The Fringe Benefits Tax (FBT) year wraps up on March 31. We’ve pinpointed the key areas for employers and employees.
FBT Exemption for Electric Cars
Employers who provide eligible electric vehicles (EVs) to their employees can potentially qualify for an FBT exemption. This is typically applicable when:
- The vehicle is a zero or low emission type (battery electric, hydrogen fuel cell, or plug-in hybrid electric).
- The vehicle is first held and used on or after July 1, 2022.
- The car’s value is below the luxury car tax threshold for fuel-efficient vehicles, which is $89,332 for the 2024-25 financial year.
Plug-In Hybrid Vehicles No Longer FBT Exempt
Beginning April 1, 2025, plug-in hybrid electric vehicles will not qualify for the FBT exemption unless:
- The vehicle’s use was exempt prior to April 1, 2025, and
- There is a binding financial commitment to continue providing the vehicle for private use on and after April 1, 2025. Any disruption or alteration to this commitment from April 1, 2025, onward typically means the exemption will no longer be available.
Working with the Exemption
Even if an FBT exemption applies, your business must still calculate the taxable value of the benefit as if the exemption didn’t apply. This is because the value of the exempt benefit is included when determining the reportable fringe benefits amount for the employee. While this amount is not subject to income tax, it can affect the employee in various areas, such as the Medicare levy surcharge, private health insurance rebate, employee share scheme reduction, and social security payments.
This means employees may need to calculate their home electricity costs for charging the electric vehicle. This cost can be treated as an employee contribution to reduce the benefit’s value.
While determining this can be practically challenging, the ATO has issued guidelines that suggest a 4.20 cent per km shortcut rate to aid in calculations. These guidelines do not apply to plug-in hybrid vehicles.
Many electric vehicles are also bundled with electric charging stations. Be aware that the FBT exemption for electric cars does not extend to charging stations provided at the employee’s home.
Providing Equipment to Work from Home
Many companies continue to offer flexible work-from-home arrangements. Employees often receive work-related items to help them work from home. Generally, if these items are provided primarily for work purposes, FBT shouldn’t apply.
For instance, portable electronic devices like laptops and mobile phones given to employees shouldn’t trigger an FBT liability as long as they are primarily for work use. Multiple similar items can also be provided during the FBT year if needed—such as multiple laptops—provided the business has an aggregated turnover of less than $50 million (previously, the threshold was less than $10 million).
If an employee uses equipment provided by the business for private purposes, normally FBT would apply to the private use. However, the FBT liability can be reduced based on the percentage of business use.
Does FBT Apply to Your Contractors?
FBT rules typically apply when benefits are provided to employees and certain officeholders, such as directors. FBT should not apply when benefits are provided to genuine independent contractors, but you need to ensure that your contractors are indeed contractors.
Are Your Contractors Really Contractors?
Following two landmark decisions by the High Court, the ATO finalized a ruling TR 2023/4 that helps determine whether a worker is an employee or an independent contractor. If the parties have a written contract, the focus should be on the contract terms to establish the relationship’s nature, rather than the parties’ conduct. Labeling a worker as an independent contractor doesn’t necessarily mean they won’t be treated as an employee if the contract terms suggest an employment relationship.
The ATO also issued PCG 2023/2, outlining four risk categories. Arrangements are viewed more favorably when:
- There is evidence of agreed classification between you and the worker.
- There is a comprehensive written agreement governing the relationship.
- Both parties understand the classification’s consequences.
- The arrangement’s performance hasn’t significantly deviated from the contract terms.
- Specific advice has been sought confirming the classification is correct.
- Tax, superannuation, and reporting obligations are met when the worker is classified as an employee or independent contractor (as applicable).
If your business employs contractors, ensure a process is in place for correct classification of the arrangements and determining the ATO’s risk rating. Review these arrangements over time.
Even when a worker is a genuine independent contractor, remember that the business might still have some employment-like obligations. For instance, some contractors are deemed employees for superannuation guarantee and payroll tax purposes.
