If you have ever heard anyone query whether FBT audits actually exist, 2018 may be the year this urban myth will be retired. Recently the ATO indicated it is intending to ramp up its audit of FBT, particularly in the area of motor vehicle expenses and we expect to see an increase in compliance activity across the board.
A range of initiatives in addressing FBT treatments is now under the microscope and this is not just FBT for motor vehicles. The ATO is looking at a range of initiatives that will have considerable FBT impact for many businesses. The changes currently being considered will apply across a wide range of organisations, plus specific rules for certain industries or employer types and our message is brace for change. Even the treatment of Uber is under the microscope and we can expect amendments to the legislation to support this.
Whether you are an expert in FBT or tackle it once a year it is a great time to understand where the increases in compliance activity are more than likely going to appear, as well as be across this year’s changes.
We have engaged FBT expert, Paul Mather of FBT Solutions to host a workshop and series of follow up webinars on managing 2018 FBT and working out your game plan. This includes free access to the FBT Query service until 30 June 2018.
Here we tackle some of the trickier areas to review in Entertainment FBT treatments
Let the 2018 Entertainment FBT challenge begin – things to consider:
- It’s not just about FBT, there are interactions with Income Tax and GST that require consideration and ultimately reconciliation;
- The need to separate the sustenance (deductible) from the entertainment;
- There are 3 different types of defined Entertainment that require separate analysis, FBT valuation and FBT reporting;
- For meal entertainment and entertainment facility leasing expenses, there is a valuation choice between 50/50 and actual method (subject to adequate records being maintained);
- When valuing meal entertainment using the actual method; consideration can be given to claiming the FBT exemptions for on-premises entertainment and minor benefits exemption; and
- For recreational entertainment, the 50/50 valuation method is not available. However, consideration can be given to claiming the minor benefits exemption.
Where to start?
A review of general ledger transactions should be undertaken based on a trial balance review. The following general ledger codes should be reviewed:
- entertainment expenses (deductible or non-deductible)
- staff functions
- food expenses (for example, sustenance, morning teas, food and beverage)
- staff awards
- travel expenses
- any codes with ‘FBT’ or ‘no FBT’ in the title
- staff amenities
- other administrative expenses
- miscellaneous expenses
- marketing & sales expenses
- conference expenses
- promotional expenses
Some of the specific challenges:
1. Sustenance versus Meal Entertainment
Try to understand how your organisation has distinguished between sustenance and meal entertainment on a day to day basis, from both a policy, accounting and tax perspective. Sample testing of transactions is a good way to see if you can rely on the general ledger postings and coding rules. Importantly, in undertaking the sample testing, it is necessary to analyse how the coding/posting takes in to account:
- whether any $ thresholds have been applied;
- on-premises versus off-premises costs; and
- distinguishes between expenditure that is travel versus non-travel related (which is often impacted by the attendee types)
2. Staff functions and parties
Some tips when reviewing expenses for staff functions and parties:
- understand the substance of the event and the attendees (who attended – just employees or did spouses/clients also attend?);
- it will be necessary to analyse the costs and where applicable, split the costs between meal entertainment, entertainment facility expenses and recreational entertainment;
- if using the actual method, can you confirm if the minor benefits exemption (less than $300 including GST per head cost) applies?;
- don’t forget deposits or security bonds that may have been paid earlier – these will impact all of the above; and
- were there other related costs such as – accommodation, meals, taxis, flights, parking, gifts, etc.
3. Travel meals
Always a challenge to review. Here are some tips when reviewing travel meals:
- never assume the meal costs are automatically deductible and do not constitute sustenance;
- understand the attendees and their role / relationship to your company. For example, when a non-travelling employee or client dines with a travelling employee, then there will be FBT and deductibility issues to consider;
- don’t assume that the consumption of alcohol with a meal automatically categorises the expense as entertainment;
- understand what information has been provided with the employee’s expense claim to help determine the tax implications; and
- bar tabs (drinks at the bar) would generally always constitute meal entertainment.