Special Tax Topics 2017 · Case study –Minor fringe benefits TR 2007/12 –Christmas parties Employer holds Christmas party at a local restaurant. Employees' partners and children

2/02/2017

Copyright © 2016 Chartered Accountants Australia and New Zealand 1

Special Tax Topics 2017Fringe Tax Benefits (FBT), Technical Session

1 March 2017

© Chartered Accountants Australia + New Zealand 2017

Fringe Benefits Tax (FBT)


Session Content

• Cars

• Expense payments

• Entertainment

• Exemptions and reductions of taxable value

• Structuring Salary packaging agreements

• FBT and Division 7A.

2

What we are discussing today

2/02/2017





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




• 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.

Conditions for car fringe benefits

• “Car”

• “Held” by provider

• Private use.

Cars

2/02/2017





• “Held” means owned leased or

otherwise made available

• Does not include taxi travel or short-

term hire arrangements unless

intended to be effectively continual

under successive arrangements.


• “Car”

• “Held” by provider

• Private use.

Cars




• 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.


• “Car”

• “held” by provider

• Private use.

Cars

2/02/2017





• 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.

Cars




• C = Number of car FB days

• D = Number of days in FBT year.

Statutory fraction method

• TV = [0.2 x (BV x C/D)] – Employee

contribution.

Cars

2/02/2017





• 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.

• Inherited cars

• Re-leasing to different employee

• Interstate or overseas travel

• Car is used on a business trip.

$’000? Base value

Sales Rep2 Sales Rep1

$50,000 Base value

Cars

Traps with statutory fraction method rules




• 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.

• Inherited cars




$’000? Base value

Employee2 Employee1

$50,000 Base value

Cars


2/02/2017





• Employee goes on a trip

• Car garaged at home; or

• Parked in LT park; and

• Employee has keys

• Car fringe benefit.


• Inherited cars




Cars

Airport

Car park

Overseas

Holiday

?




• Inherited car




• 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

Cars


2/02/2017





• Employee on road trip

• Car is not at employee’s home; and

• Employee stays at motels

• Car fringe benefit.

• Inherited cars




Sydney

MotelBrisbane

Motel

Cairns

Motel

Cars





• Employer pays 3rd party obligation incurred by employee; or

• Employer reimburses employee for obligation paid by employee to 3rd party.

Supplier

EmployerEmployee

Legal obligation to payPays direct

Reimburses

Expense Payment Fringe Benefits

Expense payment fringe benefit may arise:

2/02/2017





• 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.

Expense Payment Fringe Benefits

Expense payment fringe benefit TV:




• 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?

Entertainment

Basic concepts

2/02/2017





• What is ‘entertainment’?

• If not entertainment, could be other forms of FBT. May qualify as minor

benefits. Consider TR 2007/12.

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 No

Entertainment

Basic concepts




• Actual cost

• 50:50 split method

• 12 week register

Interaction with

income tax & GST.}

Entertainment

Calculation of taxable value

2/02/2017





• Actual cost method

• Expense payment

• Property

• Residual

How much of benefit attributable

to employees and associates?

Example

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






• Expense payment

• Property

• Residual

} Some benefits can be exempt

under either, S.41 or S.58P.

Case study – Minor fringe benefits

TR 2007/12 – Christmas parties

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.

Entertainment


2/02/2017






• Interaction with tax & GST.Expenditure

Amount attributable to

employeesAmount attributable to

others

Is this amount subject to

FBT?

Tax deductions

ITCs allow ed

No tax deductions

No ITCs allow ed

No

Yes

•Promotional events; or•Eligible seminars; or•In-house dining facility; or

NoYes

Entertainment





• 50:50 split method

• Simple calculation process

• Add all food & drink expenses

• Multiply by 50%

• No exemptions under S.41 or S.58P. Expenditure

Amount not subject to FBTAmount subject to FBT

Tax deductions

ITCs allowed

No tax deductions

No ITCs allowed

50% 50%

Entertainment


2/02/2017





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.

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.

Exemptions




• 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.

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”.

Exemptions

2/02/2017





• 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.

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.

Exemptions




• Examples

• 57– Certain benefits paid to

employees of religious institutions

• 58GA – Small business car

parking

• 58Q – Long service awards.

Other Exemptions

• Division 13 contains a number of

exemptions that apply in specific

circumstances

• See paper for full list.

Exemptions

2/02/2017





• Examples

‒ S.60A and 61 – Remote area

holiday transport

‒ 61C – Temp accommodation for

relocation

‒ 65A – Education of children of

overseas employees.

Other reductions

• Division 14 contains a number of

reductions in TV that apply in specific

circumstances

• See paper for full list.

Reductions in TV




• 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.

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.

Salary Packaging Arrangements

2/02/2017





ExampleKen 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?AnswerWe 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 $5,500ITC ($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) $89,216Television $5,500





• 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.

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.


2/02/2017





• 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).

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.





Example

• 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.

Ace Auto Services Pty Ltd

$200k @ 0%, no agreement –deemed dividend

Shareholder/Employee

May 2013 June 2013 June 2014March 2014

Loan Div 7A FBT MYR

No FBT

Div 7A applies

FBT and Division 7A

Related party employees

2/02/2017





Example

• 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.


$200k @ 5.65%, written agreement – no deemed dividend



Loan Div 7A FBT MYR

No FBT

Div 7A applies

FBT and Division 7A





Example

• 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.


$200k @ 5.65%, written agreement – no deemed dividend



Loan Div 7A FBT MYR

No FBT

Div 7A applies

FBT and Division 7A


2/02/2017





• Rates and thresholds updated like each year

• PCG 2016/10 “Fleet Cars: 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.

FBT Update

What is new?




Don’t miss upcoming…

These LiveOne sessions are a lso 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 Essential Tax Update 2017 - March

Tuesday 21 March 2017 Essential SMSF Updates 2017 - March

2/02/2017


© Chartered Accountants Australia + New Zealand 2017Copyright © Chartered Accountants Australia and New Zealand 2016. All rights reserved.

More Online Training opportunities

Find more LiveOne online training opportunities at charteredaccountants.com.au/liveone

Subscribe to the eLearning Update to receive updates on LiveOne and eLearning opportunities


Thank you!

https://www.charteredaccountants.com.au/My-Account/Profile/Newsletter-sign-ups

Documents

Special Tax Topics 2017 · Case study –Minor fringe benefits TR 2007/12 –Christmas parties Employer holds Christmas party at a local restaurant. Employees' partners and children