Fringe Benefits Tax; Can the Commissioner of Taxation use his General Powers of Administration to improve fairness and efficient administration of the act?
The Fringe Benefits Tax year ends on March 31st with return due in May; if you need help of advice with your Fringe Benefits Tax obligations please get in contract with our Tax Experts Here.
Fringe Benefits Tax – the problem
Fringe Benefits Tax has the worst compliance of any tax administered in Australia with a 22-26% tax gap (tax that should be collected but is not) according to the Australian Tax Office.
History (introduction of FBT)
Fringe Benefits Tax’s Orgins can be traced back to the Asprey Report in 1975[1] however the Government of the time did not action any of the recommendations, it was not until 1985 when the Hawke Government started to take the recommendations seriously. FBT was introduced in July 1986. At the time a series of reforms were passed, on the one had dropping taxes primarily decreasing the personal tax rates, the top marginal rate was dropped from 60 per cent to 49 per cent[2] amongst other adjustments. To make this work it was the intention to close perceived or real loop holes to fund these tax rate drops. The Introduction of FBT was one of the loop holes that was closed, although how it met the stated policy goals at the time of making the tax system simpler or fairer or the Asprey principles of “fairness (or equity), efficiency (or neutrality) and simplicity”[3] is not clear.[4] They also introduced Capital Gains Tax as part of the same series of tax reviews and new legislation. At the time the Business Council of Australian objected to FBT on the basis would increase business costs.[5]
Prior to this point Employees frequently had non cash benefits like meals and cars built into their employment package. These costs were tax deductible for the employer and had no tax impact for the employees. The introduction of FBT had a drastic impact on sectors of the economy that benefitted from this policy setting like CBD restaurants.[6]
Background
- Legislation The Fringe Benefits Tax Assessment Act received royal assent on 24 June 1986 and came into effect on that day[7] and the Commissioner of Taxation has responsibility for administering the act “The Commissioner has the General Administration of this Act” [8]
The right to set laws like this is embodied in the Constitution stating that the Governments will “have power to make laws for the peace, order, and good government of the Commonwealth with respect to:
…taxation; but so as not to discriminate between States or parts of States;…”[9]
The Commissioner is appointed by the Governor General of Australia[10] as head of the ATO, and he has a range of responsibilities when discussing Administration of the Fringe Benefits Tax laws and the Tax System more generally one of his important responsibilities is the obligation to use Public monies and resources and an efficient and fair manner.
Application & Administration of the Fringe benefits Tax Act
- Who does the Act apply to?
Fringe Benefits Tax applies to Employers (of any size or type) as s 5 states “Tax is imposed in respect of the Fringe Benefits…of an employer” According to the ATO there are around 1 million in employers in Australia[11] who collectively paid 3.5 Billion dollars[12] in FBT in the 20-21 year. This has increased from 3.3 Billion in the 1998-1999 year[13]
In practice it is mainly companies that are liable for FBT, particularly in the Small and Micro business sector were the owners of the business would be the main ones being provided Fringe Benefits. Where owners carry out businesses as Sole Traders, Partnerships and Trusts the owners will not be Employees of their business being paid by profit distribution instead (and so the Fringe Benefits Tax regime does not apply to them). Often Fringe Benefits paid for by these business types are captured and by the general prohibition is s 8-1(2)[14] in the 1997 Income Tax Act which prohibits against claiming for expenses that are “private or domestic”[15] in nature along with associated case law. (the prior 1936 Act contained the same wording prohibiting private and domestic claims in section 51(1) of the act)
The 1997 Act also applies to Companies and so this same prohibition on claiming private & domestic expenses could also apply to Companies but there is an argument that Companies do not have private or domestic expense this was confirmed in case S74[16] where it was held that the concept of a company or a trust having a private or domestic purpose was not tenable, this opens the door for a range of possible claims within Companies that would be prohibited by the negative limb in s 8-1(2) for example:
- School Fees
- Private Expenses paid on behalf of employees by their employer
- The private portion of company assets
- Private subscriptions paid by the employer
Thus payments of this nature are able to be claimed but Companies but are caught as an Expense payment[17], Entertainment[18] or other benefit by the FBT Act.
