Fringe benefits = happy employees, but get the tax right!

Perks can help attract and keep good employees, but remember that they attract tax. By TERRY HAYES of Thomson Legal and Regulatory.

Providing fringe benefits is all part of the process of keeping good employees and attracting new ones. It is usually perceived as being more common for big business, but SMEs also provide many of these benefits.

Fringe benefits bring the inevitable issue of tax, fringe benefits tax (FBT) to be precise. FBT has been around since 1986 and remains a compliance headache for most employers. It’s great to reward employees with fringe benefits such as a car, loan, etc, but be mindful of the FBT consequences.

FBT is payable by the employer on benefits, other than salary or wages, paid to employees. It is deductible to the employer as a business expense, but there are some compliance headaches and traps to be wary of. Fringe benefits can also be paid to former employees and to the spouse or child or relative of an employee.

If a fringe benefit is paid to an employee and it is subject to FBT, its value must be determined so the correct amount of tax to pay can be calculated. That’s where the complexity and compliance costs can become an issue.

Cars are the most common benefit

The most commonly provided fringe benefit is the company car. There are two methods that can be used to work out the taxable value of that car: the “statutory formula” method or the “operating costs” method. The statutory formula method is the most common because it is simpler to use. The FBT is worked out by multiplying the base value of the car by a percentage determined by how many kilometres the car is driven in a year, remembering of course that the FBT year starts on April1. Those percentages are:

So, the further the car is driven, the less FBT is payable. Under this method, it doesn’t matter if the car is driven totally for business use, totally for private use, or somewhere in between.

The operating costs method requires working out the total operating costs of the car (fuel, oil, servicing, etc) and reducing that total by the proportion of total distance that is for private use. It is most often used where business kilometres travelled are high, but is more complicated and requires more records (logbooks) to be kept and calculations to be made. That said, a sample calculation of the FBT payable under the two methods might convince an SME that the operating costs method will produce a significant enough saving in FBT to warrant its use.

If the statutory formula is used, there are a number of traps to be wary of, and the tax office warns that it regularly comes across these errors.

The cost price (which includes GST and dealer delivery) is obviously part of a car’s base value for FBT purposes, but registration and stamp duty are not included.

The base value of the car also includes accessories fitted at the time of purchase such as air conditioning, window tinting, and rust-proofing. However, the cost base does not include accessories fitted to meet the special needs of a business, such as a two-way radio in a salesperson’s car.

When, for example, an employee is on holiday, the FBT on the car can be reduced provided the car is garaged at the employer’s premises while the employee is away.

If the employer has owned the car for more than four years, there is an FBT saving because its base value is reduced by one-third. This is a once-only reduction and applies only to the original base value of the car.

Actual kilometres travelled (not an estimate) must be recorded on March 31 each year in order to work out how many kilometres were travelled in the FBT year.

Some fringe benefits are exempt from tax

It’s important to note that SMEs can provide their employees with a number of work-related items that are not subject to FBT; that is, they are exempt from FBT. These include:

• Car phones.
• Mobile phones (where used primarily for use in the employee’s employment).
• Protective clothing.
• Briefcases.
• Calculators.
• Laptop computers. Printers designed for use with laptops are also exempt from FBT.
• Subscriptions to professional journals.

Car parking for employees can get messy from an FBT point of view. Generally, it is exempt, unless there is a commercial car park within a one-kilometre radius that charges more than $6.62 a day. More useful for SMEs is that the provision of car parking on their premises is exempt from FBT.

Fringe benefits are part of the employment scene for many businesses. SMEs contribute just over 20% of all FBT collected, so it is a significant issue for them. For FBT purposes, working out the tax payable on fringe benefits is something of a mechanical exercise, but it does require the keeping of certain records and information.

It is important for SMEs to get that right. The tax office provides an FBT guide for employers, available on its Website www.ato.gov.au, and, of course, if things get complicated, SMEs should consult their accountants or advisers.