The end of March spells the end of the FBT financial year. While I know this hardly calls for wild celebrations and dancing in the street, as a small business operator, there are a few things that you should have top of mind.
Without wanting to bore you senseless, FBT is, of course, a tax that is levied on employers, and the most common fringe benefit provided by employers to their employees is the car. Today I’m only going to discuss car benefits. FBT can apply where a car is used partly or wholly for private purposes and where you, the employer, own or lease the car, pay the employee’s lease payments via a novation or pay the operating costs.
A very common misunderstanding is that FBT is a tax on the employee. It’s not. The employer is liable for the tax. This confusion arises because many employee contracts allow the FBT liability to be forwarded to the employee. And this is commonplace for car benefits. However, an important lesson for employers is FBT is your problem, not your employees.
So, if you provide non-cash benefits such as car packaging, you need to be fully aware of the relevant information you are responsible for gathering in order to prepare FBT returns to the Tax Office on time. Your employees have the data, but it’s your responsibility to get it.
Of utmost importance: you need to ensure that your employees give you a signed odometer declaration as at 31 March. Put that date in your diary now. You see, while your FBT tax return isn’t due to be lodged by your business until around the end of May, if you don’t get this documentation from your employees at the end of this month, chances are that your accountant will be scrambling for this information two months after the event. Needless to say, accurate odometer readings for the end of March at the end of May will be hard to come by.
When it comes to calculating a car’s FBT liability, you and your employees have two options, one of which will result in lower FBT. Yet, in practice, the option used most frequently is the statutory method because it’s the easiest to calculate as it’s based on kilometers traveled.
Statutory method: All you need for this method is opening and closing odometer readings. In the past, any employee covering a lot of kilometers would have achieved a better FBT result using this method.
Operating costs method: However, for those employees who live close to work and don’t travel many kilometers for personal purposes, which is often the case with inner-city dwellers, then the operating costs method (also known as the logbook method) will provide a much better FBT result.
In fact, in this scenario, using the statutory method would result in a high FBT liability, negating any advantages of packaging the vehicle in the first place.
Lastly, you need to know the statutory method now has a flat rate of 20%. This will hurt the employees that used to travel big kilometer’s over the year, which minimized any FBT liability. Those staff may have been on an FBT rate as low as 11% or even 7%. So a jump to 20% is a considerable hike and may come as an unwelcome surprise in a couple of months from now when you are asking them for the money to pay for their new FBT liability.
On the other hand, the rate change could benefit the employees that travel minimal kilometers and didn’t use the car that much for business purposes, though it’s unlikely that these employees would have bothered to package the car in the first place.
While FBT is difficult enough for most small businesses to swallow, don’t forget that all states impose a payroll tax on fringe benefits. It’s pain that we all share!
Ashleigh Swayn is CEO of Countplus MBT, a leading chartered accountancy practice offering accounting, financial planning, and finance expertise.