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Following approval in both houses of parliament, legislation to cap FBT concessions for certain entertainment benefits from 1 April 2016, and limit the ways car deductions can be made from 1 July 2015, now awaits Royal Assent.
Entertainment capping for Not For Profits
Lobbying to increase the proposed new cap on concessional fringe benefits tax (FBT) treatment for entertainment has fallen on deaf ears. A $5,000 cap in grossed up value of benefits will apply from 1 April 2016. This equates to a limit of about $2,500 in actual entertainment expenditure that will qualify for an FBT exemption or rebate (depending on the organisation’s tax endorsement status).
Other points to note are:
- The $5,000 cap applies to meal entertainment (e.g. restaurant meals) and entertainment facility leasing expenses (e.g. venue hire)
- More of this entertainment could actually qualify for the FBT exemption or rebate, but only if it falls within the employer’s general cap for concessional treatment (currently $31,177 or $17,667)
- Salary packaged entertainment will become reportable on payment summaries
- The 50-50 and 12-week register valuation options will no longer be available for salary packaged entertainment
Grant Thornton’s view
While we welcome the concept of a cap on entertainment packaging, there should also have been some recognition of the fact that this benefit is relied on by the NFP sector to ‘top up’ salaries, particularly as the real value of other salary packaging (with caps that are not indexed) has diminished over time. This situation could have been recognised with a higher cap or with some other benefit handed directly to the sector.
What do you need to do?
A number of transitional issues arise, principally:
- Where employees are reimbursed entertainment expenses, given the concession is uncapped until 1 April 2016, consider whether you will allow prepayments (e.g. holidays) to be salary packaged and what your process will be to determine whether the holiday is taken or refunded and whether any tax adjustments need to be made
- If employees have accrued salary sacrifice balances for entertainment not yet taken at 31 March 2016, consider whether these need to be paid out in full, or whether some can be carried forward
Commercial sector impact of entertainment changes
Salary packaging of entertainment in the commercial sector has relied on application of the 50-50 valuation method. Since the changes remove this valuation option for salary packaged entertainment in the commercial sector also, as well as making it reportable on payment summaries, salary packaging of the benefit will generally no longer be attractive.
Car allowances and deductions
The current tiered cents per kilometre rates for car allowances and deductions have been scrapped in favour of a single rate. This has been initially being set at 66 cents, which is a drop from the previous 76 cents rate that we saw most commonly applied. The new rate will now also apply to electric and hybrid cars.
The change affects both the amount individuals can claim as car deductions and the rate at which employers can pay car allowances without having to withhold PAYG or report on payment summaries.
Further, the 12 per cent of original value and the one third of actual expenses methods for claiming car deductions have been removed.
Importantly, these changes apply retrospectively, from 1 July 2015.
Grant Thornton’s view
Although we did have some warning it was coming, Grant Thornton is disappointed that this is a retrospective change. It will create difficulties for employers in the transition, particularly where they have been paying a higher rate.
What do you need to do?
If after 1 July 2015, you have been paying a rate of car allowance higher than 66 cents per kilometre, then:
- You technically have a PAYG obligation on the difference
- The employee will need to report the allowance in their tax return and claim a deduction using either the 66 cents rate or using a log book method