Section 32 of the 1997 Act[19] prohibits Companies (or any taxpayer) from claiming Entertainment Expenses prior to the 1997 Act s 51AE of the 1936 Act operated in a similar way. However s 32-20 specifically allows for entertainment claims “to the extent that you incur it in respect of providing * entertainment by way of *providing a * fringe benefit.”[20] Further confirming that these expenses would be prohibited but for the existence of the FBT Act.
One of the ways that the Commissioner can clarify and (potentially) simplify the way tax laws apply is by issuing Public, Private or Oral Rulings. The idea is that this power can be used to clarify the law and the way the Commissioner applies it “so that the risks to you of uncertainty when you are self assessing or working out your tax obligations or entitlements are reduced.”[21] Once issued a ruling binds the commissioner[22] and he must apply the law in the way set out in the ruling. When following a ruling taxpayers are protected from increases in tax, penalties[23] or interest charges[24] where they have followed a ruling.
- Administrative advice
FBT “Fringe benefits tax – a guide for employers”[25] claims to be “This Guide is our most comprehensive guide to FBT” but taxpayers can not rely on it; it does not bind the FCT – from the first page of the guide: “If you follow our information and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we will take that into account when determining what action, if any, we should take.”
Guide vs Legislation
The FBT Act is quite detailed in terms of it’s application covering the rules of what is taxable as well as administrative details like the need to lodge returns[26], due dates, payment is FBT Instalments in advance.[27]
The Act also contains detailed rules around how the act will apply like the statutory method of calculating car use[28] The ATO has also advised the Inspector General of Taxation during his review into Employer Obligations that it was considering two areas identified by the SHWG which may benefit from additional guidance, on of these was being practical examples on:
“ • the level of infrequent/minor use that is acceptable for ‘exempt’ vehicles;…”[29]
I believe that PCG 2018/3[30] is the end result of this recommendation.
PCG 2018/3 is a guide and does not bind the commissioner in the same way as a tax ruling, it is a good example of the way the commissioner uses his allocation of resources in general administration of the tax act and is a good example of the issues in administering FBT, this ruling assures taxpayers that the commissioner will not allocate compliance resources to their case if they follow this guide[31].
The guide involves the way FBT applies to private car use;
The guide applies to a narrow band of possible applications as set out in paragraph six of the ruling the Commissioner restricts application of this guide to a narrow band of possible applications.[32]
Basically what the guide is saying is that if an employee uses a company car (as opposed to one they salary sacrifice or lease through their employment) which is also under the car threshold and they meet these rules then they can ignore any private use of the vehicle:
“(f) your employee uses the vehicle to travel between their home and their place of work and any diversion adds no more than two kilometres to the ordinary length of that trip, and
(g) for journeys undertaken for a wholly private purpose (other than travel between home and place of work), the employee does not use the vehicle to travel
(i) more than 1,000 kilometres in total, and
(ii) a return journey that exceeds 200 kilometres.”[33]
The Commissioner then sets out a range of examples where an employee diverts too and from work and uses their work car for private purposes. In one of them the employee use their car to go away to the beach with a round trip of over 200kms[34]
Lets say for example that this trip was 300km using the c/km method to attribute a cost to this travel for simplicity (the law would actually require NEED EXACT) gives a value of $216 (72c/km).
- Was it really worth writing a compliance guide about this situation? How often will this guide provide certainty and ensure the FBT laws administered by the Commissioner apply…so that the risks to you of uncertainty when you are self assessing …are reduced?[35]
- How would the Tax Office ever pick a single 300km trip to the beach by an employee using their company car in a compliance or audit situation?
Tax Gaps in more detail.
