With the end of the 2018/19 FBT year now upon us, we provide you with the latest updates to get you ready for the FBT season, including the ATO’s audit hotspots.
1. Latest FBT rates and thresholds
For the 2019 FBT year, the FBT rate will remain the same at 47% with the associated Type 1 and Type 2 gross-up rates also remaining the same as last year.
Other rates and thresholds are as follows:
Key FBT dates to be aware of:
2. Revised exempt vehicle record keeping guidelines
In July 2018, Practical Compliance Guideline (PCG) 2018/3 Exempt car benefits and exempt residual benefits: compliance approach to determining private use of vehicles was introduced. The PCG applies to the 2019 FBT year and later years and represents a safe harbour from record keeping where certain conditions are met. The previous draft PCG has been updated to allow employers to satisfy the record keeping requirements where the employer has a policy in place limiting private use of the vehicle and obtains assurance from the employee that their private use is limited to the use outlined in the PCG.
These are the conditions which must be met to satisfy the record keeping exemption:
- The vehicle provided to a current employee is an ‘eligible vehicle’ and is provided to the employee to perform their work duties. Please click here to view eligible vehicles.
- The vehicle’s GST inclusive value is less than the luxury car tax threshold at the time the vehicle was acquired (i.e. $66,631 for the 2019 year);
- The vehicle is not provided as part of a salary packaging arrangement;
- The employee uses their vehicle to travel between their home and their place of work and any diversion adds no more than two kilometres to the ordinary length of that trip;
- The employer has a policy in place that limits private use of the vehicle and obtains assurance from their employee that their use is limited to private journeys (other than home to work travel) which are:
- No more than 1,000 kilometres in total; and
- No return journey exceeds 200 kilometres.
Where employers are satisfied that the conditions in the PCG are met, the following records should ideally be maintained:
- Declarations should be obtained from employees to show that the private use is no more than 1,000 kilometres in total and no return journey exceeds 200 kilometres; and
- Evidence that the employer has a policy in place limiting private travel.
3. Don’t get caught out with an invalid logbook
In a recent Private Binding Ruling sought by an employer, the Commissioner did not accept a logbook that was backdated to a previous FBT year to calculate a car fringe benefit under the operating cost method. This was on the basis that the records maintained did not meet the substantiation requirements for a valid logbook. The employer used diary records and calendar appointments to recreate the logbook and provided an estimate of the number of kilometres travelled, however could not confirm the odometer readings. There were also inconsistencies between the logbook and records maintained.
This raises the importance of a logbook being prepared correctly to be considered valid. If a logbook is not valid, the statutory formula method, at the rate of 20% of the base value of the car, must be used to calculate the amount of a car fringe benefit.
These are what a valid logbook should contain:
- When the logbook period begins and ends (i.e. identify the relevant 12-week period);
- The car’s odometer readings at the start and end of the logbook period;
- The total number of kilometres the car travelled during the logbook period;
- The business-use percentage for the logbook period;
- The number of kilometres travelled and reasons for each journey, start and finishing dates and odometer readings at the start and end date of each journey.
A new logbook will be valid for five years, however, where the business use percentage of a logbook changes by more than 10%, a new logbook will need to be completed.
4. ATO guidance on travel related benefits – still in draft but applies now
In 2017, the ATO issued Draft Taxation Ruling TR 2017/D6 Income tax and fringe benefits tax: when are deductions allowed for employees’ travel expenses? While TR 2017/D6 is still yet to be finalised, the draft ruling applies to the 2019 FBT year and onwards in relation to employee travel expenses.
In determining whether travel benefits are ‘otherwise deductible’ and therefore not subject to FBT, employers should consider whether an employee is required to travel as part of performing their work-related duties having regard to the guidance provided in the draft ruling.
It is important to note that the previous 21 day rule for distinguishing travelling for work versus living away from home has been withdrawn and new guidance has been provided by the ATO.
For further details on the ATO guidance on travel expenses, please click here.
5. No escape for frequent flyers
It is becoming common for businesses to accrue frequent flyer reward points for airline travel, with these points accruing separately to an individual’s frequent flyer points. A recent Private Binding Ruling issued by the ATO confirms that where frequent flyer points are transferred to an employee’s frequent flyer account under an Airline Business Rewards Program, this will give rise to a fringe benefit at the time the points are transferred to the employee (subject to the minor benefits exemption).
The taxable value of the benefit is to be determined using the notional value of the property i.e. the amount the employee could be expected to pay under an arm’s length transaction.
Where the employee uses the frequent flyer points for work-related travel, the taxable value of the benefit may be reduced under the otherwise deductible rule. However, practically this may not be able to be determined until long after the frequent flyer points have been transferred to the employee.
6. ATO audit hot spots
In 2019, the ATO have announced the following areas as a particular audit focus:
- Private use of motor vehicles – the ATO have increased audit activity to capture employers failing to identify or report vehicles used privately as well as incorrectly applying exemptions.
- Employee contributions – the ATO are using data matching software to find mismatches between income tax returns and FBT returns where contributions have not been disclosed as income or overstated to reduce the taxable value in the FBT return.
- Non-lodgement – the ATO are focusing on employers failing to identify fringe benefits and miscalculating benefits such that the taxable value is reduced to nil. We recommend that where employers are registered for FBT and the taxable value is nil, an FBT return is lodged instead of a notice of non-lodgement as this will avoid an unlimited amendment period.
- Living-Away-From-Home Allowance (LAHFA) – the ATO have expressed concern that LAHFAs are not being calculated correctly. Errors include claiming a reduction for ineligible employees, failing to obtain declarations, claiming a reduction for invalid circumstances and failure to substantiate.
- Car parking valuations – situations that will attract the ATO attention include using inappropriately low market valuations, fees for car parking facilities incorrectly classified as a commercial car park and insufficient evidence to support the lowest fee for the car parking rates used.
Future Developments to watch
7. Exempt fringe benefits may be caught – Division 7A proposed changes
As part of the Government’s proposed reform to the deemed dividend provisions (Division 7A ), an amendment has been proposed affecting the interaction between Division 7A and the FBT rules in relation to the provision of exempt benefits by a private company to an employee (who is also a shareholder or associate of a shareholder) from 1 July 2019. By way of background, Division 7A contains anti-avoidance measures that prevent private companies from making tax-free distribution of profits or assets to shareholders or their associates by way of loans, payments or the use of property.
If the proposed amendments go ahead, a payment/provision of an asset from a private company to a dual capacity individual (someone who is an employee and a shareholder of the company) must constitute a fringe benefit in order to be excluded from the Division 7A rules. Accordingly, legitimate employment-related benefits provided to a dual capacity individual which are exempt from FBT will become subject to Division 7A.
Commonly provided FBT-exempt benefits which may be impacted by this proposed change include:
- The provision of eligible work-related items (e.g. laptop computer primarily used in an employee’s employment);
- Certain FBT-exempt living-away-from-home and relocation benefits;
- Provision of an exempt vehicle; and
- Minor benefits that are exempt from FBT.
These changes are very likely to significantly increase the FBT cost for closely held and family owned businesses operating out of private companies.
Your next steps
If you would like further information on how FBT may impact you, please contact our FBT team: