Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)General Outline and Financial Impact
Entertainment
Amends the fringe benefits and income tax laws to:
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- allow an employer who provides 'meal entertainment' benefits to choose one of three methods to determine the fringe benefits tax (FBT) liability on the cost of 'meal entertainment' provided to employees. These methods are a ratio based on 12 weeks of record keeping, a 50/50 split or actual expenditure;
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- make it clear that corporate boxes and other similar hospitality arrangements are not treated as 'business premises' thus ensuring that food and drink consumed by employees and their associates on those premises will be subject to FBT;
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- provide that a 50/50 apportionment may be applied to leasing or hiring costs of corporate boxes and other similar hospitality arrangements to determine what amount will be subject to FBT.
Date of effect: 1 April 1995.
Proposal announced: Treasurer's Press Release of 24 February 1995.
Financial impact: The proposed measures will have a small but unquantifiable cost to revenue.
Compliance cost impact: Employers have been particularly concerned about the compliance costs involved in determining their liability to FBT on entertainment provided to employees. The main difficulty has been the application of the law to many situations where meal entertainment may occur. The compliance costs in this area will be reduced by providing employers with three options for determining the FBT liability.
The 50/50 apportionment method is the most simple to apply. Under this method it will be accepted that 50% of the total meal entertainment expenditure incurred by an employer will be subject to FBT, with the balance being non-deductible for income tax purposes.
The 12 week record keeping method provides that the apportionment of total expenditure can be based on a register which needs to be maintained by the provider of meal entertainment benefits for a representative continuous 12 week period in an FBT year. A new register will have to be kept every 5 years or if total expenditure varies by more than 20 percent.
The 50/50 apportionment method will reduce compliance costs. It will remove the need for employers to maintain records to split entertainment expenditure between employees and associates and non-employees who receive food and drink under these arrangements.
Living away from home allowance
Amends the fringe benefits tax law to modify the conditions that must exist before an allowance received by an employee will be a living away from home allowance (LAFHA) fringe benefit. Changes will also be made to the definitions of 'exempt food component' and 'exempt accommodation component'. These are the amounts by which the taxable value of a LAFHA fringe benefit can be reduced.
Consequential changes will be made to the exemption for accommodation and food provided to employees living away from home where the benefit is provided by way of expense payment fringe benefit or residual fringe benefit or property fringe benefit. These amendments will complement the changes made to the LAFHA fringe benefit provisions.
Date of effect: 1 July 1995.
Proposal announced: This measure was announced in the Treasurer's Press Release of 24 February 1995. Subsequently, the 12 month rule has been extended to 2 years for those employees living in remote areas and removed for those employees who are living at the work site on a "fly-in, fly-out" basis. The date of effect has been postponed from 1 April 1995 to 1 July 1995. These changes have not been announced previously.
Financial impact: The measures will have an unquantifiable effect on revenue.
Compliance cost impact: Simple and certain rules about when an employee is considered to be living away from home will significantly reduce compliance costs. Time limits for when an employee is taken to be living away from his or her usual place of residence will remove the uncertainty that has existed on this issue. The guidelines issued by the Commissioner of Taxation in Taxation Ruling MT2030 have been difficult for many employers to apply.
The need for an employer and employee to provide appropriate documentation to verify the time that an employee will be living away from his or her usual place of residence will impose a small additional compliance cost.
The terms 'exempt food component' and 'exempt accommodation component' will be redefined so that these amounts can be more easily determined:
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- the amount of 'exempt food component' has been particularly difficult to calculate. This calculation will be simplified.
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- the definition of 'exempt accommodation component' will be amended so it will also be more easily determined, i.e., it will be the amount actually incurred by the employee on accommodation. However, before the taxable value of a LAFHA fringe benefit can be reduced the amounts will need to be fully substantiated. This substantiation requirement will lead to an increase in compliance costs but it is necessary to maintain the integrity of the measure.
Car parking benefits
Amends the fringe benefits tax law to:
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- provide that the taxable value of a car parking benefit may be determined under an 'average commercial parking station' method;
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- ensure that a car parking benefit can only arise where there is a 'commercial parking station' within a 1 km radius of the employer's premises which charges more than $5 a day at the start of the FBT year;
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- allow an employer to choose one of three methods to calculate the number of car parking benefits provided in a year, i.e., the statutory formula method, the 12 week record keeping method or the number of actual benefits provided; and
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- make consequential amendments to section 51AGB of the Income Tax Assessment Act 1936, which provides for the deductibility of car parking expenses to self-employed persons.
The Bill will also make a technical correction to section 58G of the Fringe Benefits Tax Assessment Act 1986 to ensure that car parking benefits provided to the employees of government public educational institutions are exempt from fringe benefits tax.
Date of effect: 1 April 1995 for all the measures other than the amendment to section 58G, which will be effective from 1 April 1993.
Proposal announced: These measures were announced in the Treasurer's Press Release of 24 February 1995, except for the amendment to section 58G which has not been announced previously.
Financial impact: The cost of these measures is estimated at $76 million in 1995-96 and $62 million in each later year. The amendment to section 58G will have no financial impact.