One of the ATOs main goals is to “We build community confidence by sustainably reducing the tax gap and providing assurance across the tax and superannuation systems”[36]
The Fringe benefits tax gap is estimated to be around 22% currently which is the largest tax gap measured on a % basis. (see table below)
Despite this there is no mention of Audit activity in the FBT area on the Commissioners Annual report. I was unable to find any reference on the ATO website to any audit activity relating to Fringe benefits tax either past or proposed. Personally, I have been involved in hundreds of Tax reviews and Audits, some of these reviews were of clients that had potential FBT liabilities in the tens of thousands of dollars; despite this FBT was never mentioned. Is this perhaps an example of the FCT telling his auditors where to wave their metal detectors and where not to waive their metal detectors?
Inefficient tax
Is this an example of the FCTs deliberate application of GPA? Or is it a mistake
What is the commissioners purpose – ie to collect tax in the most effective manner $ of compliance vs ensuring rules are enforced and integrity of the system (is it fair ) – – what source can I take from this?
If so can we rely on admin practices ruling ?
Should the ATO issue an Admin Ruling -> reading https://www.ato.gov.au/law/view/document?docid=PSR/PS19981/NAT/ATO/00001
Commissioners Difficulty in Administering the Act
Fringe Benefits Tax is a relatively complex tax; There are three possible populations of FBT payers 1. Those who are paying their correct FBT Tax; 2. Those who are paying tax but incorrectly and 3. Those who should be paying but are not.
the majority of possible tax payers by number are small businesses; 59,567 FBT Taxpayers in the Small and Micro business sectors in 2020 vs only 5598 in the large business sector.[38] The Small and Micro business sectors are hard to conduct compliance on just by their sheer numbers. In terms of compliance with other taxes for these segments the commissioner rely’s heavily on data matching and computer algorithms to identify possible breaches of the law within the market segment (NEED Ref). The issue with FBT is that he cannot rely on these same measures as many FBT compliance issues are behavioural not numbers driven, for example private use of a motor vehicle and others do not have a correlation to numbers on tax returns or other data that could be used as part of Data matching.
Because of the nature of Fringe Benefits Tax “the recent ATO risk based approach to compliance… particularly those aimed at shifting compliance activities upstream to address risks earlier.”[39] Taxpayers are also having trouble with FBT, “the cost of complying with FBT requirements, particularly when compared to the amount of FBT revenue raised. Stakeholders have also observed that such costs are disproportionately high for small employers.”[40]
Many Fringe Benefits could only be identified as an Audit and even under Audit some may be hard to detect; certainly extensive time would need to be allocated. For example payment of personal expenses in amongst thousands of business related transactions or interviews about car use along with analysis of log books; diaries and other source evidence all take time to complete.
Needs to be allocated against the commissioner’s duty to allocate is resources NEED REF HERE RE $
Is it meeting other tests – fair & reasonable/ integrity of the system?
When FBT was brought in it supposedly referenced “fairness, efficiency and simplicity”[41] as it’s goals, it is very hard to see how the legislation meets these goals today in retrospect. It is important to note that fairness is one of the measures, because of the issues discussed it could be that less than 50% of Fringe benefits taxpayers are paying the correct amount of tax. This is hardly fair.
The Commissioner states that his role is “making it easy for the community to understand and comply with obligations”[42] The FCT also states in his 20-21 annual report that “We design for a better tax and superannuation system to make it easy to comply and hard not to”[43]
The complexity of Fringe Benefits Tax and general lack of knowledge both in tax payers and tax professionals is an issue as is the fact that compliance is so poor. The low compliance in this area is likely to reduce confidence in the ATO[44] and in reducing confidence in the ATO this is also like to reduce compliance in the overall tax system. [45]
Education
FBT Tax Payer Alerts 7 in all of history; “Alerts commonly address schemes or arrangements that go beyond the policy intent of the law or involve deliberate approaches to avoid any type of tax or superannuation obligation.”[46] I do not believe the lack of compliance in FBT is a deliberate approach to avoid tax but more apathy and lack of knowledge overall. I think that Tax Alerts could be used as part of a strategy to lift tax payer awareness and re-focus taxpayers and intermediaries on the importance of meeting their compliance requirements.
