The ATO has recenty published a list of behaviours and characteristics that may attract its attention. In order to minimise the chances of ATO scrutiny, this section provides the details.
Capital Gains Tax
Broadly, the ATO is focussed on capital losses that on the face of it appear to be exaggerated, fabricated or misclassified; all with the aim or reducing taxable income. Specifically, the following attract the ATO’s attention:
- For companies, if from the time the losses were incurred to the time they are used, other information indicates that the company had a change in ownership or there was a change in the type of activites being conducted
- Capital losses that are artificially generated (for example, non-arm’s length transactions or through ‘wash sales’ where loss-making shares are sold and then bought back) with the express purpose to offset capital gains
- Reclassifying capital losses as revenue losses with the aim of reducing taxable income
- “Loss washing” whereby a taxpayer deliberately triggers a CGT event (e.g. sale) in order to bring to account an unrealised loss in a year in which a capital gain is made.
The ATO focusses on your reporting and payment obligations resulting from a disposal of a capital asset. It has particular concerns where the amount of a net capital gain reported on a tax return is less than the ATO believes it should be based on their external data sources. The following specifically attract ATO attention:
Fringe Benefits Tax
- Entities that fail to meet their lodgement obligations
- Companies claiming the 50% CGT discount (other than life insurance companies, the discount for holding a CGT asset for 12 months or more is not available to companies)
- Entities that receive cash through a partial scrip-for-scrip rollover. By way of background, you may be entitled to a scrip-for-scrip rollover and avoid CGT where a company in which you owned shares was taken over and you received new shares in the takeover company
- Entities which dispose of high-value assests but record small capital gains or losses on their tax retun
- Entities that incorrectly access the Small Business CGT Concessions. (Note that despite the increase of the Small Business Entity turnover threshold from $2 million to $10 milliion (effective 1 July 2016) this does not apply for the purposes of accessing the CGT concessions. To access the concessions, generally businesses must have an aggregated turnover of less than $2 million, or have net assets to the value of less than $6 million).
The ATO focuses on situations where an employer-provided motor vehicle is used or made available for use. This may constitute a fringe benefit and require an FBT return to be lodged. Note that an employer-provided vehicle will be deemed to be avalable for private use – and therefore a fringe benefit may arise – where an employee keeps it at their residence overnight (even if it not used).
An employee contribution is an amount paid to an employer by an employee in relation to a fringe benetit, The contribution reduces the taxable value of a fringe benefit, and must be made by the employee from their after-tax income. These contributions will normally be assessable in the hands of the employer. The FBT legislation describes three types of employee contributions:
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Not a member? Join today //mytaxsavers.com.au/plans/subscriptions/ Living Away From Home Allowances (LAFHAs) can be paid to employees who live away from home to conduct employment duties. An allowance is paid to an employee to compensate them for additional costs in living away from home. Importantly, the employee must be living away from home rather than having permanently relocated. There is also a clear distinction between someone who is living away from home, as opposed to travelling.
LAFHAs are compensatory in nature. The compensation is payable for additional expenses incurred becasue the employee is required to live away from his or her usual place of residence in order to perform their employment duties. LAFHAs are taxed under the Fringe Benefits Tax (FBT) rules.
From 1 October 2012, in order for an employer to reduce the FBT on the amount paid to the employee, the following conditions will apply:
Where these conditions are satisfied, the taxable value of the LAFHA will be able to be reduced by the employer by:
- Employees must maintain a home in Australia (at which they usually reside) for thier immeditate use and enjoyment at all times while required to live away from that home for their work;
- Concessional FBT treatment is only available for a maximum period of 12 months, per employee, per work location: and
- Employees must provide their employer with a declatration containg (a) the place in Australia where the employee usually resides when in Australia (b) that the place is a unit of accommodationin which the employee or the employee’s spouse has an ownership interest (c) that the place continues to be available for the employee’s immediate use and enjoyment during the period that their duties require the employee to live away from it (d) the address of each place where the employee was actually residing during the period to which the LAFHA relates.
- The amount of the employee’s actual substantiated accommodation expenditure while loving away from home; and
- The amounts incurred by the employee for food or drink cost while living away from home, less a statutory amount if applicable. (Taxation Determination TD 2017/5 sets out the ‘reasonable’ food components of a LAFHA for the FBT year commencing 1 April 2017).
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Not a subscriber? – Join today //mytaxsavers.com.au/plans/subscriptions/ 31 March marks the end of the Fringe Benefits Tax year. This article aims to assist employers to get their affairs together with a view to ascertaining and minimising their 2016/2017 FBT liability.
COLLATION AND SOFTWARE FILE
While it will generally fall to your Accountant to:
- Determine whether a fringe benefit has been provided by you to an employee or their associate (e.g. spouse)
- Determine whether an FBT exemption applies
- Determine the taxable value of your fringe benefits
- Ascertain your FBT liability
- Complete and lodge your FBT return….
… there is something you can do to assist with this process.You may wish to collate/detail all the instances where a private expense of an employee has been paid for by the business. If you or one of your employees is responsible for maintain the accounting software file (entering and coding each transaction undertaken by your business) ensure that the file is in good order. From an FBT perspective this involves coding personal expenses paid by the employer to an “employee benefits (FBT)” account in the management accounts. This will alert your Accountant to the existence of a potential fringe benefit.
