Advivo Partner, Chris Morris, shares insight into managing and reducing your FBT
Fringe Benefits Tax (FBT) and managing shareholder and director loans can be a source of pain and frustration for many business owners.
Some of the more common situations which tend to trip business owners up are when their company:
- Pays for personal car costs and loan repayments;
- Pays for personal PAYG Income Tax Instalments (those raised for individuals);
- Pays for personal insurances such as life insurance;
- Pays for personal electricity, internet and other personal utilities; and
- Makes company assets i.e. cars, utes boats etc. ‘available for private use’ by garaging them at home.
- Note – the ATO defines ‘available for private use’ extremely broadly.
When any of the above occurs, it creates either an FBT or a shareholder/director loan issue which needs to be managed appropriately. To not correctly identify and address the above can leave business owners forced to deal with unintended tax consequences which can quite easily snowball over a very short period of time.
The good news is that with proper planning and ensuring you’re doing what you can to minimise negative impacts caused by the above, FBT and associated shareholder/director loan implications can easily be managed and worked into routine systems and processes so there are no nasty surprises.
Importantly, in some circumstances, it may be beneficial to pay personal expenses for employees as part of an overall remuneration strategy and this would normally be intended by the employer. This article is addressing the unintended FBT and associated shareholder/director loan implications that can arise from common transactions in business records.
Where possible, we normally recommend an FBT minimisation strategy.
Reducing FBT & Company Loan Implications
The following are just some of our tips that can help with reducing FBT and company loan implications for your business.
- Try to ensure personal payments being paid by the company would be otherwise tax-deductible by the individual.
- If a portion of the payment would have been deductible to the individual (i.e. your car was 50% work use but the company was paying for 100% of the costs), then the portion that isn’t tax-deductible would create either an FBT liability or a shareholder/director loan, both of which would need to be managed.
- Tip – personal PAYG Income Tax Instalments are personal and are not tax deductible, even by the individual, so these are best paid by the individuals, not the company.
- Employee Contributions
- This is when the individual recipient pays an amount back to the company to offset part or all of the fringe benefit which they have received.
- Tip – if the company is going to routinely pay for personal expenses, consider reducing the amount of FBT or company loan implications by routinely setting up an employee contribution or a loan offset strategy. This can easily be done through most payroll systems and can help business owners considerably when it comes to managing their cash flow and tax obligations.
- Provide employees with a cash bonus instead of a fringe benefit
- By doing this, the tax liability of that payment falls with the employee as opposed to you as the employer.
- Note – you may be able to then give the employee the option of whether they want to salary sacrifice some or all of it into their superannuation fund which could ultimately save them on tax anyway.
- Minimise personal use of company assets. Tips for cars and commercial vehicles (i.e. utes)
- Where possible, limit the private use of company assets (including cars and commercial utes).
- Commercial Vehicles including many utes:
- Whilst in certain situations commercial utes can be exempt from FBT, the ATO have defined their ‘minor, infrequent and irregular’ wording used to describe the acceptable amount of personal use of commercial vehicles, whilst still maintaining their FBT exempt status. If personal use of a commercial vehicle exceeds this, that vehicle will then lose its FBT exempt status and be considered a ‘car’ for FBT purposes.
- Tip – to provide the best chance of retaining the FBT exemption for commercial vehicles we suggest having a clear policy stating that commercial vehicles are not to be used for any purpose apart from work related use and travelling to and from work.
- Cars:
- Cars are not commercial vehicles and therefore in most instances, travel to and from work is considered private. Depending on the situation this can often form a large percentage of the total kilometres travelled for that car which can result in a low logbook business use %.
- Similar to commercial vehicles, a policy stating that company cars are only to be used for business related matters (i.e. no personal use) could help to considerably reduce FBT and associated shareholder/director loans.
- Logbooks can be a great way to reduce FBT and associated shareholder/director loans because there are two methods available for calculating the FBT liability on cars and keeping a logbook allows you to choose the method which provides the best result for your situation.
- Commercial Vehicles including many utes:
- Where possible, limit the private use of company assets (including cars and commercial utes).
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- Assets (including cars) that are ‘available for private use’
- FBT and its impact on associated shareholder/director loans are reduced proportionately by the number of days in the FBT year for which the asset was NOT available for private use. This means if an asset such as a car is garaged at the company office or the workshop which is a different location to your residence, then that car will not be considered ‘available’ for private use during that time meaning if a car is permanently garaged at work, it has the potential to have a very high business use logbook %.
- Assets (including cars) that are ‘available for private use’
Note – not all the above strategies will be appropriate for everyone because individual circumstances can and do vary. If you would like to discuss your own FBT and shareholder/director loan minimisation strategies for your business we’d love to hear from you so please feel free to contact us today.
Written by Chris Morris, Advivo Partner
