The Fringe Benefit Tax (FBT) year runs from 1 April to 31 March. FBT is one of those areas that many employers struggle with; not because the tax is complex but because of the level of detail required to fulfill your obligations.
Living Away from Home Allowance (LAHFA) changes
The reforms to the treatment of living away from home allowances and related benefits have been finalised and there are a series of important changes that employers need to be aware of.
LAFHA benefits will continue to be wholly taxed under the FBT system and from 1 October 2012, the reforms:
- Limit access to LAFHA benefits – particularly for non-resident employees – unless strict conditions are met;
- Reduce the time period a LAFHA can apply to 12 months in each work location (special rules exist for fly-in fly-out and drive-in and drive-out employees); and
- Require a higher level of substantiation.
If the new conditions are not met, the full amount of any LAFHA paid to an employee will be subject to FBT. If the conditions are met, the tax the employer needs to pay on the compensation provided to employees living away from home can be significantly reduced.
What are the conditions?
The conditions that need to be met in order to reduce the taxable value of LAFHA benefits are:
- Maintain a home in Australia – The employee must maintain a home in Australia (which is their normal place of residence) for their immediate use and enjoyment at all times while living away from that home for their work. For example, the home cannot be rented out.
- Keep invoices – The employee must substantiate expenses incurred for accommodation and food or drink (if the food and drink expenses exceed the Commissioner’s reasonable amounts); and
- Complete a declaration – The employee has provided their employer with a declaration about living away from home.
Special rules apply to employees who are working on a fly-in fly-out or drive-in drive-out basis. These employees do not have to maintain a home in Australia and the 12-month limit on concessional tax treatment does not apply.
Transitional rules for existing contracts
Transitional rules apply to permanent residents who have employment arrangements for LAFHAs in place prior to 7.30 pm (AEST) on 8 May 2012. These employees are not required to maintain a home in Australia for the concessional treatment to apply and the concession is not limited to a maximum period of 12 months until the earlier of 1 July 2014 or the date a new employment contract is entered into, or the existing contract is varied in a material way.
The transitional rules also apply to temporary residents who maintain a home in Australia.
For the purposes of the transitional rules, you have not made a material change to the employment arrangement if:
- an employee’s salary is adjusted as a result of an annual salary review;
- other annual adjustments are made, such as to the food component of a living-away-from-home allowance; or
- an employee is promoted and the underlying terms of the employment arrangement do not change.
Travelling or living away from home – what’s the difference?
Another issue that comes up is determining whether someone is actually living away from home or just travelling. The ATO is looking closely at Australian taxpayers claiming LAFHAs to make sure they are not incorrectly claiming exempt LAFHA.
If somebody is living in Sydney but travelling to Melbourne on an ad hoc basis every other week for work, they are simply travelling. They may be entitled to travel deductions but cannot claim an exempt LAFHA. If the person relocates temporarily to Melbourne, keeps their home in Sydney for their use (can’t be rented out), then it’s more likely they can claim a living away from home allowance. You need to double check to get the distinctions right.
Reforms to salary sacrificed in-house fringe benefits
In-house fringe benefits arise when employees or their associates receive goods or services provided by their employer which are identical to or similar to those sold by the employer to customers as part of their business. Common examples of salary sacrificed in-house fringe benefits include retailers who provide discounted clothes to employees or private schools discounting school fees for children of employees.
Under the old rules, the taxable value of in-house fringe benefits is 75% of either the lowest price at which an identical benefit is sold to the public or under an arm’s length transaction, depending on the nature of the benefit. This can be reduced by a further $1,000.
However, under the new rules:
- The taxable value is simply the market value the employee could reasonably be expected to have been required to pay under an arm’s length transaction; and
- Access to $1,000 tax-free threshold is no longer available.
- The changes applied from 22 October 2012 but only if the benefits are provided under a salary sacrifice arrangement. Transitional rules ensure that the concessions can still apply up to 31 March 2014 where the salary sacrifice arrangement was put in place before 22 October 2012.
How do I know if I need to pay FBT?
If you are not sure whether you are providing fringe benefits to your employees, here are some key questions you should ask yourself:
- Do you make vehicles owned or leased by the business available to employees for private use?
- Does your business provide loans at reduced interest rates to employees?
- Has your business forgiven any debts owed by employees?
- Has your business paid for, or reimbursed, any private expenses incurred by employees?
- Does your business provide a house or unit of accommodation to employees?
- Does your business provide employees with living-away-from-home allowances?
- Does your business provide entertainment by way of food, drink or recreation to employees?
- Do any employees have a salary package (salary sacrifice) arrangement in place?
- Has your business provided employees with goods at a lower price than they are normally sold to the public?
A common area of confusion is motor vehicles. Where a motor vehicle owned or leased by the business is used by an employee for private purposes (including travelling between home and the workplace), then FBT is an issue that needs to be managed. The Tax Office will once again be specifically targeting motor vehicles that are owned by businesses so it will be important to identify any potential FBT issues before the Tax Office does.
Another common area of confusion is entertainment. Entertainment can be almost anything from food, drink, recreation such as movie tickets, to non-work based travel. If you provided any entertainment benefit to employees, such as an employee attending a business lunch, then FBT applies. Entertainment is an area of continued focus for the Tax Office as the FBT treatment also interacts with the treatment of these expenses for income tax and GST purposes.
What is exempt from FBT?
Certain benefits are excluded from the scope of the FBT rules. The following work related items are exempt from FBT if they are provided primarily for use in the employee’s employment:
- Portable electronic devices (e.g. laptop, tablet, mobile, PDA, electronic diary, notebook computer, GPS navigation device) that are provided primarily for use in the employee’s employment (limited to the purchase or reimbursement of one portable electronic device for each employee per FBT year);
- An item of computer software;
- Protective clothing required for the employee’s job;
- A briefcase;
- A calculator;
- A tool of trade.