FBT Refresher, Common
Mistakes and Update
Adrian Abbott & Peter Cohilj
Crowe Horwath Sydney
27th February 2014
Outline
• What is new for the FBT year ended 31 March 2014.
• Refresher on the basics of FBT and common mistakes
including:





In respect of employment
Motor vehicles
Entertainment
Conferences
Entertainment Facility Leasing Expenses (EFLE)
• Availability of LAFH concessions post 1/10/2012
 Declarations and when to use them
What is new
 Lodgement due date for FBT returns is 21 May 2014
 Due date extended to 28 May 2014 for tax agents lodging
less than 25 clients per year
 Due date extended to 25 June 2014 for tax agents lodging
more than 25 clients per year
 Extended due dates for 2015 will not be applied unless:
•
•
The FBT returns are lodged electronically; and
At lease 85% of the tax agent’s FBT returns are lodged on
time.
What is new
Effective from 1 April 2014
•
The FBT rate increases to 47%.
•
Type 1 increases to 2.0802 and
•
Type 2 increases to 1.8868
This comes as a result of increase in Medicare levy from
1.5% to 2% to help fund NDIS
What is New – In-house fringe benefits
 In-house fringe benefit?
• Benefits that are provided to employees that are sold in the
ordinary course of the employer’s business.
 Concessional valuation rules
• Taxable value is generally equal to 75% of the price that the
employer charges clients / customers.
• An exemption of up to $1,000 will apply to physical property
and services such as a discount on white goods and
services such as reduced legal fees. The exemption does
not apply to intangible benefits such as gift cards.
What is New – In-house fringe benefitsin-house
benefits
 Effective from 22 October 2012
 Only effects benefits accessed via a salary sacrifice
arrangement
 Summary of changes
̶
No concessional valuation rules (i.e. 75% valuation)
̶
No $1,000 reduction
̶
No exemption for work-related travel through public
transport for providers of public transport
 Transitional rules apply to existing arrangements to 1 April
2014.
Refresher on the Basics of FBT
and Common Mistakes
In Respect of Employment
Before applying FBT it is necessary that we determine whether
FBT is applicable.
To do this we consider the threshold issues relevant to FBT.
Threshold requirements for FBT:
• Has a benefit been provided by the employer or an
associate of the employer?
• Is the recipient an employee or an associate of the an
employee?
• Was that benefit “in respect of” that employment?
In Respect of Employment
 No fringe benefit unless: the benefit is “in respect of
employment”
 Section 136: “in relation to…by reason of…for…directly or
indirectly”
 Must consider case law :
•
•
•
•
Smith v FC of T (1987) 164 CLR 513
Curtain World Pty Ltd v DFC of T (1999) 99 ATC 2020
J & G Knowles & Associates v FC or T (2000) ATC 4460
Starrim Pty Ltd v FC of T (2000) 44 ATR 487
Smith v FC of T (1987) 164 CLR
 The facts in Smith considered whether a $570 allowance
received by an employee was taxable. Not an FBT case but
required the court to consider whether the allowance was “in
respect of employment”.
 In determining whether the benefit was “in respect of
employment” Wilson J found it helpful to ask whether the
benefit provided is:
“a consequence of the employment of the taxpayer”
“a product or incident of the employment”
 What is required is a “necessary relation” to the employment.
Curtain World Pty Ltd v DFC of T (1999)
99 ATC 2020
• In Curtain World the AAT considered whether FBT
applied to the use of cars by employees / directors.
• Involved the use of cars by company directors that had
business use of up to 90%  The high business use of the
car pointed to the conclusion that the cars were in relation to
directly or indirectly to that employment
• Prior to Knowles it was held in Curtain World that “in respect
of” merely implies that a “causal connection” between
employment and the benefits provided would be sufficient
for FBT to apply.
• For example, a shareholder director authorising the
provision of benefits demonstrates a causal connection.
