Special Tax Topics 2017 Fringe Tax Benefits (FBT), Technical Session 1 March 2017 Session Content What we are discussing today Expense payments Entertainment Exemptions and reductions of taxable value Structuring Salary packaging agreements FBT and Division 7A. 2 Copyright 2016 Chartered Accountants Australia and New Zealand 1
Pop Quiz Why do we have FBT at all? What is a benefit? What is a Fringe Benefit? Who is an employer? Who is an employee? Who is an associate? What does in respect of employment mean? How id FBT calculated? 3 Conditions for car fringe benefits Car Held by provider Private use. Motor vehicle designed to carry less than one tonne and fewer than 9 passengers Does not include motor cycle or similar vehicle Provision of m/c, trucks etc cannot be car FB but may be residual FB. Copyright 2016 Chartered Accountants Australia and New Zealand 2
Conditions for car fringe benefits Car Held by provider Private use. Held means owned leased or otherwise made available Does not include taxi travel or shortterm hire arrangements unless intended to be effectively continual under successive arrangements. Conditions for car fringe benefits Car held by provider Private use. If actual or deemed private use on a day that day is a car fringe benefit day Actual private use is any use by employee or associate that is not their employment duties Deemed availability for private use Garaged at or near private residence Not at employer s premises and not doing your work Associate has custody and control or car. Copyright 2016 Chartered Accountants Australia and New Zealand 3
Statutory fraction method TV = [0.2 x (BV x C/D)] Employee contribution. BV = Base Value Generally the GST-inclusive cost of owning the car incl dealer delivery charges, GST, Customs duty Does not include other costs Stamp duty, registration insurance or extended warranty Base Value assessed at earliest holding time by employer or associate. Statutory fraction method TV = [0.2 x (BV x C/D)] Employee contribution. C = Number of car FB days D = Number of days in FBT year. Copyright 2016 Chartered Accountants Australia and New Zealand 4
Traps with statutory fraction method rules Inherited cars Re-leasing to different employee Interstate or overseas travel Car is used on a business trip. Sales Rep2 Sales Rep1 has car, Base value = $50,000 Sales Rep1 gets promoted, gets new car Sales Rep2 inherits car Sales Rep1 s car, market value = $30,000. Sales Rep1 $ 000? Base value $50,000 Base value Traps with statutory fraction method rules Inherited cars Re-leasing to different employee Interstate or overseas travel Car is used on a business trip. Employee2 Employee1 leases car, Base value = $50,000. RV on lease is $25,000 Market value at end of lease is $30,000 Employee2 acquires car through new lease of car at $25,000. Employee1 $ 000? Base value $50,000 Base value Copyright 2016 Chartered Accountants Australia and New Zealand 5
Traps with statutory fraction method rules Inherited cars Re-leasing to different employee Interstate or overseas travel Car is used on a business trip. Employee goes on a trip Car garaged at home; or Parked in LT park; and Employee has keys Car fringe benefit. Overseas Holiday Airport? Car park Traps with statutory fraction method rules Inherited car Re-leasing to different employee Interstate or overseas travel Car is used on a business trip. Employee goes on a trip Car is not at employee s home; Car garaged at employer s business premises; and Employer enforces private use prohibition No car fringe benefit. Work Overseas Holiday Copyright 2016 Chartered Accountants Australia and New Zealand 6
Traps with statutory fraction method rules Inherited cars Re-leasing to different employee Interstate or overseas travel Car is used on a business trip. Cairns Motel Employee on road trip Car is not at employee s home; and Employee stays at motels Car fringe benefit. Brisbane Motel Sydney Motel Expense Payment Fringe Benefits Expense payment fringe benefit may arise: Employer pays 3 rd party obligation incurred by employee; or Employer reimburses employee for obligation paid by employee to 3 rd party. Supplier Pays direct Legal obligation to pay Employer Reimburses Employee Copyright 2016 Chartered Accountants Australia and New Zealand 7
Expense Payment Fringe Benefits Expense payment fringe benefit TV: External expense payment FB = the GST-inclusive amount paid by provider Internal expense payment FB = depends on type of benefit Reductions in TV Otherwise deductible rule applies Exemptions No private use declaration made by employer LAFH accommodation Car expenses where car FB applies. Entertainment Basic concepts What is entertainment? Why is the food & drink being provided? What food & drink is being provided? When is food & drink is being provided? Where is food & drink is being provided? Copyright 2016 Chartered Accountants Australia and New Zealand 8
