The Fringe Benefits Tax (FBT) year ends on 31 March. We’ve outlined the hot spots for employers and employees.

Not lodging FBT returns
The ATO is concerned that some employers are not lodging FBT returns when required to.

If your business employs staff (even closely held staff such as family members), and is not registered for FBT, it’s essential to ensure that the position is reviewed to check whether the business could potentially have an FBT liability. 

If the business provides cars, car spaces, reimburses private (not business) expenses, provides entertainment (food and drink), employee discounts etc., then you are likely to be providing at least some fringe benefits.

There is a list of benefits that are considered exempt from FBT, such as portable electronic devices like laptops, protective clothing, tools of trade etc. If your business only provides these exempt items, or items that are infrequent and valued under $300, then you are unlikely to have to worry about FBT.

Why should you lodge an FBT Return?

Well, for the simple reason that it turns on a three-year deadline for the ATO to commence audit activities.

Without an FBT return being lodged, the ATO has the discretion to launch an audit into activities as far back as a business has had employees. Without the evidence (e.g. signed declarations, logbooks, meal entertainment records, etc.) that FBT was NOT payable in each year the ATO is likely to raise FBT liabilities, even where the employee who enjoyed the benefit may no longer work for the business. This makes it impossible for the business to recoup anything from the past employee.

Even where an employer believes they have done everything in accordance with legislation, people will make mistakes. A common mistake occurs where an employee is provided with a car and the private use is worked out using the operating cost (logbook) method. A part of using the logbook method is working out deemed depreciation each year and many accountants overlook this or work it out incorrectly by relying on the depreciation claimed on the business’ financial statements. This mistake can give rise to an FBT liability where the calculated employee contribution is insufficient to remove the car’s taxable value.

If a mistake like this is identified, the ATO is likely to review the entire period that the car was owned by the business. Lodging an FBT return would limit the length of time the ATO can audit to three years.

FBT exemption for electric cars

To encourage the adoption of no or low emissions vehicles, the Government introduced a concession to make these vehicles FBT-free when provided to employees.

Employers that provide employees with the use of electric cars, hydrogen fuel cell electric cars or plug-in hybrid electric cars can potentially qualify for an exemption from FBT. This should normally be the case where:

• The value of the car is below the luxury car tax threshold for fuel efficient vehicles (which is $89,332 for 2023-24 financial year); and
• The car is both first held and used on or after 1 July 2022.

Employee contributions – savings due to salary sacrifice arrangement

Where an employee enters into a novated lease arrangement, or otherwise agrees to financially contribute towards the provision of a car fringe benefit, some or all of the employee contribution will typically be made from after-tax salary. For electric cars that qualify for this exemption, the total contribution made by an employee may now be made from pre-tax amounts. This change is expected to provide significant tax savings for the employee due to reduced taxable income.

This means the employee’s own home electricity costs incurred on charging the electric vehicle would often need to be worked out. This figure can generally be treated as an employee contribution to reduce the value of the benefit.

While this can be practically difficult to determine, the ATO has now finalised a guideline providing a 4.20 cent per km shortcut rate that can potentially help with the calculation. These guidelines do not apply to plug-in hybrid vehicles.

Many electric vehicles are also packaged together with electric charging stations. Just be aware that the FBT exemption for electric cars does not extend to charging stations provided at the employee’s home.

Work from home arrangements

Many businesses continue to offer flexible work from home arrangements with team members working from home either on a full-time basis or for at least part of the work week.

Some businesses may have provided their employees with work-related items to assist their employees when working from home.

Portable electric devices such as laptops and mobile phones are commonly used for work. Providing such devices to your employees shouldn’t trigger a FBT liability, as long they are primarily used by your employees for work.

Where multiple similar items have been provided during the FBT year, the situation becomes more complex unless your business has an aggregated turnover of less than $50m (previously, this threshold was less than $10m).

If an FBT exemption isn’t available, it is often worthwhile instead considering whether the FBT liability of such items could be reduced to the extent the employee could claim a once-only deduction in their personal return (i.e., had they purchased the item themselves).

Contractor or employee

Our update in early March 2024 provided clarification in understanding the relationship whether a worker is an employee or an independent contractor.

The FBT rules tend to apply when benefits are provided to employees and certain office holders, such as directors. FBT should not apply when benefits are provided to genuine independent contractors.

If the parties have entered into a written contract, then you need to focus on the terms of that contract to establish the nature of the relationship (rather than looking at the conduct of the parties). However, merely labelling a worker as an independent contractor doesn’t necessarily mean that they won’t be treated as an employee if the terms of the contract suggest that the parties have entered into an employment relationship.

If your business employs contractors, you should have a process in place to ensure the correct classification of the arrangements and to determine the ATO’s risk rating. These arrangements should also be reviewed over time.

Even when a worker is a genuine independent contractor, just remember that this doesn’t necessarily mean that the business won’t have at least some employment-like obligations to meet. For example, some contractors are deemed to be employees for superannuation guarantee and payroll tax purposes.

Mismatched information for entertainment claimed as a deduction and what is reported for FBT purposes

One of the easiest ways for the ATO to pick up on problem areas is where there are mismatches.

When it comes to entertainment, employers are keen to claim a deduction but this can be a problem if it is not recognised as a fringe benefit provided to employees.

Expenses related to entertainment such as a meal in a restaurant are generally not deductible and no GST credits can be claimed unless the expenses are subject to FBT.

Let’s say you taken a client out to lunch and the amount per head is less than $300. If your business uses the ‘actual’ method for FBT purposes then there should not be any FBT implications. This is because benefits provided to client are not subject to FBT and minor benefits (i.e., value of less than $300) provided to employees on an infrequent and irregular basis are generally exempt from FBT. However, no deductions should be claimed for the entertainment and no GST credits would normally be available either.

If the business uses the 50/50 method, then 50% of the meal entertainment expenses would be subject to FBT (the minor benefits exemption would not apply). As a result, 50% of the expenses would be deductible and the business would be able to claim 50% of the GST credits.

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