When a family business operating through a private company provides benefits to employees who are also shareholders, it is common for the benefits to be ‘cashed out’. That is, the taxable value of benefits (and therefore any FBT liability) is reduced to nil by employee contributions. Such contributions are often made by way of an accounting journal entry, being a debit to the shareholder loan account (representing the amount owing by the employee to the company) and a corresponding credit to the profit and loss statement. This methodology is accepted by the ATO as resulting in a valid employee contribution, so there should be no problem. However, we have identified on a number of occasions, scenarios where insufficient care was taken with the calculation of taxable value, with some unexpected consequences. Just because the benefit is being ‘cashed out’, doesn’t mean that the employer is absolved from proper due diligence on the FBT calculations.
In particular, where the calculation of a benefit’s taxable value for FBT purposes was incorrect, the amount loaned to the employee to cover the employee contribution will also have been incorrect. If the taxable value was understated, insufficient employee contribution will have been received. This could result in a number of adverse outcomes, including:
- FBT could be payable in relation to the remaining taxable value, plus interest
- The loan provided might actually have been higher than recorded and a deemed dividend problem might arise where the repayment schedule is inadequate for the higher amount; and
- GST may have been underpaid in relation to the additional employee contribution amount
So, when it comes the time for preparing accounts and recording loans for employee contribution amounts, think about whether your FBT calculations and related policies are adequate. An FBT review can still be relevant even when you are ‘cashing out’ the benefits and don’t plan to lodge an FBT return – it might save a different kind of tax problem in the future.