Providing certain benefits to staff instead of cash as part of their remuneration is fairly common practice. The usual outcome for employers is an exposure to the joys of fringe benefits tax — at the FBT rate of 46.5%. There is also the added bother of keeping appropriate records, accounting for the benefits provided, and lodging an FBT return every year.
There exists however, in the maze of the ATO’s legal database, a legitimate way to provide remuneration to employees in a form other than cash while not being required to account for these benefits via the fringe benefits tax regime.
Positives for employers include:
• no need to lodge an annual FBT return (a notice of non-lodgement may be required)
• the portion of remuneration represented by the benefit will be taxed at the employer’s rate of tax instead of 46.5%, and
• mitigating the risk of an FBT tax audit exposure.
This may be particularly attractive to people with a business that is a company or trust where they are an employee of that company or trust, or to closely held groups where a closely held company or trust employs related parties.
The secret to this tax and headache saving tactic is contained in a “miscellaneous taxation ruling” (ruling MT2050). The basic premise of the ruling is that a benefit provided to an employee, where the employee agrees to kick-in something towards the tax cost of the said benefit (known as the “recipient’s contribution”), can be accounted for via journal entry in some situations — that is, the benefit can be dealt with in the business’s books and income tax return, needing no separate FBT return. The employee does not need to physically pay an amount in order to provide the contribution under this ruling.
The ruling states that such journal entries are permitted in the employer accounts if the following conditions are met:
a) the employee has an obligation to make a contribution to the employer towards a fringe benefit
b) the employer has an obligation to make a payment to the employee (for instance a pre-existing loan account or some other obligation)
c) the employer and employee agree to set-off the employee’s obligation to the employer against the employer’s obligation to the employee.
The end result, tax-wise, is that the amount involved is counted as assessable income of the employer for income tax purposes (and may be subject to GST if the employer is registered), and so generally attracts income tax at the employer’s rate of tax (which can be less than the 46.5% payable under the FBT rules).
The employer could use this ruling for example in regards to a motor vehicle acquired for their employee. The private use portion associated with it could be eliminated as the FBT provisions apply, with the employee contribution available to reduce the taxable benefit.
This would mean 100% of the expenses of the motor vehicle would be claimable to the employer using this method (rather than an apportionment based on a mix of private and business use). If the taxable value of the car is less than the total expenses of running it, the employee contribution added to assessable income may well be less than the deductible expenses incurred on the car.
It is important that the arrangement is set up correctly (we can help with this), and that the conditions mentioned above are satisfied. But once put in place, and assuming the arrangement suits your circumstances, both
• apportioning the deduction for costs incurred in respect of motor vehicles provided to employees, and
• lodging FBT returns,
could eventually become a dim memory.
The beaut ute
The fact that motor vehicles are hugely attractive as a fringe benefit places another opportunity at the feet of employers in the form of another miscellaneous taxation ruling (MT2024 this time).
This ruling basically states that a dual cab vehicle may be eligible for an exemption to FBT where private use is limited to certain work-related travel. It will more than likely be preferable to have a declaration prepared to cover the relevant facts, which we can help draft for you. It is a taxpayer’s responsibility to ensure that any statements made in a declaration are true and correct.
Again, see this office for more information if this tactic seems to suit your business’s circumstances.