FBT Basics

With the end of the Fringe Benefits Tax (FBT) year fast approaching on the 31^st of March, we have provided below some FBT basics to help you determine if this applies to your business.

The FBT year runs from the 1 April through to 31 March.

Where a business has taxable fringe benefit a FBT return is required to be lodged by the 25^th of June and paid by the 28^th of May.

A fringe benefit is a right, privilege or service provided to a current, future or former employee, and/or the employee’s associate.  This benefit could have been provided by the employer, an associate of the employer or a third party.

Benefits that are excluded from the definition of a ‘fringe benefit’ are salary, wages, eligible termination payments (ETPs), employer superannuation contributions and shares purchased under approved employee share acquisition schemes.

Where a benefit is ‘Otherwise Deductible’, that is, if the employee would have been entitled to claim an income tax deduction for the expense if the employer had not paid for the expense, then no FBT is payable for the benefit.  For example, an employee drives to a customer’s business premise and pays for parking while attending to business matters at the site.  The reimbursement of the parking fee would not incur FBT liability as the expense would have been ‘otherwise deductible’ to the employee if no reimbursement had been claimed.

​Common fringe benefits include:

• Employees taking business vehicles home and garaging them overnight
• Employees using business vehicles for private use
• Salary package arrangements
• Paying or reimbursing any employees’ expenses​
• Entertainment, such as food, drink or recreation for your employees and/or their associates
• Car parking provided for employees
• Gifting of property, such as electrical goods, to your employees either free or selling them to the employee at a discount
• Providing an employee with a house or unit of accommodation
• Providing loans at reduced or no interest rates to any employees
• Releasing an employee from a debt they owed the business
• Providing employees with living-away-from-home allowances

Exempt Benefits include:

• Laptops or other portable electronic devices provided to employees for work use​
• Membership fees and subscriptions ​
• Property given in the ordinary course of business and consumed on premises that day (e.g. a bakery that gives baked goods to employees consumed on the business premises)​
• Relocation expenses​
• Recreational or leisure facilities if they are provided on business premises (e.g. child minding facilities or gym located on premises)​

However, there are traps for the unwary business owner, for example, holding a fitness class at the office for employees and/or associates to attend does not fall under the recreational or leisure facility exemption.

FBT is separate tax from income tax and is levied at 47% for the 2018 FBT year.

To work out the amount of tax payable, the fringe benefit amount is grossed-up and then the tax rate is applied.

The grossing-up is applied to increase the taxable value of benefit provided to reflect the gross salary the employee would have earned at the highest marginal tax rate, including Medicare levy, if they had paid for the benefit themselves after paying tax.

FBT gross up rates that have applied from 1 April 2017 (2018 FBT year) are:

• For Type 1 Benefits – gross up rate of 2.0802
• For Type 2 Benefits – gross up rate of 1.8868

​Type 1 Benefits are benefits that are entitled to have a GST credit claimed by the business for GST paid.

Type 2 Benefits are benefits that can have no GST credit claimed.

Where the total taxable value of reportable fringe benefits for an employee is more than $2,000 for the current FBT year, the employer must include the grossed-up value on the employee’s PAYG payment summary.

However, regardless of whether the benefit provided is Type 1 or Type 2 benefit, for the purposes of Reportable Fringe Benefits on an employee’s PAYG Payment Summary, only the lower gross up rate is applied​.

GeersSullivan will be sending out FBT checklists and documentation to our clients at the end of March.   If you have any FBT questions please do not hesitate to contact our office.

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TAX AND PROPERTY DEVELOPERS: A CAUTIONARY TALE

Buying an older, run down house in a good location and redeveloping the site has become such a popular investment option in Perth that building companies now operate specialised divisions to service this market. While the building process has become easier the tax law surrounding the projects remains complex and unless properly considered can quickly eat through any potential profits.

Between 2008 and 2010 an experienced property developer, who unfortunately was not a GeersSullivan client, completed construction of 12 apartments in Mandurah. The sudden downturn in the market caused by the Global Financial Crisis prevented a quick sale of the apartments and it was 2015 before the final sales were completed. The downturn in the market was so severe that the developer recorded an average loss on each unit of over $100,000. Before commencing the project, the developer had consulted with his accountant who advised that the sale of land and buildings could be treated as a capital gains tax event. The developer had received conflicting advice from friends involved in similar projects but chose to push ahead.

In 2015 the ATO commenced an audit of the developer’s 2010-2014 tax returns and amended the capital losses to ordinary losses upon determining that the developer was in the business of property developing based on his intentions in commencing the project. As part of this determination the ATO registered the developer for GST and treated each property sale as a taxable supply. The developer was required to remit 10% of the sale price of each unit to the ATO, though fortunately was spared any penalty or interest charges. As it had been over 4 years since the expenses were incurred, the developer was outside of the BAS amendment window and was unable to retrospectively claim any GST credits on the cost of building the apartments or to apply the margin scheme.

In total, the developer lost close to $2 million on the project. If he had received proper accounting advice and support this loss would have been reduced by over $660,000.

While this is an extreme case, the above holds some key lessons for all tax payers considering property development as an investment choice:

1. The act of buying land for the purpose of building and selling houses or apartments is likely to constitute an enterprise and the tax payer will likely need to register for an ABN and GST.
2. The ATO pay close attention to the intent of the tax payer when determining if they are in business; in the example above the tax payer was clearly setting out to make a profit from their property development and not simply realise an asset for the highest possible value.
3. While having to remit GST can squeeze the margins of any development, failing to register can have expensive consequences in the event of an audit.
4. If you have any doubts about the advice given to you by your accountant, ask them to explain the legal context behind their opinion and provide proof for their reasoning.

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