Inefficient, complex FBT regime ripe for overhaul

The FBT legislation doesn’t change much and its prominence on the tax landscape only once a year means it rarely gets the attention it deserves. The government collected $3.3 billion in FBT in 2021–22, which is only 0.64 per cent of total revenue collections.

 

Of greater interest is the FBT tax gap, which is the ATO’s estimate of the difference between the amount of FBT it collects and what it would have collected if every employer was fully compliant. For 2019–20, the net FBT tax gap was $991 million or 20.3 per cent, meaning that the ATO collected almost 80 per cent of the FBT revenue that was theoretically payable. This is largely consistent with the FBT tax gap since 2016–17 but is by far the largest tax gap and contrasts starkly with the gap for large business income of just 4.2 per cent for 2019–20.

Let’s pause on that … on a revenue base of roughly $4 billion, only 80 per cent of the theoretical tax payable is collected, where that tax represents less than 1 per cent of all revenue collected federally. It is one of the most inefficient, complex and poorly complied with tax regimes and its archaic provisions desperately need modernising. FBT creates a disproportionate compliance burden in comparison to the revenue generated and has not adapted well to the growing unassigned category of workers outside traditional employer-employee relationships, such as those in the gig economy.

Dr Ken Henry identified in his 2009 review of Australia’s future tax system that FBT relies on a high number of statutory valuation rules and a great number of concessions and exemptions.

However, the role of FBT as a driver of behaviour and a steward of equity in the tax system remains. This is achieved by subjecting non-cash benefits provided by employers to employees to tax as if the employee had instead received a direct form of remuneration, except that the FBT rate is imposed at a flat rate of 47 per cent regardless of the employee’s marginal tax rate. This is significant given it is estimated that, by 2024–25, approximately 94 per cent of taxpayers will face a marginal tax rate of 30 per cent or less.

A key question is whether FBT’s policy intent could be achieved through a differently designed set of rules, perhaps one that incorporates the principles into the income tax law and instead subjects the benefits to PAYG withholding.

According to the ATO, the primary driver for the tax gap is employers not participating in the FBT system when they provide benefits to their employees. Further, contact between tax agents and their clients for FBT matters is often ad hoc, compared to the strong focus and the regular contact concerning income tax and GST matters. Accordingly, some of the traps discussed below result from inadvertent oversight.

Car fringe benefits

The most common category of fringe benefits is cars, followed by expense payment fringe benefits. The ATO sees significant non-compliance concerning the provision of motor vehicles to employees where:

• Cars are treated as being used wholly for business use, even though they are used or available for a private purpose.
• There isn’t a valid logbook, or the logbook is not a representative sample of actual travel.
• All eligible commercial vehicles are treated as FBT exempt, without considering if the private use of the vehicle was limited.

A panel van or ute is exempt from FBT only if it is designed to carry a load of less than one tonne, there is no private use of the car other than work-related travel and any other private use by the employee or their associate is minor, infrequent and irregular. Some employers pay little heed to the latter condition of this exemption. A visit to a sporting stadium car park during footy season by ATO compliance officers can quickly determine whether the FBT position pertaining to a ute is correct.

The ATO often undertakes data-matching projects that involve reviewing lifestyle assets, such as luxury cars and boats, that are covered by insurance policies. An examination of the policy holder can easily identify whether the asset is held by a company or a trust to determine whether the FBT position is correct based on the private use of the asset.

When using the operating cost method to value a car fringe benefit, the operating costs are reduced by the business use percentage only if a valid logbook and odometer records are maintained. This includes taking an annual reading of the odometer at the start and the end of each FBT year. Even if the car is used wholly or substantially for business purposes, failure to maintain the requisite records will result in the valuation of the benefit defaulting to the statutory formula method, which incorporates an inherent private use of 20 per cent.

Electric vehicles

In a clear signal to incentivise employees to drive more environmentally-friendly cars, an FBT exemption applies from 1 July 2022. The provision of qualifying zero or low-emission electric vehicles (EVs) to employees for private purposes is exempt from FBT if the vehicle is both held and used on or after 1 July 2022 and the value of the car is below the luxury car tax threshold for fuel-efficient vehicles ($84,916 for 2022–23).