J &G Knowles v Commissioner of Taxation (2000)
FCA 196
 The taxpayer was the Knowles unit trust.
 Each director of the trustee company was paid a salary
and in addition was entitled to draw an amount for
personal expenses which at the end of each year were
treated as interest free loans.
 There was no relationship between the amounts drawn
and the personal effort involved in working as director.
 The ATO assessed FBT in respect of the loans.
 Issue: Were the loans in respect of employment?
J &G Knowles v Commissioner of Taxation (2000)
FCA 196
 In determining whether the loans were ‘in respect of
employment’ the Full Federal Court held:
“What must be established is whether there is a sufficient or
material rather than a causal connection or relationship
between the benefit and the employment”
“The stated purpose suggests that asking whether the benefit
is a product or incident of employment will be helpful. If it is
not, then the benefit is likely to be extraneous to the
employment and will not bear FBT”
The Court considered the purpose of the FBT legislation and
referred to Mr Keating’s second reading speech “To ensure that
all forms of remuneration bear a fair measure of tax”.
Starrim Pty Ltd v FC of T [2000] FCA 952
• In Starrim the Federal Court considered whether loans
and payments to the shareholders / employees were in
respect of employment and subject to FBT
• Relying on Knowles, it was held that the relationship
between the benefits provided and employment must be
more than a causal relationship.
• i.e. The directors having the capacity to authorise
transactions is an insufficient link to employment.
• On the basis that the benefits were not in respect of
employment FBT was held not to be payable.
In respect of employment - Conclusion
 There has to be a link to employment that is both “sufficient and
material” and not merely a “causal relationship”
• Is the benefit used for work?
• Is the benefit a form or remuneration? i.e. as intended by
FBT
• Is the benefit a product of incident of employment?
• Is employment a substantial reason for the benefit?
• But for the employment relationship would the benefit have
been provided?
• Is there another reason the benefit was provided?
“A benefit that is authorised by a director will not of itself be
sufficient to characterise the benefit as being in respect of
employment”
Taxable value of car fringe benefits
There are two ways to calculate the taxable value of car
fringe benefits:
• Statutory Formula Method
• Operating Cost Method (Must elect to use this method)
Statutory formula Method
• Base value x Stat Fraction x No. of days provided
•
365
less Recipient’s Contribution
• Formula: (A x B x C ÷ D) – E
A
B
C
D
E
=
=
=
=
=
Base value of the car
Statutory fraction
Number of days a benefit is provided
365
Recipient’s contribution
Base Value
 GST inclusive cost price of the car
 Excluding
• Registration
• Stamp duty
 Can be reduced by:
• one third after four full FBT years i.e. for 2014 cars
purchased on or before 31/3/2009
• Employee trade in (not employer trade in)
• By fleet discounts received after purchase
• Refer to TR 2011/3 for more information
Statutory rates after 10 May 2011
tory formula –
• Transitional statutory rates applied to new commitments
entered into after 7:30pm on 10 May 2011.
• Statutory fractions for car fringe benefits to be phased out
over 4 year period and replaced with a flat rate of 20%.
Statutory rate
Distance travelled
during the FBT year
Pre-10 May
2011 rates
New contracts entered into after 7.30pm
AEST on 10 May 2011
From 1 April 2013
From 1 April 2014
0 - 15,000 km
.26
.20
.20
15,000 – 25,000
.20
.20
.20
25,000 – 40,000
.11
.20
.20
> 40,000 km
.07
.17
.20
Statutory Formula - Common errors
 Transitional statutory rates apply when the agreement to
provide the car fringe benefit was entered into after 10
May 2011. i.e. can apply to pre-10 May 2011 cars that are
refinanced or subject to new agreements.
 Km should only be annualised if the car has been
provided for part of the year. Do not annualise Km when
the car has not been available for private use.
 Reduction for no private use only permitted if the car has
not been available for the full day.
Other common errors
 Exemption for Utility vehicles, panel vans and taxis
•
Use of the vehicle must be limited to:
• Home to work;
• Work to home; and
• Other private use that is minor, infrequent and irregular.
How would you demonstrate that the requisite private use
has been satisfied?
Operating Cost Method
 Operating Cost x (Private use) – Recipient’s Contribution
Formula: [C x (100% - BP)] – R
Where:
C
BP
R
=
=
=
GST inclusive operating costs of the car
the business percentage for the car
recipient’s contribution
Operating Cost v Statutory formula
 Operating cost v Statutory formula
• As a result of the changes to the statutory formula method,
employers should consider whether the operating cost
method produces a better outcome.
• Cars with high km (previously low statutory rate)  may
have high business use. In these circumstances the
Operating Cost Method may produce a lower result.
• As the statutory formula method no longer rewards higher
kilometres, the operating cost method is likely to be more
widely used.
Operating Costs costs
Includes
• Actual expenses (employer or employee)
‒ Lease payments (only if leased, incl.
luxury car lease)
‒ Registration
‒ Insurance
‒ Repairs, auto club, car washes
‒ Fuel and oil
• Deemed – car must be owned or under
hire purchase
‒ Depreciation
‒ Interest
Excludes
•
•
•
•
Bridge and road tolls
Car parking
Repairs paid by insurance company
Hire purchase instalments
Operating Costs - deemed
ABC ÷ D
Deemed Depreciation
Deemed Interest
Where:
A=
depreciable cost of the car*
Same as deemed deprecation*
B=
25.00% (acquired after 9 May 2006)
6.45% for current FBT year (TD 2013/8)
•18.75% (if acquired after 1 July 2002)
•22.50% (if acquired before 1 July 2002)
C=
number of days car was held
Same as deemed deprecation
D=
365
Same as deemed deprecation
*Tax depreciation limit is not relevant
Operating Cost Method – Log Book
 Must ensure that log books are valid:
• Log book must be for 12 consecutive weeks
• Cannot be used retrospectively
• Entries must include: the date the journey began and ended,
opening and closing odometer readings, the kilometres
travelled and a detailed narration explaining the reason for
the journey.
Operating Cost Method – Log Book
• Continued…
• Business use percentages should take into account any
variation in the pattern of business use, for example staff
who have taken long service leave or maternity leave.
• The preparation of log books can be simplified by using log
book applications that are incorporated in satellite navigation
equipment. Refer to class rulings on next slide for available
products.
Operating Cost Method – Log Book
 CR 2013/54: Fringe benefits tax: employer clients of Mercurien
Limited who use the BetterDriver telematics and reporting system for
car log book records and for odometer records.
 CR 2013/66: Fringe benefits tax: employers who use the Navman
Wireless Australia telematics system for car log book records and
for odometer records.
Operating Cost – Common errors
 Invalid or no log books
 Classification of travel – business vs private
 Operating costs must be GST inclusive
Entertainment – What is it?
Defined as:
•
Entertainment by way of food, drink or recreation; or
•
Accommodation or travel provided in connection with the
provision of entertainment by way of food, drink or
recreation,
•
Irrespective of any business purpose.
Entertainment – Identifying relevant
costs & methodology
For FBT purposes, “entertainment” is effectively split
between three types:
1. Meal entertainment eg. Food and Drink  Actual
method, 50/50 split method or 12 week register;
2. Entertainment Facility Leasing Expense (EFLE)
e.g. Venue hire costs  Actual or 50/50 split
3. Other recreational entertainment e.g. individual sporting
tickets  Actual method only.
Meal entertainment: 50/50 Split
 Under 50/50 split method  50% of all ‘meal
entertainment’ is subject to FBT, is tax deductible and
eligible for input tax credits.
 No additional exemptions or concessions are available
under this method e.g. no 'minor benefit' exemption, no
‘on premises’ property exemption
 This method is a significant reduction in compliance, but
may result in more FBT being paid.
 Under 50/50 split you must exclude all other non ‘meal
entertainment’ expenditure.
