goods which an employer sells in the normal course of their business, is often overlooked. Generally, this gives rise to a property benefit and there are specific rules for valuing the benefit based on the market into which the employer normally sells the goods.
Minor benefits – A common mistake is to apply the minor benefit exemption where it is not available. It is also important to ensure the exemption applies to benefits that are both infrequent and irregular. Again, this requires detailed records to be maintained.
Otherwise deductible rule (ODR)
Generally, the reduction in the FBT value of a benefit using the ODR requires a signed declaration by the employee. If this is not kept, the ATO could disallow the reduction in the value of the benefit, resulting in FBT being payable on a benefit which would otherwise have no FBT payable.
Given that an employer’s FBT liability is dependent on records and documentation being properly maintained, it follows that keeping up-to-date with your record keeping requirements regularly throughout the year will mitigate your risk and save time and effort in the long run.
For more information around fringe benefits tax, contact your adviser.
By Jason Gaudoin, Associate Principal – Tax