Given the costs and complexities of complying with fringe benefits tax (FBT), small businesses are usually advised to stay away from this tax regime. However, you can, and you should as well, still make the most out of it, by taking advantage of its exemptions and concessions, which allow you to make your staff happier (generally resulting in better work performance) with the right benefit offering, without having to lodge or pay FBT.
But how to make sure you don’t get caught under the FBT regime while providing employee benefits?
First of all, we need to clarify what a fringe benefit is.
A fringe benefit is a NON-CASH benefit “paid” to an employee or his/her associates because of their employment. For fringe benefits tax (FBT) purposes, an employee includes a:
- current, future or past employee
- director of a company
- beneficiary of a trust who works in the business.
Here are some examples of fringe benefits:
- Allowing an employee to use a work car for private purposes
- Giving an employee a discounted loan
- Paying an employee’s gym membership
- Providing free accommodation
- Providing entertainment by way of free meals or tickets to concerts
- Reimbursing an expense incurred by an employee, such as school fees
- Giving benefits under a salary sacrifice arrangement with an employee
For a complete list of all the different fringe benefits, visit the ATO website.
Exemptions and concessions
Knowing what a fringe benefit is, then, to stay in the safe haven, you need to learn below key areas for applying exemptions and concessions.
Work-related portable electronic devices
They are exempt from FBT if the employee mainly uses it for work.
Examples of portable electronic devices include:
- mobile phones
- personal digital assistants (PDAs)
- laptop computers
- portable printers
- portable global positioning system (GPS) navigation receivers
This exemption is usually limited to one work-related portable electronic device only per FBT year unless the item is a replacement item. However, if you are categorised as a small business, multiple work-related portable electronic devices are allowed – even if the devices have substantially identical functions. For example, you can give a laptop and an iPad to the same employee in the same FBT year.
Other work-related items exemption
- computer software
- protective clothing
- tools of trade.
- This exemption applies to items mainly for use in the employee’s employment, and it is limited to one item per FBT year for items that are basically the same, unless the item is a replacement item.
Minor benefits exemption
A minor benefit is a benefit that has a value of less than $300. It is exempt from FBT if it would be unreasonable to treat it as a fringe benefit, that is, if:
- the benefit is provided infrequently and irregularly
- the taxable value of the minor benefit and other similar or identical benefits (if they were treated as fringe benefits) is low
- the likely total taxable value of the minor benefit and other associated benefits is low (associated benefits are those provided in conjunction with the minor benefit, for example, electricity and telephone benefits provided as part of an accommodation package)
- it is difficult to calculate the taxable value of the benefit and any associated benefits
- the benefit is provided as a result of a contingency (for example, unexpected overtime).
Small business car parking exemption
Car parking benefits provided (NOT in a commercial car park) by small business employers are exempt.
Living Away From Home Allowance (LAFHA) Concession
LAFHA is unique in the sense that they are the only CASH fringe benefit that is dealt with under the FBT law. A living-away-from-home allowance (LAFHA) fringe benefit may arise if the employer pays an allowance to their employee to cover additional expenses and any disadvantages suffered due to them being temporarily required to live away from their normal residence to perform their employment duties.
Living Away From Home amounts paid within reasonable limits, do not give rise to a taxable LAFHA fringe benefit.
The tax-exempt parts of a LAFHA (paid for no more than 12 months) are:
- “Reasonable” accommodation costs; and
- “Reasonable” food costs – statutory costs deemed to be $42 per week for adults (12 years old and above), and $21 per week for children (under 12 ).
LAFHA is a bit complicated to deal with on your own. Make sure to consult your tax agent before offering an allowance.
Car fringe benefit concession
Car salary packaging is popular because car running costs are treated as an exempt fringe benefit and the calculation normally assumes greater than actual business use, which makes a car fringe benefit concessionally taxed. Annual FBT return is still required to be prepared and lodged by a tax professional, which is what we are trying to avoid here as a small business. But if you are interested in learning more about salary packaging please check out my other post Salary packaging for dummies
For the purpose of minimising FBT compliance costs, below two areas should be considered:
Ute, van or similar vehicles
Most of the time, utes and similar vehicles provided by an employer are exempt from FBT. The exemption can be quite valuable as it allows the home-to-work trip to be considered, in effect, as a business trip. However, the exemption will only apply where other private use of the vehicle is minor, infrequent and irregular.
