With more of us working from home now as part of our ‘new normal’, the ATO is increasingly turning its attention to business expenses and employee deductions. Here’s how to ensure you don’t get caught out.
What is a fringe benefit?
Really simply, a fringe benefit is an additional ‘payment’ or benefit you receive on top of your regular salary or wages.
For instance, the company you own or work for may allow you to use a work vehicle as if it were your own. This means you would be free to drive the vehicle home of an evening and use it to go grocery shopping and to yoga, and to take your children to soccer practice and the movies on weekends. There’s no requirement for you to leave the vehicle at work at the end of the day; despite it not being registered in your name, it is essentially ‘yours’ to use as you see fit. You don’t have to own or maintain your own personal vehicle.
Other common fringe benefits employees receive include:
- mobile phones and laptops;
- gym memberships;
- ‘entertainment’ by way of free tickets to concerts, ‘business’ lunches and staff Christmas party functions;
- the reimbursement of expenses like school fees and mortgage payments; and
- benefits received under a salary sacrifice arrangement (with the exception of pre-tax superannuation contributions, which are exempt from fringe benefits tax (FBT)).
How do fringe benefits impact me?
For many of you reading, the fringe benefits you receive aren’t necessarily something you need to think too much about.
If you are an employee working for a company that you don’t own, and for people you are unrelated to, and the amount you receive as a benefit is low (under $2,000), your employer’s accounting and payroll team will take care of things. The most complicated it may get for you is that you might be asked to maintain a motor vehicle logbook or advise the number of non-employee guests at a function, and you’ll see an FBT amount pop up in your income tax return.
For others, however, fringe benefits can get complicated.
If the taxable value of certain fringe benefits received by you in an FBT year exceeds $2,000, the grossed-up taxable value of the benefits will be recorded on your income statement for the corresponding income tax year. (Fringe benefits are grossed up to reflect the amount in after-tax dollars you otherwise would have had to spend to acquire the benefit/s you received.) This taxable value is known as your reportable fringe benefits amount and must be shown in your income tax return. While the amount itself won’t be included in your assessable (or taxable) income, it will be used to calculate other obligations you may have, including:
- child support payments;
- HECS/HELP and other study and trade support loan repayments;
- your Medicare levy surcharge (if applicable); and
- Division 293 tax (affecting super contributions).
Your reportable fringe benefits amount may also reduce the amount you receive in:
- superannuation co-contribution;
- private health insurance rebates;
- income-tested government benefits; and
- various tax offsets.
Define employee…
You are considered an employee for Fringe Benefits Tax purposes if you are a:
- current, future or past employee;
- director of a company; and/or
- beneficiary of a trust who works in the business.
Okay… and so what about Fringe Benefits Tax, then?
In the 1970s and 80s, providing fringe benefits was a hugely popular way to remunerate staff in a tax-free manner. The benefits a business’ employees received were deductible expenses as far as the business was concerned and the employees themselves didn’t have to declare the perks in their tax returns. It was a win/win situation for everyone but the Australian Government. The system was abused, resulting in the Hawke government introducing the Fringe Benefits Tax Assessment Act 1986 and related legislation.
Since then, FBT has been payable by employers on various benefits provided to employees or their employees’ family or associates. It is a separate tax from income tax and is calculated based on the taxable value of the fringe benefit provided and at the top marginal tax rate including the Medicare Levy so that those in the top tax bracket don’t gain an advantage by utilising FBT to artificially reduce their tax liability.
The biggest issues with Australia’s FBT system is that it is an expensive tax, relative to others, it can be tricky to get right, and you as the recipient may not fully understand the wider-reaching impacts receiving fringe benefits may have on your overall tax position. We also know the issue of FBT will increasingly be on the ATO’s radar given how differently many of us are living and working now, as a result of COVID-19.
The calculation of your FBT liability isn’t necessarily simple or straightforward as there are a number of factors that impact on the bottom line, including:
- the types of benefits provided;
- whether or not the benefits are exempt from FBT;
- GST;
- whether or not an employee makes a personal contribution to the cost of the benefit provided;
- if the benefit is considered ‘minor’;
- the records you’ve kept to substantiate your benefits;
- and so on.
To make things even more complicated, the FBT year (1 April to 31 March) doesn’t align with our financial year (1 July to 30 June), meaning that adjustments often need to be made to accurately record and report the expenses a business has incurred and its various tax liabilities.
On the plus side, however, if you find you have an FBT liability, you can generally claim an income tax deduction for the cost of providing fringe benefits and for the FBT you pay. The GST credits for items provided as fringe benefits are also generally claimable, too. In addition, when you lodge an FBT return, you reduce the Tax Office’s timeframe to audit you for FBT purposes from indefinitely down to three years.
Identifying your FBT liability
Meet Gary
Gary* is the sole Director of a consulting company. Gary used to lease and share office space in a building in the CBD, however, as a result of the coronavirus, Gary has downscaled the scope of his business activities and now works out of a room in the house that he owns 50/50 with his wife, that the two of them transformed into a home office. He advised ASIC of the change to his business’ location within the relevant 28-day window, so as not to incur any penalties, and now his home serves as his company’s registered office and business address. Gary’s company-owned car, which he used to use extensively to visit clients and project-sites, is now mostly used to go shopping.
