Over the last few weeks, we have been sending out FBT returns for signing. In nearly all cases, there is no amount payable. So what’s the point?
FBT was brought in as an additional tax regime in 1986. The purpose was to provide a taxing point for ‘non-cash’ benefits outside an employee’s normal salary. The objective was to return these non-cash benefits to a pre-tax point, and using the top marginal rate as the base tax rate. Non-cash benefits are quite wide ranging and can include:
– a company car being provided to an employee or an associate (child, spouse, parent etc.)
– a low finance loan
– food and entertainment (onsite or externally)
– carparking spot (which would otherwise be paid from post-tax income)
– paying rent or someone’s mortgage (sometimes allowed for not-for-profits)
– many other defined fringe benefits
– residual benefit is a catch-all clause that if something isn’t provided as cash, it can still be a fringe benefit.
The most common fringe benefits provided in a small business are motor vehicle and exempt motor vehicle benefits.
The FBT year ends 31 March 2021 (to make our lives easier?!), hence we are preparing your FBT returns now for 30 June 2021 tax returns.
Unlike individual/sole trader/partnerships, which rely on the logbook method or cents per KM, in a company or trust (where the owners are usually deemed employees), expenses related to a vehicle owned by the company/trust are claimed 100%, even if its your 4WD you only go camping in or to the shops (i.e. 100% personal use).
But rather than having to pay tax of around 47% (top marginal rate inc. medicare), the Government provides some concessions for low business use motor vehicles, where the annual fringe benefit is calculated at 20% of the car value when purchased (high business use can still use logbooks under the operational cost calculation)
Say you buy a Mazda3 for $30,000, the ATO will deem that the value of the fringe benefit, regardless of how many business or personal kms travel, is $30,000 x 20% = $6000. The physical payment required to the ATO would be $6000 x 2.0802 x 47% = $5,866.16 in fringe benefits tax.
So why don’t you need to pay?
Once the fringe benefit component is calculated on your car, there are two options:
– pay the amount, or
– report the fringe benefit as an income contribution from the owner/employee on the business tax return – i.e. the fringe benefit has been “zeroed” out and no FBT is payable
We prefer the latter, as it allows applying losses/deductions/franking credits against the liability, rather than making a direct payment to the ATO.
FBT does not apply to exempt vehicles (utes, vans, trucks etc.) but it is still important to disclose to the ATO that you have considered any potential or minor private use, and advise how many exempt vehicles are in your business.
Controlling an ATO Audit
As many of our client know, our Canberra partner, Michael Konarzewski was an ATO auditor and spent some time auditing FBT. One lesson he has implemented is that without an FBT return lodged in good faith (i.e. no material misstatement), the ATO’s audit powers are essentially unlimited. By lodging a NIL payable return, with the correct amount of motor vehicles and exempt vehicles in the return, the ATO’s period of review is curtailed to only 2 years from the date of lodgement.
Michael’s strong recommendation is that even if the FBT contribution is disclosed on the income tax return separately, that an FBT return be lodged. A common flag for the ATO is reviewing the motor vehicle deduction label and the FBT Employee Contribution labels or FBT return.
Michael has been involved in cases where there has been a review of motor vehicle expenses and the private usage component by the ATO. In one case, as no FBT return was lodged, the ATO imposed 6 years of FBT, as the logbooks were not correctly prepared and the taxpayer couldn’t rely on the operational cost method. Had the taxpayers lodged FBT returns, prepared in good faith on the incorrectly prepared logbooks, the ATO’s period of review/amendments would be limited to 2 years.
An FBT return is cheap insurance, especially with the ever-shifting rules for exempt vehicles on allowable personal kilometers and exempt trips.