Reducing the FBT Record-Keeping Burden
Record-keeping for FBT purposes can be demanding. From July 1, 2024, your business can choose to continue using the existing FBT record-keeping methods, use existing business records that meet legislative requirements, or a combination of both:
- Travel diaries – see LI 2024/11
- Living-away-from-home-allowance – FIFO/DIDO declarations – see LI 2024/4
- Living-away-from-home – maintaining an Australian home declaration – See LI 2024/5
- Otherwise deductible rule – expense payment, property, or residual benefit declaration – See LI 2024/6
- Otherwise deductible rule – private use of a vehicle other than a car declaration – See LI 2024/7
- Car travel to an employment interview or selection test declaration – See LI 2024/14
- Remote area holiday transport declaration – See LI 2024/10
- Overseas employment holiday transport declaration – See LI 2024/13
- Car travel to certain work-related activities declaration – See LI 2024/9
- Relocation transport declaration – See LI 2024/12
- Temporary accommodation relating to relocation declaration – See LI 2024/8
FBT Housekeeping
Ensuring the required records for fringe benefits are maintained can be challenging—especially since it may depend on employees producing records at specific times. If your business has cars, and you need to record odometer readings at the start and end of the FBT year (March 31 and April 1), ensure your team takes a photo on their phone and emails it to a central contact person—saving time and preventing missing records when employees forget.
Top FBT Risk Areas
Mismatched Claims for Entertainment: The ATO can easily spot problem areas with mismatched claims.
When it comes to entertainment, employers often seek to claim a deduction, but this can be problematic if not recognized as a fringe benefit provided to employees. Entertainment expenses, like meals in a restaurant, are generally not deductible, and no GST credits can be claimed unless the expenses are subject to FBT.
For example, if you take a client out to lunch and the amount per head is less than $300, and your business uses the ‘actual’ method for FBT purposes, there should not be any FBT implications. This is because benefits provided to clients are not subject to FBT, and minor benefits (i.e., value of less than $300) provided to employees on an infrequent and irregular basis are generally exempt from FBT. However, no deductions should be claimed for the entertainment, and no GST credits would typically be available either.
If the business uses the 50/50 method, then 50% of the meal entertainment expenses would be subject to FBT (the minor benefits exemption would not apply). As a result, 50% of the expenses would be deductible, and the business could claim 50% of the GST credits.
Employee Contributions by Journal Entry in the Accounts
Many businesses reduce the value of fringe benefits through after-tax employee contributions, often recorded by journal entry in the accounting system instead of cash payments.
While this can be acceptable if managed correctly, the ATO has raised concerns about whether journal entries made after the FBT year-end are valid employee contributions.
For a contribution made by journal entry to effectively reduce the taxable value of a benefit, all of the following conditions must be met:
- The employee must be obliged to contribute to the employer towards a fringe benefit (e.g., under the employee’s remuneration agreement).
- The employer must have an obligation to make a payment to the employee. For example, they might agree that the employer will lend an amount to the employee, or the employee might be entitled to an unpaid bonus. If a loan is made by the employer, this could trigger further tax issues that need management.
- The employee and employer must agree to set off the employee’s obligation against the employer’s obligation.
- Journal entries must be made no later than when the financial accounts are prepared for the current year (for income tax purposes).
Failing to ensure that fringe benefits and employee contributions are clearly documented can lead to issues. For example, the ATO may request evidence that the employer is obligated to make contributions towards a fringe benefit. Without evidence, significant FBT liabilities could arise.
Not Lodging FBT Returns
The ATO is concerned that some employers are failing to lodge FBT returns when required.
If your business employs staff (even closely held staff like family members) and is not registered for FBT, it’s crucial to review your position to check for potential FBT liabilities.
If the business provides cars, car spaces, reimburses private (non-business) expenses, provides entertainment (food and drink), employee discounts, etc., then you are likely providing at least some fringe benefits.
There is a list of benefits considered exempt from FBT, such as portable electronic devices like laptops, protective clothing, trade tools, etc. If your business only provides these exempt items or items that are infrequent and valued under $300, then FBT concerns are unlikely.
Make sure you have reviewed the FBT client questionnaire we sent you!
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