Meal entertainment: 12 week register-week
register method
 Required to keep comprehensive records for 12 weeks – must be
representative of the full FBT year
 The ‘register percentage’ is then applied to all meal entertainment for
the FBT year
 During the 12-week register period, only entertainment provided to
employees / associates is subject to FBT
 Register is valid for current year and next 4 years
 A new register is required after the 5th year or in year following a
20% increase in expenditure.
Actual Method
Actual method
Expense
payment
Property
Residual
TEBE
 Actual apportionment on a per head basis between employees /
associates and non-employees
 Creates a valuation choice at end of FBT year i.e. Actual v 50/50
split
 May be beneficial where few benefits are provided to employees
during the FBT year i.e. more than 50% provided to clients.
 Is required for other forms of entertainment such as recreational
activities. For example, golf, movie tickets where 50/50 cannot be
applied.
Actual method
 Other advantages of the Actual Method:
• Minor fringe benefits exemption (s.58P) can be applied
provided cost of benefits is less than $300 and similar or
identical benefits provided infrequently and irregularly
• On premises property exemption can (s.41) be applied
where food and drink is provided on premises to
employees on working days
• Otherwise deductible rule can be applied where
applicable. Eg conferences.
• Taxi travel exemption (58z) continues to apply.
Conferences – The issues to consider
 Conferences go for a number of days and incorporate
various types of expenditure:
•
•
•
•
•
•
Travel
Accommodation
Venue hire
Recreational activities
Sustenance
Meal entertainment
• What is subject to FBT?
Conferences – The issues to consider
Need to:
• Determine the predominant reason for attending;
• Perform a daily assessment of work content by
reviewing the itinerary; and
• Consider any recreational components.
Conferences – What is subject to FBT
• Recreational activities such as golf (unless minor FB
exemption applies) is subject to FBT.
• Meal entertainment that is not reasonably incidental to
attending an eligible seminar.
Conferences – What is not subject to FBT
• ‘Meal entertainment’ that is reasonably incidental to an
employee attending a seminar that goes for at least four
hours excluding breaks provided the actual method is
used is not subject to FBT.
“Seminar” – conference, lecture, meeting, training session or
educational course.
Excludes – business meetings that are predominantly for those
people carrying on the business to discuss matters related to
the business.
Conferences – What is not subject to FBT
• Food and drink that constitutes the provision of
sustenance is not subject to FBT.
• Accommodation and travel that is predominantly related
to attending a ‘seminar’ as opposed to recreational
activities is not subject to FBT.
• May need to apportion expenditure for days that are not
related to attendance at a seminar.
Entertainment Facility Leasing Expense
 This means expenses incurred in hiring or leasing:
• A corporate box;
•
Boats, or planes, for the purpose of the provision of
entertainment; or
•
Other premises, or facilities, for the purpose of the
provision of entertainment.
 Must have exclusive use of the premises.
Entertainment Facility Leasing Expense
 Taxable value
•
Exclude costs relating to meal entertainment
-
•
Can use 50/50 method or actual method on a per head
basis.
Living Away from Home Fringe Benefits
 What is a LAFH fringe benefit?
•
A Living Away From Home allowance (LAFHA) or benefit such
as accommodation or food that an employer provides to an
employee to compensate them for the additional expenses
incurred and any disadvantages suffered because the duties of
their employment require them to live away from their normal
residence.
•
Must distinguish between LAFHA and travel allowances as
concessional valuation rules do not apply to travel allowances.
•
An allowances for travel of less than 21 days is generally treated
as a travel allowance. See MT 2030.
LAFHA – TAXABLE VALUE
 Taxable value of the LAFHA is equal to:
• Amount of the allowance
Less
• Exempt Accommodation Component; and
• Exempt Food Component
LAFH – Accessing concessional treatment
 Concessional LAFH treatment (i.e. exempt
accommodation and exempt food component) does not
apply unless:
• The employee maintains a home in Australia;
• LAFH benefit is for the first 12 months that the employee is
living away from home;
• The employee provides a LAFH declaration; and
• The employee can substantiate:
• 100% of accommodation costs; and
• Food expenses where the reasonable food limit is exceeded.