An EV will qualify if it is battery powered, has a hydrogen fuel cell or is a plug-in hybrid EV (although the exemption for a plug-in hybrid EV will be phased out from 1 April 2025). The EV must also meet the definition of a “car” for FBT purposes. The exemption extends to some associated car expenses such as registration, insurance, and repairs and maintenance, but does not extend to home charging stations. Although EVs are exempt from FBT, the benefit is a reportable fringe benefit.

Car parking

FBT on car parking continues to be a particularly challenging and complex area. When navigating the myriad of requirements for determining whether FBT is payable on car parking benefits provided to employees, employers must examine the “lowest representative fee” offered by a “commercial parking station” within a 1km radius of the employer’s premises.

Contrary to the long-understood operation of the law, recent case law has held that car parks that charge penalty rates are considered to be commercial parking stations. In practice, this means a larger number of employers are likely to be subject to FBT on car parking benefits. Although the government has announced a consultation on amending the legislation so it operates as previously understood, this has not yet taken place. The government should consider broadening the scope of the proposed consultation to reform the valuation rules concerning FBT on car parking.

Portable electric devices

Portable electronic devices (PEDs) that are mainly used for work purposes continue to be exempt from FBT. Examples of PEDs include mobile phones, calculators, laptops and tablets. While small to medium businesses with a turnover of less than $50 million in the relevant FBT year can claim the exemption for multiple PEDs provided to employees, larger employers can claim this exemption for only one PED per employee per FBT year.

Meal entertainment

Many employers elect to use the 50/50 split method when working out the total taxable value of meal entertainment fringe benefits. While this method has its advantages, primarily simplicity, it comes with the caveat that employers must apply the method to all meal entertainment provided during the year. Employers using the 50/50 split method cannot then cherry pick from other meal entertainment rules such as the exemption for food or drink consumed on the premises on a working day or, more broadly, the less than $300 minor benefit exemption.

Lodging a nil FBT return

Tax practitioners may want to consider informing their clients of the benefits of lodging a nil FBT return in the event the employer does not have an FBT liability for that year, rather than lodging an FBT non-lodgement advice. This is because the ATO generally has three years from the date of the notice of assessment within which audit activity must commence if required. If an FBT return is not lodged, the three-year clock does not start ticking, which potentially provides the ATO with an indefinite period to commence audit activity.

As always, it is important to ensure all efforts are taken to get the tax right from the outset to reduce the chances of potential audit activity.

Journal entries for recipient contributions

It is common in family-owned businesses for a non-arm’s length employee to reduce the taxable value of a fringe benefit using a journal entry to record the recipient’s contribution rather than make an actual cash payment to the employer.

The ATO’s view in miscellaneous taxation ruling MT 2050 is that journal entries amount to a payment of an employee’s contribution towards a fringe benefit only if the employer and employee have agreed to set-off the employee’s obligation to make the contribution against any obligation of the employer to the employee. If cross-liabilities do not exist, the journal entry cannot effect a payment. An agreement for one party to make a voluntary payment to another does not create a liability between the parties.

Accordingly, a journal entry is effective only where the employer has an obligation to pay the employee — for example, in the form of unpaid salary or wages, or the repayment of a loan owed to the employee (ie, a credit loan) — so this obligation can be offset again the employee’s obligation to make the employee contribution to the employer. The making of a debit loan to the employee would have to be agreed in advance and may give rise to a separate loan fringe benefit or even a Division 7A issue.

Proposed changes to FBT record-keeping

The 2021–22 budget announced a measure that proposes to provide the Commissioner with the power to allow employers to rely on an alternative to the designated statutory evidentiary records. The measure will lessen the record-keeping burden for employers by allowing them to rely on adequate alternative records that will reasonably satisfy their record-keeping obligations for the various types of fringe benefits. The measure is contained in the Treasury Laws Amendment (2022 Measures No. 4) Bill 2022 (currently before the Senate) and is proposed to commence from the first FBT year after the date of royal assent.

Conclusion

The infrequency of a focus on FBT and the complexity of the rules inevitably means that practitioners can make inadvertent errors when assisting clients, or fail to identify miscalculations made by clients. The FBT regime is ripe for an overhaul to bring it into the 21st century and vastly improve its efficiency as a revenue source.

Robyn Jacobson is the senior advocate at the Tax Institute.