Company car used by director
As the director of a small business owner, if you don’t have a separate car for private use, it’s almost always assumed that you are using the company car for some private use, therefore subject to FBT. To avoid lodging an FBT return, you can simply reimburse the company the full amount of car benefits received for the relevant FBT year. The calculation is relatively simple under the statutory method and the taxable amount is usually less than the actual use. If you are claiming the company car is 100% business use, the burden is on yourself to prove it is so.
Food and drinks provided at workplace – exempt property fringe benefits
The exemption applies where food and drinks are provided to, and consumed by, current employees (not by an associate) on working days (doesn’t have to be at working hours) in the workplace. Examples are:
- working lunch
- morning coffee and cake to celebrate an employee’s birthday
- Friday night drinks and snacks at a business premise
In-house property fringe benefits – $1,000 concession
You may provide a property fringe benefit when you provide an employee with in house property (for example, your own business’s goods or services), either free or at a discount. While the discounted amount is subject to FBT, the first $1,000 is exempt.
Otherwise deductible rule exemption
You may not have an FBT liability if you give an employee a benefit that they would otherwise have been able to claim as an income tax deduction.
Sue, the manager of a hairdressing salon, pays for two senior stylists to attend a hair colouring course run by a hairdressing association. The course, paid for by the business, is to reward the senior stylists for their work performance over the last year.
There is no FBT payable because the two employees would be entitled to a full income tax deduction for the cost of attending the course, if they had paid for it themselves.
It should be noted that the deduction that would otherwise have been available to the employee must be a “once only” deduction. This means that the otherwise deductible rule doesn’t apply where the deduction would be for the decline in value of depreciating assets over a period of time, except when the cost is less than $301.
An employee has been given by the employer a $2,000 laptop mainly used for work. The otherwise deductible rule exemption doesn’t apply as the amount exceeds the “once off” deduction limit. However, the exemption can still be claimed under the work-related portable electronic devices as discussed above.
Entertainment-related fringe benefits & income tax deductibility
We must be careful with all the fringe benefits provided that could have an entertainment context. The general rules are as follows:
- If it is an exempt benefit and categorised as entertainment, no FBT payable, not tax-deductible expenditure, not entitled to GST credits;
- If it is an exempt benefit and categorised as non-entertainment, no FBT payable, tax-deductible expenditure, entitled to GST credits;
- If it is a non-exempt benefit and categorised as entertainment, FBT payable, tax-deductible expenditure, entitled to GST credits;
- If it is a non-exempt benefit and categorised as non-entertainment, FBT payable, tax-deductible expenditure, entitled to GST credits.
- Friday night drinks (wine, beer etc) and snacks at a business premise. As it is a property fringe benefit provided on a working day in the workplace, it is FBT exempt. It is a social function and has an entertainment context, therefore, not tax-deductible for theemployer.
- Coffee and cakes provided to staff during an in-house staff training session. It is also FBT exempt but doesn’t have an entertainment context, hence tax-deductible in this case.
- Christmas party staff dinner at an Italian restaurant with spending less than $300 per head. FBT exempt under the minor benefits exemption. However, aChristmas party is entertainment, hence not tax-deductible.
To avoid or reduce your fringe benefit tax liability, below key areas should be considered and studied:
- Work-related portable electronic devices
- Other work-related items exemption
- Minor benefits exemption
- Small business car parking exemption
- Living Away From Home Allowance (LAFHA) Concession
- Car fringe benefit concession
- Food and drinks provided at workplace – exempt property fringe benefits
- In-house property fringe benefits – $1,000 concession
- Otherwise deductible rule
While applying exemptions to fringe benefits, great care should be taken NOT to claim a tax deduction on FBT exempt, entertainment expenditure paid for employees.
Having a specific question? Feel free to comment below or contact us directly for a 20 mins free initial consultation session.
Please note that this post is intended to be a general guide only, and should not be seen to constitute legal or tax advice. Where necessary, you should seek a second professional opinion for any legal or tax issues raised in your personal or business tax affairs.