A lot of family businesses think that fringe benefits tax (FBT) is simply another regulatory headache. With the presence of reportable fringe benefits, FBT accounting, registering for FBT and the impact of FBT employee contributions you could be excused for trying to avoid another connected with fringe benefits tax in any way.
However, this does not have to be the case.
FBT is a tax on a person’s salary that is not by way of cash. Why? Because the only time an employee will pay income tax on their salary is if they are paid in cash. So if an employer provided, for example, accommodation to an employee, the employer would achieve a tax deduction (as the payment was connected to an employee) and the employee would not pay tax at all.
This gave rise to the potential of tax avoidance.
The remuneration of an employee by salary packaging fringe benefits does not only have a tax advantage. There are multiple persons who are interested in a person who has higher income levels including superannuation surcharge, child maintenance and pension entitlements.
The introduction of reportable fringe benefits effectively ensured that a person’s total salary was properly disclosed to these other interest agencies. So while the income tax was not affected, other connected persons were able to get a true perspective.
As family businesses compete for top-level talent, the need to remunerate staff tax effectively increases. And fringe benefits tax and reportable fringe benefits are effectively connected to privately enjoyed benefits.
As an employer, you can provide your staff with business-related remuneration that will fall outside the FBT categories and reduce your overall compliance burden. For example, an employer can provide a staff member with work-related travel, smartphones, laptops and professional subscriptions without incurring fringe benefits tax or being required to disclose this on the employee’s annual PAYGW reports.
The presence of these “work-related items” is part of the normal cost of employment for many family businesses in Perth. However, the primary takeaway point here is that items like that discussed are typically tax deductible for businesses.
There are also many ways you can salary package medical expenses to assist employee remuneration structuring.
While you can salary package “standard” work-related items, you can also salary package items that are “otherwise deductible” for employees.
This is of benefit as the adjusted taxable income for an employee will typically exclude the tax deductions associated with many items that are tax deductible.
The most notable of these items relates to rental property expenses.
Tom earns $300,000 a year as a medical practitioner. He also has negatively geared rental properties that cost around $60,000 to hold. So Tom’s net taxable income is now $240,000.
If Tom chooses to salary sacrifice his rental property expenses with his employer the option is that the employer pays a salary of say, $240,000, only. And as the rental properties have been already claimed as a tax deduction (through his work) Tom now shows his taxable income as $240,000.
The significant benefit is that Tom will no longer have to pay the superannuation surcharge on his contributions into his SMSF. So he would ordinarily incur an additional tax liability of $3,750 in the SMSF but some smart tax advisory has completely eliminated this cost.
The most common salary packaged fringe benefit for Perth family businesses are motor vehicles.
The advantage in this instance is that the Tax Office calculate the FBT liability using an arbitrary formula so that only a small amount of the car becomes deemed business use. Now the way this is calculated is convoluted but it is fair to say that the net deemed business use is not significant.
So most employees who are provided with a car maintain a motor vehicle log book. And if the employee is legitimately using the car the log book will almost always create a better outcome.
The presence of online calculators for this area of law is sadly lacking. Many FBT salary sacrifice companies are effectively forcing you to buy a car from them – so the use of their car calculators typically includes a value for their fees and so forth.
Further, the net benefit incurred is intrinsically related to the estimated ongoing costs of ownership and the salary of the individual.
At Westcourt we offer a free salary sacrifice calculator for motor vehicle fringe benefits. Many family businesses will typically use this tool to assist with talent management or just considering if you want to go down the reportable FBT rout.
If you contact our office we are happy to provide it free of charge.