Compliance cost impact: As a result of these amendments, the compliance costs associated with car parking benefits will be reduced as follows:
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- by allowing an employer to value a car parking benefit under an 'average valuation method', the necessity for an employer to obtain daily values of the lowest fee charged by commercial parking station operators is removed. All that is required is for the employer to obtain an average of the lowest fee charged on the first and last day that the benefit is provided in a FBT year.
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- because a car parking benefit will only arise where there is a 'commercial parking station' within a 1 km radius of the employer's premises which charges more than $5 a day, many employers located in regional areas will no longer be subject to FBT on car parking benefits provided to employees;
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- by allowing employers to use the 12 week register method or the statutory formula method to calculate the number of car parking benefits provided during the year. Both methods require considerably less record keeping than determining the actual number of car parking benefits provided.
The amendment to section 58G will have no compliance cost impact.
FBT exemption of certain benefits
Amends the fringe benefits tax law so that a range of primarily business related benefits provided to employees will be exempt from FBT. In addition, car phones and mobile phones will not be subject to FBT where private use is only minor or incidental to the primary business use.
Date of effect: 1 April 1995.
Proposal announced: Treasurer's Press Release of 24 February 1995.
Financial impact: There will be some cost to revenue by exempting these items from FBT. However, this cost is expected to be small and cannot be reliably estimated.
Compliance cost impact: These measures complement the changes made to the declaration requirements. The number of declaration forms that need to be supplied by an employee to an employer will be reduced further by exempting these primarily business related items from FBT.
In addition, employers who only provided this range of minor fringe benefits may no longer need to be concerned with the FBT system.
Taxi travel provided to employees
Amends the fringe benefits tax law so that taxi travel provided by an employer to sick employees to travel home or to employees who are required to travel to and from home between 8pm and 6am will be exempt from FBT.
Date of effect: 1 April 1995.
Proposal announced: Treasurer's Press Release of 24 February 1995.
Financial impact: The estimated cost to revenue is $45m in 1995-96 and $30m in each later year.
Compliance cost impact: Under the existing law, employers providing regular taxi travel to their employees must keep sufficient records to determine the taxable value for FBT purposes. This measure will remove the record keeping required for taxi travel between 8pm and 6am.
Rebate for medical research bodies
Amends the fringe benefits tax law to provide for certain non-profit, non-government medical research bodies a rebate under section 65J of an amount broadly equivalent to the amount of tax paid under the grossing up provisions.
Date of effect: 1 April 1994.
Proposal announced: Not previously announced.
Financial impact: Negligible.
Compliance cost impact: None.
Declarations
Amends the fringe benefits tax law to reduce the number of declarations which an employer must obtain from an employee before the taxable value of benefits can be reduced.
Date of effect: 1 April 1995.
Proposal announced: Treasurer's Press Release of 24 February 1995.
Financial impact: The above measure is unlikely to have any impact on revenue.
Compliance cost impact: When a benefit is provided to an employee and the benefit is used for both business and private purposes, the employee is required to submit to the employer a declaration form indicating the business percentage usage of the benefit. The requirement to lodge a large number of declarations was identified as a major area of compliance costs.
This problem has been addressed by reducing the number of declarations required. This is achieved by providing that where an employee receives a series of identical benefits, generally only one declaration is to be provided.
A further proposal is that where an employer only reimburses business expenses, or where the employer does not permit private use of a benefit, an employer will be able to make a single annual declaration.
Car benefits - statutory formula method
Amends the fringe benefits tax law to increase the statutory fractions used in the statutory formula method for determining the taxable value of a car benefit.
Date of effect: 1 April 1995.
Proposal announced: Treasurer's Press Release of 24 February 1995.
Financial impact: The estimated gain to revenue is $121m in 1995-96 and $91m in each later year.
Compliance cost impact: As the amendment only changes the fractions that form part of a statutory formula, there will be no change to compliance costs where an employer continues to use the statutory formula method. Some employers may, as a result of this measure, choose to use the operating cost method to determine the taxable value of a car benefit. The compliance costs in using the operating cost method are greater than those in using the statutory formula method.
Substantiation rules
Amends the fringe benefits tax law to ensure that the FBT substantiation rules are substantially consistent with the revised income tax substantiation rules. The changes will:
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- revise the rules for calculating the business use percentage of cars;
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- reduce the number of situations requiring a new log book;
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- simplify the requirements for making entries in log books, odometer records, petty cash books and travel diaries;
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- remove the need for travel diaries for short term overseas travel;
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- reduce the retention period for FBT records from 7 years to 5 years and for statutory evidentiary documents (required by the FBT substantiation provisions) from 6 years to 5 years;
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- modify the Commissioner's discretion to review a failure to substantiate; and
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- extend the time to obtain documentary evidence of expenses.
Date of effect: 1 April 1995.
Proposal announced: Assistant Treasurer's Press Release of 29 March 1995.
Financial impact: Negligible.
Compliance cost impact: Compliance costs will be reduced. Calculating the business use percentage for cars will be easier. Fewer records will be required and record keeping will be simpler. The period that records need to be kept will be reduced.