As we approach the final quarter of the 2018 financial year, Fringe Benefits Tax (FBT) is probably not something that is top of mind. However, given that the FBT year ends on 31 March 2018, now is the time to take action to minimise your 2018 FBT liability.
Some employers may not realise that they are providing benefits to employees that are subject to FBT. If you provide any of your employees with a car, insurance, meals, a gym membership or even throw a Christmas party for your staff, this can give rise to an FBT liability.
So how do you minimise your FBT liability?
Exempt Fringe Benefits
Firstly, some benefits are exempt from FBT altogether. Examples of exempt benefits include:
- Laptops, tablets, mobile phones and other portable electronic devices that are provided for work related purposes.
- Some utes and panel vans where there is minimal private use
- Minor and infrequent benefits under $300 (subject to additional criteria)
- Taxi travel to or from work
- Expenses that the employee would be able to claim a tax deduction for, had they paid the expense themselves (the “otherwise deductible” rule)
- Car parking if you are small business and the parking provided is not in a commercial car park
Motor Vehicles – Operating Cost / Log Book
One of the more common benefits provided to employees, that is generally subject to FBT, is the use of a car. If the employee uses this car for work related purposes, they should maintain a log book for 12 weeks to demonstrate the work use vs private use %. The FBT will then only be charged on the private portion of vehicle expenses, including fuel, insurance, repairs and services, deprecation and interest. This is known as the “operating cost” method.
If no log book is maintained, FBT is charged on a nominal value of 20% of the vehicle’s original cost (less a 1/3 discount if the vehicle is over 4 years old). This is known as the “statutory formula” method and can lead to a higher FBT liability than the operating cost method if the vehicle is partially used for work related purposes.
In addition to maintaining a log book, it can be beneficial for employees to make a contribution towards the benefit being provided. This is due to the FBT rate being 47% for 2018. Any employee earning less than $180,000 will have a marginal tax rate lower than this. A common strategy is for employers to pay employees a bonus to allow them to fund this contribution, or factor it into their regular salary payments.
Consider the below example for an employee on a gross salary package of $80,000. They have chosen to salary package a $50,000 car. The lease repayments and running costs of the car total $15,000 per year. The employee uses the car for work related purposes 45% of the time, and private purposes 55% of the time.
This simplistic example (which ignores on-costs such as super, payroll tax etc) highlights the cash saving generated by using an employee contribution to negate the FBT liability. It also demonstrates the potential savings of using the operating cost method compared to the statutory formula for motor vehicle fringe benefits, however this does depend on the work related vs private usage of the vehicle.
Ensure you Fringe Benefit Tax is set up accurately and on time. Any one of our team of advisers can assist you by getting in touch with BLG online or by calling (02) 4229 2211.