Entertainment Basic concepts What is entertainment? Item Entertainment Reference Gifts of bottles of wine or whiskey Unlikely to be entertainment TD 94/55 Theatre or movie tickets Yes TD 94/55 Gifts of electrical appliances Unlikely to be entertainment TD 94/55 Bouquets of flowers If not entertainment, could be other forms of FBT. May qualify as minor benefits. Consider TR 2007/12. No Entertainment Calculation of taxable value } Actual cost 50:50 split method 12 week register Interaction with income tax & GST. Copyright 2016 Chartered Accountants Australia and New Zealand 9
Entertainment Calculation of taxable value Actual cost method Expense payment } Property Residual Example How much of benefit attributable to employees and associates? Accounting Co Pty Ltd has a theatre night for clients. 3 clients and spouses are invited, as well as 3 managers and their spouses Clients and staff entertained at the opening night of Jersey Boys. Tickets were $350 each, included the show, complimentary drinks and canapés. Company uses actual method for FBT. In respect of staff and their spouses, property fringe benefit would apply. Taxable value based on cost of tickets. Entertainment Calculation of taxable value Actual cost method } Expense payment Some Property Residual Case study Minor fringe benefits TR 2007/12 Christmas parties benefits can be exempt under either, S.41 or S.58P. Employer holds Christmas party at a local restaurant. Employees' partners and children are able to attend. Cost per person is less than $300. Necessary to consider criteria listed in S.58P to determine if unreasonable to treat benefit as a fringe benefit. Christmas party is provided infrequently, but regularly. Regard must be had to other criteria in TR 2007/12. ATO usually accepts the party is minor benefit If exempt no income tax deduction and no ITC. Copyright 2016 Chartered Accountants Australia and New Zealand 10
Entertainment Calculation of taxable value Actual cost method Interaction with tax & GST. Expenditure Amount attributable to employees Amount attributable to others Is this amount subject to FBT? Yes No Promotional events; or Eligible seminars; or In-house dining facility; or Tax deductions ITCs allow ed Yes No No tax deductions No ITCs allow ed Entertainment Calculation of taxable value 50:50 split method Simple calculation process Add all food & drink expenses Multiply by 50% No exemptions under S.41 or S.58P. 50% Expenditure 50% Amount subject to FBT Amount not subject to FBT Tax deductions ITCs allowed No tax deductions No ITCs allowed Copyright 2016 Chartered Accountants Australia and New Zealand 11
Exemptions Minor Benefits S.58P makes minor benefits exempt from FBT Conditions TV of benefit must be < $300; and It must be unreasonable to treat the benefit as a FB Taking a series of factors into account. Factors include Infrequency and irregularity Total TV of benefit and similar benefits Total TV of benefit and associated benefits Difficulty in calculating TV Circumstances in which it is provided See TR 2007/12 Exemption cannot apply if for food or drink and 50:50 or register method chosen. Exemptions Property Benefits S.41 makes exempt from FBT property benefits - Provided on work premises of the employer Consumed on the work premises On a work day By a current employee. Does not apply if benefits are provided under a salary package arrangement Does not apply to food and drink if the employer uses the 50:50 method or the register method. Copyright 2016 Chartered Accountants Australia and New Zealand 12
Exemptions Work related items S.58X makes exempt from FBT certain work related items if primarily for use in employees employment - Portable electronic device An item of computer software An item of protective clothing A briefcase A tool of trade. Only one of each item with substantially identical functions per FBT year; unless It is a replacement item; or It is a portable electronic device and employer is a SBE. Exemptions Other Exemptions Division 13 contains a number of exemptions that apply in specific circumstances See paper for full list. Examples 57 Certain benefits paid to employees of religious institutions 58GA Small business car parking 58Q Long service awards. Copyright 2016 Chartered Accountants Australia and New Zealand 13
Reductions in TV Other reductions Division 14 contains a number of reductions in TV that apply in specific circumstances See paper for full list. Examples S.60A and 61 Remote area holiday transport 61C Temp accommodation for relocation 65A Education of children of overseas employees. Salary Packaging Arrangements Definition Salary packaging or salary sacrifice arrangements (SSA) are: Arrangement between employee and employer where; Employee agrees to forgo salary in exchange for; The employer providing benefits of a similar cost. Arrangements maintain total cost of employment to employer by charging against the remuneration total: The cost of any benefit to the employer; Any FBT payable; The GST payable on any recipient contribution; Adding back ITC the employer gets; The residual salary and wages. Copyright 2016 Chartered Accountants Australia and New Zealand 14
