Why Fringe Benefits Tax calculation should matter to SMBs
Small to medium-sized businesses can achieve real dollar savings by controlling company expenses through the way Fringe Benefits Tax (FBT) meals entertainment is calculated and managed. But, confusion and challenges lie in implementing the best approach. While many organisations are confident in identifying and applying their FBT, others still struggle to pinpoint the best method for their business resulting in them paying more FBT than necessary.
Method to the Madness
What is so confusing? There are three methods used for calculating FBT for meals and entertainment: 50/50, 12-week register or Actual. As most SMB businesses don’t have the systems in place to analyse the most tax effective FBT calculation method. The Australian Taxation Office (ATO) actually encourages businesses to select the method that results in the lowest FBT payment. But how do you know if you are?
The 50/50 Method
The 50/50 method calculates FBT on 50 per cent of the total taxable value of fringe benefits incurred by providing meal entertainment during the FBT year. Usually the 50/50 method is used when you don’t have all the attendee data. The total meal entertainment expenditure includes expenses that might otherwise be exempt from FBT or not normally subject to FBT.
The 12-week Register Method
The 12-week register method involves tracking the taxable value of each individual fringe benefit. It’s based on the percentage of meals and entertainment provided to employees (vs non-employees) as itemised within a register or log for a 12-week representative period.
The Actual Method
The Actual method is used to calculate the taxable value based on actual expenditure. It is used when you can identify the attendees of the majority of meals and entertainment provided at individual events or the total value of all meals and entertainment during the FBT year.
Understanding FBT on Food and Drink
FBT on food and drink is often an area of contention and causes a lot of stress for many companies, especially when rules rely on analysis that can often be subjective. It’s important you understand why, what, when and where food or drink is being provided. It is important to improve the way you manage and calculate FBT to ensure real dollar savings are achieved making a huge difference to profit margins.
Five FBT Strategies You Should Consider
- Automate the expense management process. This helps determine the lowest FBT liability automatically. It will not only save time but will provide full visibility into expenses and will enforce the travel and entertainment policy to optimise the expense management process.
- Use clear descriptive definitions for meal and entertainment expenses. Over-complicating it will confuse employees and impact the quality of data from both a calculation and compliance perspective.
- Train employees. Ensure employees understand the difference between the travelling and non-travelling employee status as this affects the FBT liability.
- Use an employee master list to ensure data accuracy. Make it simple to search for employee data and avoid multiple versions of the same data.
- Review the FBT reporting method annually. Don’t assume a specific calculation method will always equate to the lowest FBT liability. For example, leverage technology to establish benchmark testing annually against a 50/50 calculation.
What the ATO Wants to See
- Appropriate documentation ‘Appropriate documentation’ refers to a full and robust end-to-end record of forms, receipts and approval processes which allows the company to prevent things from falling through the cracks. A business reason should be provided for why every line item was incurred. In addition, every line item should be documented and supported by an appropriate tax invoice to show that the money has been spent. Logs of items such as mileage must also be kept for FBT purposes, or you could be liable.
- Appropriate checks and controls The ATO often looks to make sure that appropriate checks and controls have been carried out on those completed forms. Typically, these checks are performed by the finance team or outsourced as an audit process to a third party. An example of these checks include making sure there is an appropriate process as well as some type of receipt verification.
By implementing simple strategies today and utilising the right tools achieve the most beneficial FBT calculations, businesses can soon gain clearer insight into company expense and productivity barriers. Knowledge is power.
Written by: Matt Goss