FBT liabilities can trap unwary businesses, some of whom don’t recognise that there can be a tax consequence from providing benefits to staff such as entertainment.
It is essential to understand there can be implications from seemingly straight-forward business activities across income tax and GST, as well as FBT.
For some smaller businesses, it can come as a surprise that business-related activities can fall within the FBT system. While there are some exemptions in place, e.g. minor or infrequent activities, businesses need a clear understanding that many benefits could come under the scrutiny of the Australian Taxation Office (ATO).
The ATO’s top FBT problem areas
- Motor vehicle fringe benefits – failing to report motor vehicle fringe benefits, incorrectly applying exemptions for vehicles or incorrectly claiming reductions for these benefits
- FBT and income tax mismatch – mismatches between the amount reported as an employee contribution on an FBT return compared to the income amounts on an employer’s tax return
- Entertainment claimed as a deduction but not recognised as FBT – claiming entertainment expenses as a deduction but not correctly reporting them as a fringe benefit, or incorrectly classifying entertainment expenses as sponsorship or advertising
- Car parking fringe benefits – incorrectly calculating car parking fringe benefits due to:
- Significantly discounting market valuations
- Using non-commercial parking rates
- Not being supported by adequate evidence
- Business assets you use personally – not reporting fringe benefits on business assets that are provided for the personal enjoyment of employees or associates
- Not lodging FBT returns – not lodging FBT returns (or lodging them late) to delay or avoid payment of tax.
A small business owner might think it appropriate to take a good customer or supplier to lunch. It might also seem natural to take along a staff member to that lunch. But there could be an FBT liability that arises depending on the value of the food and drink on a per head basis and how frequently staff members receive similar benefits.
Excellent record-keeping is fundamental. It is crucial at lunches, for example, to note who was there because the portion relating to staff members might be subject to FBT while the portion relating to clients would not generally trigger FBT.
In addition to determining whether there is an FBT issue, these records will also generally be used to check whether the business can claim a deduction and GST credits for the expenses. The ATO’s approach is very evidence-based; there needs to be documentation to back up whatever the business is claiming.
That record-keeping can be complicated, especially if they do not have a dedicated internal accountant.
Motor vehicles are another critical FBT issue. Many businesses provide cars to staff or allow them to take vehicles home, but this can easily trigger an FBT liability – although again, some businesses may be unaware of that.
While some exemptions can apply to these benefits, and it may be possible to reduce or eliminate the FBT liability, there must be detailed record-keeping. For example, a car that is used solely for business purposes could still potentially trigger a significant FBT liability unless there is a valid log-book in place.
There can be questions raised by the ATO if, for example, a business has substantial motor vehicle expenses, yet they do not lodge an FBT return.
You cannot avoid the FBT system by simply not claiming a deduction for expenses relating to a vehicle.
Further, if you would like to discuss any of the above measures or the financial impact you are currently facing, in general, please feel free to email your AHJ contact or firstname.lastname@example.org or call (07) 3253 1500.