CAR FRINGE BENEFITS
Operating Cost Method
If you use the Operating Cost Method to calculate FBT on motor vehicle usage, in order to calculated the private use percentage (and therefore the FBT payable), you will need to maintain a valid log book recording your usage of the vehicle over a 12-week sample period. Failure to do so, will result in the entire use of the vehicle being subject to FBT (therefore, it’s vital to have a valid log-book). Provided there has been no substantial change in the usage of your vehicle (in terms of the mix between work and personal use) a new log book mush be prepared it one was not prepared for any of the previous four years.
Therefore, if you first kept a log book for 2011/2012 FBT year, you are required to have kept a new log book for the current 2016/2017 FBT year. Leading up to the end of March, if you do not yet have a valid 2016/2017 log book, don’t panic! Although we are now right at the end of the FBT year, it is not too late to keep a log book to substantiate the private use of the vehicle for 2016/2017.
Log books can commence as late as right at the end of the FBT year even though the end of the 12-week period for which it needs to be maintained may extend beyond the end of the FBT year in which the log book commenced. You can purchase a log book from you local Newsagent or you can download one of the innumerable log book apps on the market, either from the AppStore or Googleplay as the case may be.
Upon completion, ensure the log book contains the following information, in English:
- Car details, including registration number
- The date the journey began and the date the journey ended
- Odometer readings at the commencement and conclusion of each journey
- Number of kilometres travelled by the card in the course of the journey
- A description of the purpose or purposes of the journey (generic descriptions such as ‘business trip’ are not adequate)
- Business and private kilometres travelled (although this is not a legislative requirement, it may help with collating data for FBT purposes).
Also ensure that if using the Operating Cost method, you capture the odometer reading at every 31 March. Furthermore the Statutory Formula Method is the default option therefore to use the Operating Cost Method the employer should have an election in place.
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Instead of gifts, it’s quite common for employers to host a Christmas Party for their staff (often including spouses) at a restaurant.
Where this is the case, the total cost will generally be exempt from FBT provided the per-head cost (dinner and drinks) is kept to under $300 per person. This is known as the Minor Benefits Exemption. To enjoy this exemption the employer must use the Actual Method for valuing FBT meal entertainment. The Actual Method is the default method for valuing meal entertainment, and no formal ATO election is required to use this method. Under the Actual Method, an employer pays FBT (in the absence of an exemption) on all taxable meal entertainment provided to employees and their associates such as spouses (entertainment provided to other parties such as clients, contractors, or suppliers is exempt from FBT). The downside of using the Minor Benefit Exemption is that the meal entertainment is not tax deductible, and nor can you claim a GST credit.
This Minor Benefit Exemption is not available if you elect to value your meal entertainment under the alternative 50/50 Method. Under this method, you pay FBT on only 50% of all taxable meal entertainment provided to employees, spouses AND third-parties such as clients/contractors/customers etc irrespective of the cost. Likewise, you can only claim a 50% income tax deduction and 50% GST credits on such meal entertainment. However, as stated earlier, with the FBT rate now at 49%, the 50% tax deduction and 50% GST credits available under the 50/50 Method is unlikely to provide a better after-tax result than the Actual Method where no FBT is payable.
The ‘take-home message’ is that if like many employers the only social functions you host for employees during the year are a Christmas Party (and perhaps the Melbourne Cup), be conscious of keeping the per-head cost under $300. By doing so, you may be able to exempt the entire cost. One of the more common fringe benefits provided to employees is an expense payment fringe benefit. These may arise in either of two ways.
- Where the employer reimburses the employee for expenses that incur, or
- Where the employer pays the third-party supplier (e.g. shop) directly in satisfaction for expenses incurred by the employee.
The expenses paid for or reimbursed can consist of basically any goods or service including work related items such as laptops or private expenses such as health insurance premiums. Fringe Benefits Tax (FBT) may however arise unless the expense would have been deductible to the employee had they incurred it themselves, or unless the employee made an after-tax employee contribution to the cost of the benefit, or unless the expense is exempt from FBT such as where:
- The employer reimburses the car expenses of a car held by an employee on a cents per kilometre basis
- The employer pays for or reimburses an employee for Living Away From Home accommodation
- The employer reimburses or pays for car expenses in respect of a car held by an employer
- There is a provision of certain work-related or other benefits such as newspapers, costs incurred in relocating an employee, and employee health benefits such as compassionate travel.
Employers should consider whether an item you wish to provide to employees (i.e. expense you wish to meet on their behalf) is an exempt benefit, or will be deductible to them if they had paid for it themselves If so, employers will reimburse the employee or pay directly pay the third-party who provided the goods or services. On the other hand, if the benefit is not exempt or would not be deductible to the employee had they incurred it themselves, or they have not made an after-tax employee contribution to the benefit, then employers should consider paying the amount as an allowance to the employee instead. This is because in most cases the employee will pay a lower marginal rate of tax on the allowance that the 49% FBT rate. The employee will only pay an equivalent rate of tax on such an allowance where their annual taxable income is more than $180,000