Salary Packaging Arrangements Example Ken is an employee of Happy Co and is currently paid $100,000. He wants to salary package a television worth $5,500. How much should his salary be reduced by (ignoring superannuation guarantee amounts) so that his TCE is still $100,000? Answer We need to ensure that the total cost of employing Ken remains $100,000, so from this amount we need to subtract the costs of providing the television. These are: The cost of the television $5,500 ITC ($500) FBT payable on the television $5,784 ($5,500 x 2.1463 x 49%) Total reduction in salary $10,784 So Ken s salary package would be: Salary (i.e. $100,000 10,784) $89,216 Television $5,500 Salary Packaging Arrangements Effective Arrangements An effective arrangement is An arrangement entered into before S&W are earned so that the employee is sacrificing future S&W not year earned An ineffective arrangement attempts to convert S&W already earned into benefits Time of derivation is therefore critical in some cases. Lesson 1 When entering a package arrangement make it begin the next pay period that starts after the signing date Lesson 2 Discretionary bonus enter into agreement before employer makes decision to aw ard bonus Performance bonus enter into before criteria (eg sales target) met Profit share bonus enter into before profit calculated and employee informed of existence and amount of bonus. Copyright 2016 Chartered Accountants Australia and New Zealand 15
Salary Packaging Arrangements Effective Arrangements An effective arrangement is An arrangement entered into before S&W are earned so that the employee is sacrificing future S&W not year earned An ineffective arrangement attempts to convert S&W already earned into benefits Time of derivation is therefore critical in some cases. Lesson 3 Packages are effective when on leave, but you cannot salary sacrifice leave entitlements Lesson 4 Be careful with termination payments (unused leave, LSL etc) ATO does not think you can effectively sacrifice termination payments (See Turner s case). FBT and Division 7A Related party employees FBT loan fringe benefits exist Div 7A also applies Div 7A takes precedence over FBT. Because of this: No FBT, if loan is a deemed dividend No FBT, if loan is excluded by written agreement. Example No FBT Loan Div 7A FBT MYR Ace Auto Services Pty Ltd May 2013 June 2013 March 2014 June 2014 Shareholder/ Employee Div 7A applies $200k @ 0%, no agreement deemed dividend Copyright 2016 Chartered Accountants Australia and New Zealand 16
FBT and Division 7A Related party employees FBT loan fringe benefits exist Div 7A also applies Div 7A takes precedence over FBT. Because of this: No FBT, if loan is a deemed dividend No FBT, if loan is excluded by written agreement. Example No FBT Loan Div 7A FBT MYR Ace Auto Services Pty Ltd May 2013 June 2013 March 2014 June 2014 Shareholder/ Employee Div 7A applies $200k @ 5.65%, written agreement no deemed dividend FBT and Division 7A Related party employees Payments and private use of assets Special rule - Div 7A excluded if payment (including private use of assets) provided to s/h in capacity of employee Special rule no deemed dividend for private use of assets if it would be a minor benefit FBT takes precedence over Division 7A. Example No FBT Loan Div 7A FBT MYR Ace Auto Services Pty Ltd May 2013 June 2013 March 2014 June 2014 Shareholder/ Employee Div 7A applies $200k @ 5.65%, written agreement no deemed dividend Copyright 2016 Chartered Accountants Australia and New Zealand 17
FBT Update What is new? Rates and thresholds updated like each year PCG 2016/10 Fleet : simplified approach for calculating car fringe benefits 20+ tool of trade cars Log books for 75% then average Failing to lodge FBT returns: 75% penalties affirmed Re GSLL & Ors and FCT [2016] AATA 954 PCG 2016/14 Discount to the valuation of housing fringe benefits provided by retirement village operators 10% discount. Don t miss upcoming These LiveOne sessions are also available as OnDemand Recordings Date Topic LIVE SESSIONS Thursday 2 March 2017 Special Tax Topics 2017 Fringe Tax Benefits (FBT), Case Study Thursday 9 March 2017 Foundations of SMSFs Superannuation Essentials, Understanding SMSFs Wednesday 15 March 2017 Tuesday 21 March 2017 Essential Tax Update 2017 - March Essential SMSF Updates 2017 - March Copyright 2016 Chartered Accountants Australia and New Zealand 18
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