Gary’s wife, Sookie, also works from home as a virtual employee, and their adult daughter, Cherie, is studying online part-time, working towards her Masters in Public Health with a university located in the Eastern States. Between them, Gary and Sookie work from home approximately 80 hours a week, depending on the deadlines they are juggling. Cherie usually studies from home anywhere between eight and 16 hours a week. The three of them use a business-grade phone and internet bundle that Gary’s consulting company pays for and, between them, work across five laptop computers, three of which are owned by Gary’s company. While Sookie and Cherie own and pay for the use of their personal mobile phones, Gary’s is entirely owned and paid for by his company and while he does use it for business purposes, he also uses it to reach Sookie when she’s out and to call his brother who lives in Sydney.
Of an evening, Gary, Sookie and Cherie relax by watching tv shows and movies together on Netflix and video-calling their friends in Melbourne, Queensland and Germany. They also read the news online, download audiobooks and engage in the use of social media. The three of them mostly use their company-owned laptops to facilitate these activities, however, Gary will often use his company-owned iPad, too.
Can you identify the FBT and tax issues in Gary’s story?
As you may be able to identify in the above scenario – which is increasingly the reality for many in Australia and based on a real family – Gary’s family has a number of FBT and other tax issues to consider.
Working from home expenses
First of all, now that Gary and his wife are working from home, there are a number of working from home expenses that they may be able to claim. They will need to keep a diary and accurately record the number of hours spent in their office each week and keep handy their various utility bills so that they have options in terms of how they claim deductions. For example, in the 2019/20 and 2020/21 financial years, the Australian Government introduced a shortcut method which means that many employees can simply claim $0.80 per hour for home office expenses, all-inclusive, rather than the $0.52 per hour fixed rate method or the actual cost method.
Registered office address and primary place of business
Gary has done the correct thing and advised ASIC within 28-days of the change that his business activities have moved location. However, Gary’s decision to run his business from the home he owns with Sookie means their home may be subject to Capital Gains Tax in the future. Gary and Sookie should seek a valuation on their home so that they know what their property is worth now, to help with calculating their CGT position later.
Gary’s company car
If you are a Director and run your business through a company, as Gary does, you may be regarded as an employee of that company. This may mean that fringe benefits provided to you result in your company having FBT obligations.
Since making the change to working from home and dealing with clients remotely, Gary’s business usage of his vehicle has fallen dramatically. He, therefore, needs to keep a new logbook to accurately record his business-related travel and identify the FBT-applicable portion of his motor vehicle use.
It may make sense for Gary to divest the company of its car and purchase a vehicle in his own name, depending on his longer-term plans.
Phone and Internet costs
Gary’s company is paying the bill for his mobile phone use and the internet service that he, Sookie and Cherie all use. As such, the three are receiving fringe benefits from Gary’s company and Gary has an obligation to record and declare the benefits, and pay FBT, accordingly.
Again, this FBT calculation isn’t necessarily straightforward as phone and internet providers are increasingly bundling services and it isn’t quite as easy anymore to run your eye down a phone bill, highlight the applicable charges, and add them all up – particularly where internet data usage is concerned.
The Income Tax Assessment Act 1997, however, under section 8-1, provides some guidance in these situations. Broadly speaking, an employee (which Gary is, as Director of his company) can deduct an expense “to the extent that it is incurred in gaining or producing assessable income.” In Gary’s situation, it is appropriate for him to apportion his company’s phone and internet expenses between their income-producing and private elements. Gary is allowed to do so on a “fair and reasonable” basis, depending on his unique circumstances. For instance, Gary may take a time-based approach and apportion costs based on the number of hours he works per week, versus the number of private hours he and his family have access to the phone and internet they use.
Portable electronic devices (laptops, iPads, etc)
Lastly, Gary and his family use company laptops and an iPad for personal use in the evenings and on weekends. Generally speaking, items like laptops, tablets, mobile phones and associated hardware and software are considered exempt benefits or ‘otherwise deductible’ with no FBT applicable if they are primarily for business use. In Gary’s case, as there is a significant component of personal use that applies, he would again have to make a determination regarding business versus private use and apportion his claims accordingly.
*Names have been changed to protect identities
Reduce your FBT
If you’re already incurring and paying FBT and you’re happy with your specific situation, fantastic! There’s no need for you to change anything.
On the other hand, if you’d like to minimise or avoid the need to consider and pay FBT, there are a few things you can do:
- Don’t provide non-cash benefits to employees (including yourself). Pay them (you) a cash bonus instead (including any required superannuation guarantee) and let the individual handle the tax consequences, keeping in mind that you still have the obligation to withhold PAYG tax as usual;
- Provide items such as portable electronic devices, tools, briefcases, etc, where the primary purpose of the benefit is work/business-related;
- Keep any fringe benefits you provide both infrequent and under $300 so they are considered a minor benefit and exempt;
- Provide benefits that the employee would be eligible to otherwise claim a tax deduction for if they were to purchase or pay for the item themselves;
- Utilise employee contributions and benefits with concessional rules (for example, the statutory formula that applies to cars).
It’s complicated but we can help
The above is a basic overview of a complicated subject and tax. We hope, having explained some of the issues, that you will consider your own situation and any FBT liability you may be incurring. We are available to help you if you’d like advice on your unique circumstances and/or on how to plan ahead of the next FBT and financial years.
For more information on FBT or record-keeping, or for personalised advice, call us on (08) 9221 4100 or email admin@up-to-date.com.au.