With the 2014-15 fringe benefits tax (FBT) year-end fast approaching, the time has come to commence preparations for completing your organisation’s annual FBT return.
The lead up to the 31 March year-end requires intense planning and appropriate resourcing to ensure the lodgement deadline is achieved.
The past two years in particular have brought a number of FBT reforms which are likely to continue to add an additional layer of complexity to the completion of returns this year.
Outlined below are some issues employers need to give particular attention to this FBT season.
Major technical changes
Expiry of transitional rules for cars, in-house benefits and Living Away From Home Allowance (LAFHA)
Transitional provisions introduced to ‘transition’ legislative changes made by the previous Government, ceased to apply either from the commencement of the 2014-15 FBT year (car benefits and ‘in-house’ benefits) or during the 2014-15 FBT year (LAFHA benefits). The expiration of these transitional provisions should be considered by organisations to ensure that the FBT return lodged with the Commissioner is correct.
The legislative changes made by the previous Government affect the valuation of car fringe benefits under the statutory formula method, concessions available to salary packaged in-house benefits, and the valuation of LAFHA benefits, as follows:
- Car fringe benefits: From 1 April 2014, where the statutory formula method is chosen, the taxable value of a car fringe benefit provided for the whole of the year will be 20 per cent of the ‘base value’ of the car. If the recipient makes a contribution payment in respect of the use of the car, this payment is then deducted to determine the taxable value. The only exception to the requirement, when using the statutory formula, to use 20 per cent as the statutory percentage, is where the car was and continues to be provided under a commitment entered into before 7:30pm AEST on 10 May 2011 (pre-existing commitment).This exception will however only apply where there has been no change to that commitment since that date. Employers may continue to use the old statutory fractions in respect of cars provided under such unchanged pre-existing commitments.
- In-house benefits: All ‘in-house’ benefits provided under a ‘salary packaging arrangement’ after 1 April 2014 will be subject to the new rules. This is because the transitional measure for salary packaging arrangements entered into before 22 October 2012 no longer applies. Under the new rules, in-house benefits provided under a ‘salary packaging arrangement’ will not be subject to concessions otherwise available to in-house benefits, and will instead be valued at their ‘notional value’.
- LAFHA: From 1 July 2014, the LAFHA transitional rules will no longer be available to agreements in place before 7:30pm on 8 May 2012 (and not materially varied after that time). This means that, with effect from 1 July 2014, those previously transitioned arrangements will be subject the new rules for determining whether the food and accommodation components of a LAFHA are exempt from FBT.
Specifically, the exemption will only apply where the employee has a place of residence in Australia which is owned or leased by the employee (or spouse) throughout the period (assignment period) which the employee is required to live away from, to perform the duties of their employment. Importantly, that place must continue to be available for the employee’s immediate use and enjoyment at all times during the assignment period, and it must be reasonable to conclude that the employee will resume living at that place at the end of the assignment period. Only where these conditions are satisfied, will the exemption apply (subject to substantiation requirements being satisfied) and, even then, only for a period of 12 months commencing from the start of the assignment period. In this respect it is important to note that the 12 month period for previously transitioned arrangements will be taken to have commenced on 1 October 2012. This means that for these previously transitioned arrangements, the exemption will not apply from 1 July 2014.
Change in gross up rates from 1 April 2014 – impact on salary packaging
From 1 April 2014, the FBT rate has increased from 46.5 to 47 per cent. The increase in the rate is as a result of the increase in the Medicare Levy following the introduction of the National Disability Insurance Scheme. Accordingly, the new gross up rates from 1 April 2014, are 2.0802 for Type 1 benefits and 1.8868 for Type 2 benefits.
From 1 April 2015, the Temporary Debt Reduction Levy will further increase the FBT rate to 49 per cent. The new gross up rates from 1 April 2015, will be 2.1463 for Type 1 benefits and 1.9608 for Type 2 benefits.
Tips and reminders - 2014-15 FBT return
Some key reminders in relation to preparation of your 2014-15 FBT return include:
- Ensure your car FBT calculation methodology is updated to support the reforms. Where cars are still valued under the statutory formula method (i.e. for a pre-existing commitment), this includes obtaining odometer declarations on 31 March 2015 to calculate your car fringe benefits.
- Review your base value calculation process and ensure that all relevant fleet discounts and manufacturer rebates are excluded from the cost price of the car.
- Ensure car base values are reduced by one-third where the employer has held a car for more than four FBT years (from the start of the FBT year).
- Ensure that the correct statutory fraction is used for vehicles that were valued under the transitional rules prior to 1 April 2014. As these transitional provisions have now expired, all vehicles previously valued under the transitional rules must use the 20 per cent statutory fraction for the 2014-15 FBT year, irrespective of the total kilometres travelled during the year. The exception to this is for cars provided to employees under a pre-existing commitment.
- Consider the operating cost method to potentially reduce the taxable value, and assess whether logbooks, that are maintained to substantiate business use percentages, are valid.
- Ensure correct and timely compliance associated with employee contributions, particularly FBT, goods and services tax (GST) and income tax.
- Review excess prior year post-tax employee contributions, and determine whether they can be offset against current year taxable values.
- Compare and apply the meal entertainment valuation method (50/50 or actual method) which provides the lowest taxable value.
- Locate and apply the lowest daily rate when valuing car parking benefits to potentially reduce the taxable value.
- Consider the ‘minor benefit exemption’ to reduce your FBT liability on benefits that are less than $300 (GST inclusive) in value, and which are provided on an infrequent and irregular basis. Although this requires additional analysis, the FBT savings across a large workforce can be significant.
- Ensure you have obtained signed declarations where required, to support the treatment of certain benefits in the FBT return (for example, otherwise deductible declarations where there is a combination of business and private use by an employee).
- For employees that are living away from home, ensure that adequate records are kept of employee movements and contract variations. Also ensure that signed LAFHA declarations are received before lodgement of the FBT return. Updated declarations are available from the Australian Taxation Office. Note that as discussed above, the exemption for food and accommodation components of a LAFHA are only available (for a maximum of 12 months for each ‘assignment’) where the employee maintains a home in Australia for their immediate use and enjoyment at all times during the period their duties of employment required them to live away from home and it is reasonable to conclude that the employee will resume living at that place at the end of the assignment period.
- Ensure that the correct reasonable amounts for food and drink expenses (refer to Taxation Determination TD 2014/9) are used in calculating the exempt food component of a LAFHA , and ensure that appropriate substantiation is provided by the employee in respect of accommodation expenses incurred while living away from home.
- Ensure that travel diaries are maintained by employees where the travel is either within Australia for more than five consecutive nights and the travel is not exclusively for performing employment- related duties, or outside Australia for more than five consecutive nights.
- Ensure the GST inclusive value is used when valuing benefits.
- For employers that have strict policies in place in relation to private use, the Australian Taxation Office has advised that the employer may wish to consider whether a no-private-use declaration could be signed by the employer to reduce the administrative burden of maintaining travel diaries. The declaration must cover all travel benefits provided to employees where the employer is able to state that the benefits were provided only for employment-related purposes and there was no private portion.
FBT returns for the year ending 31 March 2015 are generally required to be lodged by 21 May 2015, however, PwC has received an extension of time to lodge returns electronically until 25 June 2015 for all clients on PwC’s lodgement program.