For small business FBT becomes a “voluntary tax” disadvantaging honest tax payers
The Tax Payers Charter sets out certain (Aspirations? CLARIFY)– the Charter does not have the force of law but it does say that Taxpayers can expect the ATO to be fair and reasonable with them. Applying the law to only XYZ % of taxpayers can not be seen to be fair to these tax payers who either lodge and pay FBT willingly or who are forced to pay FBT by Compliance and Audit Activity. This is particularly marked for Micro and Small Business Tax Payers. Only 0.32% of Micro tax payers are lodging FBT returns based on lodgement data from the tax office (see Appendix A). When compared to businesses in my last practice and my current practice (over 20,000 clients in total across Individuals, Micro and Small Business) this seems extremely low. In these practices we were loding FBT returns for around 5% of all business clients and this well below the total number of clients with potential FBT liabilities. I would estimate at least 15- 20% of business clients were required to lodge an FBT return or take other action to avoid FBT such as making employee contributions or declaring dividends to cover the value of fringe benefits received.
Cost of professional advisers to educate & enforce
Due to the lack of enforcement and education from the FCT Fringe Benefits Tax is left to be enforced by Tax Professionals. The majority of tax payers lodge their FBT returns through Tax Agents[47] however many tax agents lack the required knowledge to accurately complete these returns.[48] Many small practices also struggle for time, having issues meeting their core task of lodging tax returns on time (KPI REF NEEDED)
Tax Agent Services Act
Managing the compliance of what the Tax Office calls “volume markets” of Individuals and Small Business are challenging from a compliance point of view due to the sheer volume of numbers. One of the ways that the ATO manages this is to manage what they describe as intermediaries, primarily registered tax agents.
In recent times the ATO has focused strongly on this area, conducting a range of compliance work with Tax Agents that they consider to be doing the wrong thing, they do this by enforcing the Tax Agent Services Act 2009 Cth (TASA) the TASA received royal assent on 26 March 2009 and commenced operation on 1st March 2010.[49] The TASA brought into existence a national body for registration of tax Agents; The Tax Practitioners Board. Prior to this Tax Agents were registered by state based boards.
The TASA places various obligations on Registered Tax Agents[50] particularly relevant to the Tax Office’s compliance activities in this area are:
S 30-10
“ … (7) You must ensure that a *tax agent service that you provide, or that is provided on your behalf, is provided competently.
(8) You must maintain knowledge and skills relevant to the *tax agent services that you provide.
(9) You must take reasonable care in ascertaining a client’s state of affairs, to the extent that ascertaining the state of those affairs is relevant to a statement you are making or a thing you are doing on behalf of the client.
(10) You must take reasonable care to ensure that *taxation laws are applied correctly to the circumstances in relation to which you are providing advice to a client….”[51]
As well as;
“ …You must advise your client of the client’s rights and obligations under the *taxation laws that are materially related to the *tax agent services you provide….”[52]
The tax office can for example audit a practitioner’s clients in a random or targeted manner; based on their current practices they will do this either based on a relative likelihood of non-compliance[53] or the consequences of any potential non-compliance or a combination of both factors.[54]
Where they ATO find issues they state “In many instances this results from an intermediary’s lack of experience or expertise in managing specific tax and superannuation events. It can also arise from an intermediary having insufficient resources or administrative processes to manage issues within a client base.”[55]
If they do then find regular errors and/or compliance problems refer the matter to the Tax Practitioners Board who can allege that the practitioner has failed to take reasonable care in ascertaining a client’s state of affairs or that they have failed to take reasonable care to ensure that *taxation laws are applied correctly.[56] In the 2020-21 period the Tax Practitioners Board reviewed 1925 cases of possible tax agent mis conduct resulting in approximately 170 practitioners[57] being referred to the conduct committee of these 75 practitioners had their tax agent registrations cancelled as a result and 11 had their registration suspended.[58]
In the 2021 year 369 cases reviewed by the board related to the code items 7,8,9,10,12 discussed above out of a total of 1925, around 19% of cases.[59] Code item 7 (tax agent services are provided competently) alone had 334 cases, with only breaches of code item 1 being more common (act with honestly and integrity).
