From our experience, many businesses consistently fail to give Fringe Benefit Tax (FBT) the attention it deserves; a decision that will inevitably hurt business profitability. The correct treatment of FBT is a strategic issue that business leaders are ultimately responsible for. Following a recent review, the Tax Department has made clear its intentions to crack-down on incorrect FBT compliance.
The deadline for the March quarter FBT return is quickly approaching. We urge you to start assessing your position sooner rather than later, starting with the 12 areas outlined in our fringe benefit tax guide below:
1. Work related motor vehicles
Many businesses still incorrectly assume that work-related vehicles are exempt from FBT. If an employee has the option to use a company vehicle for non-work related activities, then you are probably required to pay FBT.
However, there are a few exceptions. For instance, you may not need to pay FBT if:
- The employee is temporarily overseas.
- The employee is working from home.
- The employee cannot safely park the motor vehicle at the company premises.
- The employee operates out of the motor vehicle for work-related activities.
The Tax Department is encouraging senior management to become more involved in the management of company motor vehicles usage. For instance, by demanding accurate documentation procedures and implementing regular physical motor vehicle checks signed off by a director of the company.
Some businesses are also still using outdated FBT rates (see point 9). For example, from 1 April 2006, the annual FBT rate reduced from 24% to 20% when calculating the taxable benefit of a motor vehicle, giving an equivalent quarterly rate of 5%.
Employers now have the option to use the Tax Book Value Method when calculating FBT on motor vehicles, and depending on the value of the vehicle and intended life of ownership, this method can be more advantageous.
2. Miscalculating GST
Remember that FBT is calculated on GST-inclusive amounts – ensure you double check that the base amount for each benefit is correct.
It’s also important to remember that you cannot claim the GST paid on FBT in your GST return; it must be claimed as a tax adjustment in your annual income tax return.
3. Using the highest FBT rate for all benefits
Many employers choose to pay the highest FBT rate across all benefits. They do this believing that the time cost of navigating the various attribution rules outweighs any potential cost savings.
From our experience this is simply not true. Many of our clients enjoy significant savings once we apply the attribution rules. It’s worth considering this option instead of choosing to use the highest FBT rate by default.
4. Overseas travel rewards
Have you rewarded any of your employees with free or subsidised overseas travel that’s not work related? If so, you are required to pay FBT on the total value of your contribution towards the international trip. Has an employee requested to take annual leave at the end of an international work trip in the foreign country? Give us a call if you’re unsure of your obligations.
5. Omitting medical insurance schemes
Employers are required to pay FBT on most workplace medical insurance schemes. The FBT is calculated based on the premium contributions you make on behalf of each employee.
6. Overpaying unnecessary FBT on superannuation
Be careful that you’re not doubling up on your superannuation tax obligations. If you have already paid a what was formerly known as Specified Superannuation Contribution Withholding Tax (SSCWT) on superannuation contributions, then you do not need to pay FBT on the same contributions. FBT is only required when SSCWT does not apply.
7. Overdrawn shareholder current accounts
If a shareholder-employee has an overdrawn current account, then you are likely required to pay FBT. The alternative is to charge interest on the overdrawn account. It’s up to each business to decide which option best suits their requirements.
8. Treatment of discounted goods and services
Businesses are required to pay FBT on any discounted or subsidised goods and services given to an employee as a reward. Calculating the FBT owed on such rewards can be very difficult as the rules differ depending on how the goods were obtained. For instance, whether the business bought or manufactured the goods.
9. Using outdated FBT rates
It’s important to make sure you are calculating FBT based on current rates. The rates have changed several times over the past five years and we are still seeing many instances of businesses using outdated. Double check you are paying the correct rates to avoid penalties (and to make sure you are not paying more than you need to).
10. FBT on vouchers, Christmas gifts and other unclassified employee benefits
Some employee benefits, such as vouchers or Christmas gifts, don’t fall under a clear classification. However, you are still required to pay FBT on these benefits, unless their value is very low.
11. Miscalculating cross-border payroll
When it comes to processing payroll there are subtle differences in the way certain items are treated between the two countries, including the method of calculation and the return filing requirements. One example is New Zealand does not have salary sacrifice rules, while Australia does. Businesses which have cross-border payrolls in operation are likely to have more complex FBT obligations that need to be factored in.
12. FBT affects charities
There was a time charities used to be more or less exempt from paying FBT, but this is no longer the case. As of April 2014, charities are required to pay FBT if benefits exceed 5 per cent of an employee’s annual salary or wages, or $1,200 per year (whichever is the smaller amount).