This month, I will talk about one of the ATO audit hot spots for taxpayers who fail to lodge Fringe Benefits Tax Returns for the benefits they provided with their employees or employee’s associates (usually family members) in respect of the employment.
Fringe benefits come in many different forms. However, the most common ones are:
- A car
- Car parking
- Low interest loans
- Payment of private expenses
It can be a useful way of attracting quality staff however the employers need to be aware of the tax consequences.
These incentives trigger fringe benefits tax (FBT) which is totally separate to income tax and is calculated on the taxable value of the fringe benefits provided.
At this point, we need to let you know that the employers can claim income tax deduction for the cost of fringe benefits and the FBT itself.
In this article, we will not discuss the technical calculation details of the FBT but we will focus on the key points that put the small business owners at the spotlight when the ATO knocks at the door.
So, why is this such an important issue?
Firstly, the fringe benefits tax is calculated in a different period which is between 1 April and 31 March, instead of the usual financial year. The reporting deadline is usually the end of June. This may cause some confusion for small business owners.
Secondly, good documentation is essential to calculate the accurate amount of FBT. For example, if you provide your employee with a car, he/she needs to keep a log book to calculate the business use percentage. Without that, the FBT will probably be much higher than it could be. Remember, all the supporting documents for motor vehicle expenses should be kept by the employer regularly, and also by the employees for the things that they paid from their own pocket. Employee’s contribution has also a reducing effect on FBT. Therefore, everyone must be aware of their own role in this calculation and play it well.
Thirdly, some items and vehicles are exempt from the FBT, such as work vehicles and some small items like mobile phones and laptops provided by the employer. But it has to be checked with the accountants to make sure that they are in this category indeed.
Finally, the last point is about ATO audits. I have seen clients who were caught by ATO for failing to lodge FBT returns. ATO does data matching with several agencies all around the country. In NSW, Service NSW is one of them. For taxman, it is really easy to identify the cars registered on a business ABN. Then the only thing they need to do is to check if there is any matching FBT return for this business. If not, the audit starts almost automatically. And the bad news is, they start a full audit on the accounts but not only on the fringe benefits provided to the employees.
In this article, we mainly focused on the car benefits which is the most common form of fringe benefit provided by the employers. However, this is a large topic. There are many other forms and very complex calculation methods that apply in different circumstances. If you need to know more, contact us.
Have a great new year.