The ATO’s risk reviews and associated work with Tax Practitioners are not subject to review and tax practitioners have no way to appeal or do anything to intervene of they feel the Tax Office’s compliance activities are un called for or heavy handed.[60]
Tax Board to closely inter related with the ATO – TPB review – Ali’s review
Inter relationship with TASA – ie Tax advisers or the ones that are administering this tax law and in small business space are responsible for educating small business and ensuring compliance if they don’t then they risk breaching TASA sections ? ABC?
Could be better served by more formal GPA advice for example only enforce for large business – but would this have un expected or unfair outcomes?
Alternative to FCT using his General Powers of
The ATO believes that for real improvement in this area legislative change is required[61]
Australia is one of the only countries where the tax on benefits is imposed on the employer with New Zealand being the only other country of note. This ‘employer approach’ has the advantage that it reduces the administration burden on the collection agency by reducing the numbers of reporting and collection points because employers are liable rather than the more plentiful employees. Although other systems, whereby employees are liable for the tax on benefits, are more common overseas, nearly every country taxes benefits.[62]
For example, in the United States and Canada, the benefit is required to be put on group certificates and employees are liable for the tax, the UK has similar rules with material benefits being treated as though they were paid in cash and taxed as normal income.
Originally it could have been easier to just prohibit certain costs, for example prohibiting businesses from claiming lunches and other private expenses, the Government could have also considered more direct penalty regime; for small business the Div 7a regime applies as a possible penalty or prohibition with payments made to small business owners and their associated able to be declared as a Div 7a dividend in essence transferring the tax liability from the business to the owners of the business.
Conclusion
Overall the Fringe Benefits Tax Regime does not seem fit for purpose and particularly in the small and micro business segment compliance is poor. This leave Accountants in an uncomfortable situation; encourage compliance with their clients and in doing so increase their tax burden compared to other businesses in the same industry or ignore the law.
Appendix
Appendix A
|
2020 Year Data |
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|
|
|
|
Returns lodged. |
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|
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|
|
|
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|
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|
|
|
|
BAS |
Hours |
FBT |
Hours |
% Who lodged FBT |
|
Large |
96,696 |
0.10 |
5,598 |
2.90 |
5.79% |
|
Small |
1,097,508 |
0.10 |
30,890 |
10.80 |
2.81% |
|
Micro |
9,004,348 |
0.30 |
28,677 |
24.30 |
0.32% |
The numbers are extracted from these references: [63][64]
[1] Asprey Report, Taxation Review Committee: Full Report, Australian Government Publishing Service, 31 January 1975.
[2] 1985 reform of the Australian tax system, Tilley P, Tax and Transfer Policy Institute, April 2021
[3] Ibid 11
[4] Ibid 8
[5] Tax Package Bias Against Business, The Australian September 1985
[6] The art of power dining, Australian Financial Review, Feb 28th 2014
[7] s 2 FBT Act
[8] s 3 FBT Act
[9] s 51(ii) Constitution
[10] s 67 Constitution
[11] Commissioner of Taxation Annual Report 20-21, Australian Tax Office, 4
[12] IBID Page 58
[13] Fringe Benefits Tax – Australian Taxation Office, The Auditor Generals Office, Cth 1999, 23 [1.1]
[14] s 8-10(2) ITAA 1997
[15] s 8-10
[16] 85 ATC 534 Case S74, Board of Review No. 3 (Australian Taxation Board of Review No3), 30 August 1985
