FBT tip for Xmas time
When holding Christmas parties, employers are generally liable to pay fringe benefits tax (FBT) on the cost of food and drink (meal entertainment) which is provided to employees and their families*.
Note (*): FBT does not apply to meal entertainment provided to clients and suppliers.
However, if the employer calculates its FBT on the 'actual' basis (i.e., rather than the 50/50 formula method), then it may be able to completely eliminate this FBT liability using the 'minor benefits exemption'.
Generally speaking, if the value of the Christmas party provided to an employee or family member is less than $300 per head, it may be exempt from FBT as a 'minor benefit'. This can also apply to gifts made to employees and family members.
Surprisingly, for the purposes of the $300 minor benefit threshold, the following tips should be considered:
- where a benefit is provided to both an employee and their family member (e.g., a spouse), the benefits are applied separately to the $300 threshold; and
- where a gift is associated with a Christmas party (e.g., it is provided at the party), each benefit (i.e., the gift and the party) is applied separately to the $300 threshold.
Example
An employer holds an external Christmas party for employees only.
The cost of food and drink per person is $260.
Employees with spouses are given a gift voucher
(for their spouse), to the value of $150.
Assuming the actual method is adopted:
- for all employees attending the party – FBT is not payable on the food and drink because each separate benefit is less than $300 (i.e., the benefits are not aggregated); and
- for employees with a spouse – no FBT is payable on the voucher.
As a result, no deduction is allowed for the entertainment, however, the voucher is deductible*.
Note: No deduction is allowed for any GST input tax credit that can be claimed.
Christmas gifts
Clients often ask what are they allowed to give away as Christmas gifts. Well briefly . . .
The following types of gifts are not considered to be entertainment and are therefore deductible:
- a Christmas hamper, a bottle of whisky, wine, etc.; and
- gift vouchers, a bottle of perfume, flowers, a pen set, etc.
Examples of entertainment gifts include tickets for sporting events or the movies, and holidays.
Briefly, the general FBT and income tax consequences for non-entertainment gifts are as follows:
- gifts to employees and family members – FBT is payable (except where minor benefit exemption applies) and a tax deduction is allowed.
- gifts to clients, suppliers, etc. – no FBT, and a tax deduction is allowed.
Medicare levy surcharge update
The Government has compromised to get its Medicare levy surcharge thresholds Bill passed, which finally became law on 31 October 2008.
The Government has increased the Medicare levy surcharge threshold to $70,000 for individuals (with annual indexation) and to $140,000 for families (to be twice the individual rate in future years).
Taxpayers whose income exceeds the threshold normally only have to pay the Medicare levy surcharge if they (and their dependants) do not have private patient hospital cover for the full year.
However, transitional arrangements will apply so that taxpayers who obtain private health cover before 1 January 2009 can avoid the surcharge for the period 1 July to 31 December 2008.
Overseas holidays deductible!
The following case shows that even unusual claims can be successful, as long as you are able to get your evidence in order, and can show a clear connection between an expense and your income earning activities.
The taxpayer was a sales consultant in a travel agency who undertook domestic and overseas travel during the 2004/05 tax year, including a round the world trip and a trip to the USA.
He claimed a tax deduction for his travel expenses of $9,985, but the claim was eventually disallowed by the Tax Office after an audit.
The taxpayer's argument
His primary reason for taking the particular flights that he did was because his employer expected employees to travel on their own time. Also, by using a particular round the world ticket offered to his travel agency exclusively, he came to understand its benefits and how to make the ticket “work for customers much better”.
After travelling on the ticket and having the knowledge and confidence to recommend it, he said he “sold literally hundreds of them”, which provided good bonuses to him.
The Tax Office's argument
The Tax Office conceded that the experience gained on the overseas trips would likely have benefited the taxpayer to some extent in his occupation as a travel agent. However, the trips undertaken were 'holidays'. Also, while overseas, he did not visit a single travel agency to see how they did business.
The Decision
The Senior Member of the Tribunal stated that the trips clearly assisted the taxpayer in his occupation as a travel agent, that they were not simply holidays, and that he did not need to visit any travel agencies as he was a sales consultant employed to sell holiday related travel products.
In addition, his remuneration increased overall each year, largely because of the receipt of bonuses.
Therefore, "none of (his) overseas travel expenses were of a private nature" (even though he spent three days out of seven in a town in Spain in which he had relatives), but the claim of $9,985 was reduced to $8,337 basically due to problems with substantiation (e.g., receipts).
FBT on laptops and GPS receivers
The Tax Office has confirmed that, after the Government's changes to the FBT laws from 13 May 2008, a GPS navigation receiver provided to an employee can be a 'portable electronic device' and can therefore be exempt from FBT as an 'eligible work related item'.