LAFH – What is maintaining a home?
 In order to ‘maintain’ a home in Australia:
• The employee or their spouse must own or lease the
accommodation where the employee usually resides.
• That home must be ‘available for their immediate use and
enjoyment’ at all times while they are living away.
• It must be reasonable to expect that the employee will
resume living at that home when they are no longer required
to live away.
LAFH - 12 month Rule
 Concessional LAFH treatment is limited to the first 12
months.
• The 12 month period can be paused
• Employees can have more than one 12 month period if
required to live at a different location. For example, 6
months in Melbourne and 10 months in Darwin.
• To trigger the start of a new 12 month period, it must be
unreasonable to expect the employee to commute between
the two locations.
Exempt accommodation and food component
Component
Exempt Accommodation
Component
Amount of LAFH Allowance Fringe Benefit that is paid to compensate
employee for accommodation benefits (including themselves and
eligible family members), while they are living away from home.
Equals the amount of accommodation expenses actually incurred.
Must be able to substantiate full amount.
Exempt Food Component
Amount of LAFH Allowance Fringe Benefit that is paid to compensate
employee for food benefits (including themselves and eligible family
members), while they are living away from home.
Equals:
the amount of food/drink expenses actually incurred
minus
the applicable statutory food amount.
Substantiation requirements
Component
Requirements
Accommodation Component
Must be substantiated in full, regardless of amount
Documentary evidence – (lease agreement, receipts, statements)
Employee declarations
Declaration about expenses , in approved form
Form varies depending on employee circumstances
Food Component
Food / Drink expenses more than Commissioner’s reasonable
amounts, then all expenses must be substantiated in full.
Documentary evidence (receipts, tax invoices, statements)
Refer TD 2013/4 - Fringe benefits tax: reasonable amounts under
section 31G of the Fringe Benefits Tax Assessment Act 1986 for
food and drink expenses incurred by employees receiving a livingaway-from-home allowance fringe benefit, for the period from 1 April
2013 to 31 March 2014
Transitional
Provisions
LAFH
Transitional rules
Employee currently
Implications for employee
Permanent Resident
 Not required to maintain a home in Australia
 Employment Arrangement in place before
7:30pm (AEST) on 8 May 2012; and
 Not limited to LAFH allowance concessions for 12
months.
 This applies until earlier of:
o 1 July 2014
o date of material variation in employment
arrangement
 Not materially varied between 7:30pm on
8 May 2012 and 1 October 2012
Temporary Resident
 Employment Arrangement in place before
7:30pm (AEST) on 8 May 2012; and
Not limited to LAFH allowance concessions for 12
months.
 Not materially varied between 7:30pm on
8 May 2012 and 1 October 2012
 This applies until earlier of:
o 1 July 2014
o date of material variation in employment
arrangement
 Required to live away from their normal
residence in Australia, which is available for
their immediate use and enjoyment at all
times
Declarations
The following declarations are required:
1. Employee Car declaration for car fringe benefits
i) Km’s travelled by the car
ii) Non private use days
iii) Recipient’s payments
iv) Business use percentage of the car
2. Expense no private use declaration (s.20A)
i) Can be made by an employer in respect of expenses
reimbursed that would otherwise have a taxable value of
nil. E.g Otherwise deductible expenses.
Declarations
The following declarations are required:
3. Residual no private use declaration (s.47A)
i) Can be made by an employer to cover all residual fringe
benefits that are covered by a consistently enforced policy
in relation to the use of the property that would result in the
taxable value of the benefit being $nil.
For example, use of company vehicles.
4. LAFH Declaration
i) Required when an employee is provided with:
ii) A LAFH allowance benefit
I
ii) LAFH accommodation
iv) LAFH food or drink