[17] Division 5b FBT Act
[18] Division 9a FBT Act
[19] s 32 ITAA 1997
[20] s 32-20
[21] Taxation Administration Act 1953, Cth s 357-5(1)
[22] Taxation Administration Act 1953, Cth, s 357-1
[23] Ibid s 357(2)(d)
[24] Idid s 357(2)(g)
[25] Fringe benefits tax – a guide for employers, ATO https://www.ato.gov.au/law/view/document?DocNum=0210000075&PiT=99991231235958&FullDocument=true
[26] S68 FBT Act
[27] s 101-113
[28] s 9 FBT Act
[29] Review into the Australian Taxation Office’s employer obligations compliance activities, Inspector General Of Taxation [3.68]
[30] PCG 2018/3 Exempt car benefits and exempt residual benefits: compliance approach to determining private use of vehicles, ATO
[31] IBID [7](b)
[32] IBID [6] (a) – (g)
[33] IBID [6]
[34] IBID [21]
[35] Taxation Administration Act 1953, Cth s 357(1)
[36] Commissioner of Taxation Annual Report 20-21, Australian Tax Office, see Strategic Directives G1 on pg 13
[37] Commissioner of Taxation Annual Report 20-21, Australian Tax Office, page 62
[38] ABS Tax Collected Data https://www.abs.gov.au/statistics/economy/government/taxation-revenue-australia/latest-release#major-categories-of-taxation-revenue
[39] Review into Improving the Self Assessment System, Inspector General Of Taxation, Cth, 7 [4]
[40] Review into the Australian Taxation Office’s employer obligations compliance activities, Inspector General of Taxation [3.62]
[41] ABS Tax Collected Data https://www.abs.gov.au/statistics/economy/government/taxation-revenue-australia/latest-release#major-categories-of-taxation-revenue 11
[42] Commissioner of Taxation Annual Report 20-21, Australian Tax Office, [1.1]
[43] Commissioner of Taxation Annual Report 20-21, Australian Tax Office, see strategic direct G2 pg 19
[44] We measure community perceptions and the level of willing participation, ATO https://www.ato.gov.au/General/Tax-and-individuals—not-in-business/We-measure-community-perceptions-and-the-level-of-willing-participation/ [5]
[45] Factors that influence willing participation by individuals, ATO, https://www.ato.gov.au/general/Tax-and-individuals—not-in-business/In-detail/Factors-that-influence-willing-participation-by-individuals/ various bin in particular see [25] – article is about Individuals not in business, but it is likely similar factors influence business Owners
[46] PS LA 2008/15, ATO, 4. When we issue alerts [6]
[47] Fringe Benefits Tax – Australian Taxation Office, The Auditor Generals Office, Cth 1999 76% of FBT returns lodged via tax agents [23]
[48] Ibid “up to 50 per cent of tax agent prepared tax returns are incorrect” [27]
[49] Tax Agent Services Act 2009 Cth, s 1-5
[50] Ibid s 30-5
[51] Tax Agent Services Act 2009 Cth, s 30-10
[52] Ibid s 30-10(12)
[53] Risk-assessment processes, Australian Tax Office, https://www.ato.gov.au/Tax-professionals/Your-practice/Tax-and-BAS-agents/Risk-assessment/Risk-assessment-processes/ Downloaded 4th November 2021 [3]
[54] Ibid [3]
[55] Ibid [28]
[56] Tax Agent Services Act 2009 Cth, s 30-10 (10)
[57] Tax Practitioners Board Annual Report 2020-21, Tax Practitioners Board, 8
[58] Ibid 36
[59] Ibid Appendix D
[60] Risk-assessment processes, Australian Tax Office, https://www.ato.gov.au/Tax-professionals/Your-practice/Tax-and-BAS-agents/Risk-assessment/Risk-assessment-processes/ Downloaded 4th November 2021 [40]
[61] Review into the Australian Taxation Office’s employer obligations compliance activities, Inspector General Of Taxation, [3.67]
[62] Fringe Benefits Tax – Australian Taxation Office, The Auditor Generals Office, Cth 1999, 29
[63] ATO Cost of Compliance data, https://data.gov.au/data/dataset/taxation-statistics-2018-19/resource/30081de7-5605-43c6-b39a-d324a0eab21f?inner_span=True
[64] ABS Tax Collected Data https://www.abs.gov.au/statistics/economy/government/taxation-revenue-australia/latest-release#major-categories-of-taxation-revenue