Also, a laptop provided to an employee can still be 'primarily for use' in their employment, and exempt, even if they sometimes use it for private purposes and the employer has no private use policy.
Medicare benefit tax statements now available online
Taxpayers can now access their Medicare benefit tax statement on the internet, via Medicare Australia’s Online Services. Those not registered for Online Services are encouraged to register now so that they can get their Medicare benefit tax statement online when they need it, via the internet at medicareaustralia.gov.au/online or by visiting their local Medicare office.
The Medicare benefit tax statement will help people claim the net medical expenses tax offset as it contains information on medical services and expenses claimed in the previous financial year.
First home saver accounts (FHSAs)
The ATO has provided a Fact Sheet on its website regarding first home saver accounts which financial institutions are now providing.
Please contact us if you would like us to provide more detailed information.
Why open an FHSA?
Basically, the government will contribute a certain percentage/amount into the FHSA provided the taxpayer is eligible for the concession.
Taxpayers can receive a tax-free amount of up to $850 in 2008/09 (calculated at the rate of 17% of contributions (up to $5,000) made to the FHSA.)
Taxpayers must make contributions (from after-tax income) of at least $1,000 for each of four financial years (not necessarily consecutive) before they can withdraw their money. Other people can contribute to the account.
Earnings on FHSAs are only taxed at 15%, and the account provider (bank) is liable to pay it.
If a taxpayer decides not to go ahead with buying or building their first home, they must contribute the funds deposited to the FHSA into their superannuation fund.
What about the First Home Owners Grant?
Taxpayers are still entitled to apply for a First Home Owners Grant if they decide to open an FHSA.
Superannuation and Business Real Property
Trustees of SMSFs are generally prohibited from acquiring assets from related parties and may only maintain 'in-house assets' (i.e., assets involving dealings with related parties) when their value is less than 5% of the total value of the fund’s assets.
An exclusion from both of these requirements applies in relation to 'business real property'.
When considering whether or not a particular property is business real property, most trustees usually need guidance regarding the 'business use test', which requires that the real property be ‘used wholly and exclusively in one or more businesses’ carried on by any entity.
A new draft ruling released by the ATO to assist trustees contains a number of examples that highlight the importance of understanding business real property, including the following.
Business real property examples
Letting holiday flats – no business
Ms Hend owns two holiday flats, which she lets for short-term accommodation at a popular holiday destination. Ms Hend and her partner manage and maintain the flats, which includes cleaning and repairing the flats, and financial tasks such as banking.
Ms Hend and her partner set up the Hend Super Fund and both become members of the fund. They propose that the Hend Super Fund acquire the flats from Ms Hend.
The elements of repetition and continuity of acts and transactions indicate the possibility of there being a rental property investment business being carried on.
However, the scale of the operation is such that it is not considered to be a business.
As there is no business conducted in respect of the premises, the property is not business real property, and so the Hend Super Fund cannot acquire the flats from Ms Hend (a related party).
Bed and breakfast – business
Dean Lamont owns a house with five bedrooms and two living areas. He uses one of the bedrooms himself. The other four bedrooms are let year-round as part of a bed and breakfast business. One living area is set aside for the exclusive use of guests. Breakfast is included in the room cost and other meals are available by arrangement.
Dean advertises his rooms with Worldwide B&B Internet bookings agency. Dean has a business plan, pays tax, and has three permanent part-time employees. The business has operated since Dean acquired the house 17 years ago.
In this case, a business is being carried on. Dean's non-business use of the property is incidental and relevant to that business. Therefore, the property is used 'wholly and exclusively' in the business and is business real property.
Genuine redundancy payments
The Tax Office has issued a ruling that shows that even taxpayers who operate their own business (through a company or trust) can be paid out "genuine redundancy payments" which are concessionally taxed.
Example: Husband and wife company
Edsel Design Pty Ltd provides car design services to Aussie Autos. Bill and Mary Edsel are directors of Edsel Design, which employs 20 people in its operations. Bill is the Administration and Marketing Manager and Mary is the Design Manager.
After several years of losses, Aussie Autos decides to cease operations.
As Aussie Autos is Edsel Design's sole client and other opportunities are not realistically available, Bill and Mary also decide to cease the operations of Edsel Design.
Redundancy payments are made to all employees, including Bill and Mary, equal to eight weeks pay over and above unused leave entitlements. None of the employees is entitled to redundancy payments under their employment arrangements.
The ATO accepts that the payments may be treated as genuine redundancy payments as it is clear that Bill and Mary's employment terminated because of redundancy. In their capacity as directors, they had no real choice but to terminate their own employment along with the other employees.
