At the end of the Fringe Benefits Tax year (31 March 2011), the thoughts of most employers turn to questions about how to calculate the taxable value of Fringe Benefits provided to their employees during the previous year and how to collect the required documentation to enable the FBT return to be prepared and lodged.
Statistics recently released by the Australian Taxation Office (ATO) indicate an alarming and disproportionate lack of compliance in relation to FBT. The ATO states that a review of "lapsed" employers (i.e. those who had ceased lodging FBT returns) indicated that 69% of those employers were still providing benefits to their employees and should have been lodging FBT returns. Further, the ATO's pilot project found that the rate of non-compliance in lodged returns was as high as 70%. Not surprisingly, the ATO have announced that FBT will be a much larger target for compliance activities over the next 12 months with a view to improving these compliance statistics (although skeptics would suggest that increasing revenue would also be a primary motivating factor in the decision).
As the FBT law has not had many significant changes over the last 12 months, the focus of this edition of Moore Tax News is to examine the compliance issues that are likely to cause problems, either through interpretation or application and to consider how employers can best manage those risks. .
One of the primary tools used by the ATO in ascertaining whether or not employers should be lodging FBT returns is data matching, and the sources of data available to the ATO for this purpose are increasing every year. For example, vehicle registration data obtained from State Government Transport Departments can be used to cross check between companies that own motor vehicles and companies that lodge FBT returns. There is also a strong likelihood that many businesses, encouraged to purchase motor vehicles under the temporary "investment allowance" rules, may have failed to consider the FBT obligations that vehicle ownership entails.
Anecdotal evidence exists of ATO auditors taking note of signage on "exempt" panel vans and utilities parked at sports grounds over a number of weekends and checking whether those businesses are claiming the vehicles as being "exempt", arguing that use on a number of weekends is an indicator that the vehicles are being used for private purposes.
Living Away From Home Allowances "LAFHA"
The rules relating to LAFHAs attract an ever increasing amount of confusion. There is also a perception within the ATO that the LAFHA exemptions are being systematically abused. Whilst other "allowances" are included in the assessable income of an employee, a LAFHA is exempt income to the employee, regardless of the nature of the payment. However, a LAFHA is subject to FBT, except to the extent that it is an "exempt accommodation component" or an "exempt food component". With regard to the "exempt accommodation component", there is a "reasonableness" test for the amount, but no clear guidance as to what amounts are "reasonable" – hence the ATO concerns about the potential for abuse in this area.
FBT returns now require disclosure of the gross amounts of LAFHAs paid to employees and exemptions claimed in order to determine the taxable value of the LAFHA fringe benefit. The fact that these amounts are being highlighted provides a potential trigger for ATO review activity. Employers paying LAFHAs should carefully review both the way in which the various LAFHA components are calculated and whether or not the employee is in fact "living away from home". Naturally, employers should also ensure that they obtain appropriate LAFHA declarations from affected employees.
Motor vehicles are still the most prolific Fringe Benefit provided, so it is not surprising that many errors identified by the ATO in FBT audits relate to motor vehicle fringe benefits. Issues that arise include:
- Incorrectly applying the depreciation "cost limits" when calculating the taxable value of motor vehicle fringe benefits;
- Motor vehicles not being declared as being "available for private use" when garaged at home (e.g. whilst the employee is travelling),
- Failure to keep adequate records (log books, purchase costs, maintenance/running costs etc.);
- Failure to adequately substantiate employee contributions, including unreimbursed expenses paid by employees;
- Incorrect determination of business use percentages; and
- Arithmetic errors in applying the statutory formula.
In addition to the above, ATO Auditors have reported that many employers incorrectly reduce income tax deductions claimed in respect of motor vehicles for the "non-business" use of vehicles provided as fringe benefits (such costs (subject to depreciation cost estimates) being wholly deductible to the employer where a motor vehicle fringe benefit is provided).
Another area that is often incorrectly dealt with relates to "employee contributions". These can either involve a payment by the employee to the employer as a contribution to the cost of providing the fringe benefit or the employee incurring expenses relating to the benefit (e.g. fuel costs) and not being reimbursed for those costs. In the latter case, the GST-inclusive amount of the unreimbursed expense is the amount that is taken into account in determining the employee contributions. As those unreimbursed expenses are not normally recorded in the employer's accounts, a procedure to capture and substantiate the claims should be put in place.
On the other hand, if the employee makes a payment to the employer in respect of the benefit, that payment is treated as consideration paid for the "supply" of the benefit and therefore, the contribution is subject to GST (assuming the employer is registered). This means that the GST-exclusive amount of the contribution should be recorded as revenue of the employer (and disclosed as such at the appropriate label on the income tax return) and 1/11th of the amount is remitted to the ATO as GST. Often, these interactions are not properly recorded, but it is a simple exercise for the ATO to compare data from the FBT and Income Tax returns to identify potential audit targets.
Inevitably, the confusion relating to minor Fringe Benefits creates a mine field for employers and their advisors and a happy hunting ground for FBT Auditors.
Whilst benefits of a minor nature (up to $300) are potentially exempt, there are conditions to satisfy for the exemption to apply. One of these is that the relevant benefit is provided on an irregular and infrequent basis. For example, an employer with a corporate box at a sports stadium who allows its employees to use that facility might not be an "irregular and infrequent" benefit if the box is available for the whole season, notwithstanding that each employee's use of the facility may cost less than $300.
Employers providing minor benefits are encouraged to consider those benefits in a broader context than merely individual items.
Work Related Items
Changes in 2008 to the "work related items" exemptions potentially allow a broader range of items to be exempt fringe benefits, particularly "portable electronic devices". However, "work related items" must now be "primarily for use in the employee's employment". Thus, a senior executive might justify claiming a laptop as a "work related item", even if it is really going to be used by the executive's student child, whereas the company's cleaner might have difficulty justifying a laptop as being required primarily for use in employment. Employers should therefore be mindful of the use to which items claimed as work related might be put before approving them (or be prepared for the FBT liability).
An additional requirement is that only one item with substantially identical functionality is allowed in any one FBT year (unless the earlier item was lost, destroyed or superseded). The ATO have confirmed that Apple iPads and similar tablet devices do not provide substantially the same functionality as laptop computers.
Other Common Errors
In addition to the above, employers should also ensure that in compiling their FBT returns, any information taken from the company's financial accounts is adjusted so that GST-inclusive amounts are used when calculating the FBT payable. Further, care should be taken in ascertaining whether benefits are "Type 1" (i.e. subject to GST) or "Type 2" (no GST). When determining Reportable Fringe Benefits to be included on employee Payment Summaries, use the Type-2 gross-up factor for all benefits.
There is a lot of interaction between a company's income tax, FBT and GST reporting and ensuring that these all reconcile is an important step in minimising the potentially adverse implications of an ATO audit.
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