In previous blogs I have written, I have from time to time mentioned something called Fringe Benefits. Some of you who have attended Curtin University in Perth might know Fringe Benefits as the hair salon on campus, however in the accounting world, I am referring to Fringe Benefits Tax (FBT). With the current market of finding good employees and providing benefits for them to stay or benefits made to business owners under a Company or Trust, the topic of FBT isn’t considered more frequently than it should and sometimes business owners are caught paying additional taxes before they realise it. As the FBT year has now finished for the year, I wanted to give a general overview and explore if you may have a tax obligation with the ATO that needs to be actioned now and/or what you can do to plan for the next FBT year.
What is FBT?
FBT is a tax liability paid by business owners for certain benefits provided to their employees, employee’s family or other associates through a FBT year.
An employee can be current, past or future as well as a director of a company and any beneficiary of a trust who is working in the business.
Is FBT the same as income tax?
No, it isn’t. FBT is a different type of tax that is separate from income tax. The amount of tax payable is related to the taxable value of the fringe benefit provided.
It should be noted that any FBT liability that you pay is considered a deduction when calculating your income tax. You can also claim a deduction on the expense and GST credits (if applicable) for providing the fringe benefit.
What period does the FBT year relate to?
The FBT year starts on 1 April through to 31 March the following year (12 months).
What do I do if FBT applies to me?
FBT is a self-assessed tax system. If you think FBT applies to your business, you will need to register and lodge an annual FBT return. Registrations can be done simply by lodging a FBT return (online or paper), online through the Business Registration Service, via phone and through your tax agent.
When is the due date to lodge a FBT return?
Following the end of the FBT year on 31 March, an annual FBT return must be lodged by 21 May. Extensions to 25 June may be available through your registered tax agent when lodged electronically.
When do I pay my FBT liability?
The tax payable on your annual FBT return will be due 21 May or the concessional lodgement date through your tax agent of 25 June if it applies.
Upon lodgement, if your annual FBT obligations are more than $3,000, you will be required to pay quarterly FBT Instalments. The ATO will add this on to your next quarterly BAS (Business Activity Statement). This is a similar process as your Pay As You Go (PAYG) Instalments where you pre-pay your tax liability in advance to help reduce the amount of FBT payable when you lodge your return.
How is FBT calculated?
The summarised version of how FBT is calculated:
· Step 1: Identify the fringe benefits you have provided
· Step 2: Check for any FBT concessions or exemptions to reduce your FBT liability
· Step 3: Calculate the taxable value of the fringe benefits provided
· Step 4: Work out your grossed up value of fringe benefits by multiplying the amount from Step 3 against the gross up rate (type 1 = 2.0802 for employers entitled to GST credits or type 2 = 1.8868 for employers not entitled to claim GST credits)
· Step 5: Multiply your grossed up value of fringe benefits (calculated in Step 4) by 47%.
What are the most common fringe benefits provided in Community Pharmacy?
The most common fringe benefits that I see owners in pharmacy providing and examples:
· Motor vehicles fringe benefits:
Delivery vehicles that are also driven for personal use. A common example is driving the delivery vehicle home and parking it in a private residence. This is deemed private use.
Owner’s motor vehicle purchased through the business that is driven for personal use.
· Entertainment fringe benefits:
Social events (i.e. Christmas parties, celebrating milestones and achievements, business lunches, etc.)
Gifts
Rewards
· Housing fringe benefits
Providing accommodation rent free or at a reduced rent and is not usually their place of residence.
· Expense payment fringe benefits
Car parking if you do not provide the car parking facilities
Laptop or work phone
What are the FBT concessions or exemptions that can reduce your FBT liability?
· Motor vehicles fringe benefits:
- Not an eligible vehicle are exempted (i.e. Single cab ute, Dual cab ute or 4 wheel drive (some conditions apply), panel van, taxi)
- Exemption is made available for eligible electric cars
Minor, infrequent and irregular use of vehicle for private purposes. A form is required to be signed by the employee stating limited use of motor vehicle for personal use and is limited to travel between home and work and small errands.
· Entertainment fringe benefits:
By answering the following questions, it will help determine if the taxable value of the entertainment expense can be reduced or exempt from FBT:
- Why are you providing this entertainment to your employee?
- What type of entertainment are you providing?
- When are you providing the entertainment?
- Where are you providing the entertainment?
Minor benefit less than $300 in taxable value and the frequency of the benefit.
Some travel in taxis, ubers and public transport are exempt. For example, your employee was unwell or injured and you paid for a taxi to drive them home from the pharmacy or relevant health practitioner. As long as it is a single trip that starts/ends at the workplace or taken to the appropriate place to assist with their illness.
· Housing fringe benefits
Can be exempt if living in an identified remote area (as classified by the ATO), living away from their usual place of residence to carry out their duties and travelling to carry out their duties.
If you are providing temporary accommodation because the employee has changed their usual residential address to start/continue employment with you, there may be 2 concessions available, and the employee must sign an employee declaration as evidence:
- 21 day temporary accommodation at the former location as the former accommodation is unavailable or unsuitable for occupancy.
- Up to 4 months temporary accommodation at the new location as long as the employee is making an effort to find long term accommodation. Can be up to 12 months depending on the employee’s circumstance.
· Expense payment fringe benefits
Car parking may be exempt if you have an employees with disabilities, a small business or exempt employer types.
Portable electronic devices are exempt and up to one item per FBT year.
In general, if an employee contributes to the value for the fringe benefits, the taxable value is also reduced for the calculation of FBT. For record keeping, it is good practise to get an employee declaration confirming their contribution.
Is there anything else I need to action after lodging a FBT return?
Because the FBT year and income tax year differ, one item that is always forgotten after the lodgement of your FBT return is reporting the fringe benefits on an employee’s payment summary. If the taxable value of reportable fringe benefits during the FBT year is more than $2,000 for any single employee, you are required to report this on the employee’s payment summary through Single Touch Payroll. Don’t forget to loop your payroll advisor in!
How long do I maintain my records for?
As always with accounting, ensure you have maintained adequate records for five years from the date they were prepared.
What areas attracts the ATO’s attention?
Each year the ATO will be transparent and publish areas that attracts their attention and will put more audit compliance measures through. It is yours and your tax agent’s duty to ensure your pharmacy is compliant.
The most common areas the ATO have recently been interested in are:
· Motor Vehicles
Treating your vehicle as 100% business even though there is a private purpose.
A valid log book.
The eligibility of exempting commercial vehicles for FBT.
· Employee Contributions
Reporting contributions into your FBT return but it does not match to the employee’s tax return.
Reducing your FBT to nil by applying employee contributions however not lodging an FBT return.
· Data Matching on Reportable Fringe Benefits Amounts (RFBA)
Including RFBA on an employee’s year end income statement but not lodging a FBT return.
Lodging a FBT return with amounts included for RFBA however not reporting it on an employee’s year end income statement.
Incorrectly reporting an employee’s salary sacrificed super contribution even though it was under an effective salary sacrifice arrangement.
The topic of FBT is very technical and I have highlighted the most important items for you to have awareness of and take the initiative to have the conversation with your advisors. The world of tax is always complex and your situation may differ from one pharmacy owner to another. I highly recommend reaching out to your accountant for further advice if you think FBT applies to your business.
Source: ATO - https://www.ato.gov.au/businesses-and-organisations/hiring-and-paying-your-workers/fringe-benefits-tax