Interaction

Never is a tax topic more hotly disputed, misunderstood and argued than that of fringe benefits tax especially when it come to Meal Entertainment. With fringe benefits season just around the corner the issue will once again rear its ugly head.

It is easy to understand the position of many small business operators who take a clients and business associate out to lunch or down to the local coffee shop. These types of social meetings are a great way to start a business relationship, build a repore with a key person, seal the deal or to express gratitude. Many come to the conclusion that if it is a meeting has a direct nexus to their business that the cost of meal and drinks is a business expense and fully deductible.

The ATO are clear on this – not only is meal entertainment not deductible it is also subject to Fringe Benefits Tax. The ATO’s argument is that food and drink are sustenance for our body and therefore not business related and are of a private nature.

The ATO have produced the following scenarios and outlined what the deductibility and Fringe Benefit treatment are.

Situation	Income tax	FBT
Employee takes two clients to lunch at a restaurant - cost $150	Employee's portion: $50 tax deductible, Client's portion: $100 non-deductible	Employee's portion: $50 fringe benefit, Client's portion: No FBT
Employee has meal in restaurant while travelling on business trip	Tax deductible	No FBT ('otherwise deductible' rule)
Employee has meal in an 'in-house canteen'	Tax deductible	Exempt from FBT
Employer provides sandwiches and juice for working lunch in office (not entertainment)	Tax deductible	Exempt from FBT
Employer provides substantial lunch with wine for employees and clients in office	Non-deductible	Exempt from FBT
Employer provides social function for employees /clients in office	Non-deductible	Exempt from FBT
Employer provides social function for employees and associates in office	Cost per employee: Non-deductible, Cost per associate: Tax deductible	Cost per employee: Exempt benefit, Cost per associate: Taxable fringe benefit
Employer reimburses employee for cost of private party	Amount reimbursed is tax deductible	Taxable fringe benefit
Employer provides employee and associates with theatre tickets	Tax deductible	Taxable fringe benefit

Minor Benefits – Exemption from Fringe Benefits

To be eligible for this provision the taxable value must be under $300 per employee and be infrequent and irregular.

The ATO have stipulated that “it is not appropriate to specify the number of times associated benefits that are identical or similar to a minor benefit, or benefits provided in connection with the minor benefit, can be provided while satisfying the 'infrequency and irregularity' criterion. However, the more often and regular those benefits are provided, the less likely that this criterion would be satisfied”

This is an absolutely impractical response from the ATO and honestly has many accountants in our industry frustrated that there are not clear guidelines on this issue. In Taxation Ruling TR 2007/12 It concludes that an employer who provides a Christmas party for its staff fails to qualify because the benefit is not infrequent as a Christmas party is arranged annually for the staff and hence occurs on a regular basis. On the other hand the ATO have released a fact sheet entitled Fringe Benefits Tax and Christmas Parties and includes the use of the minor benefit exemption in the examples it provides.

Our position at Interactive Accounting is to concentrate on the regularity instead of the frequency so that if the benefit is provided on a regular basis, every week, month, quarter or year then it does not qualify for the exemption. If the benefit occurs ad-hoc or on a one-time only basis then it will qualify as a minor benefit.

Conclusion

If you are incurring and claiming meal entertainment in your accounts you have two choices. Keeps records and pay the appropriate FBT or have the meal entertainment that is applicable to you and your employees paid out as dividends. If you are unsure about your obligations please contact support@interactiveaccounting.com.au

Remember: GST is only claimable on the tax-deductible portion.

Last night Treasurer Swann handed down his budget highlighting the expected financial results of the Australian Economy for the 2011 financial year and to present the governments proposed changes to it's projects and revenue streams for the 2012 financial year. 

Mr Swann has proposed to deliver the Australian Economy out of deficit by the 2013 financial year. Delivering the following results: 

• 2011- a deficit in 2011 of $50bn
• 2012 - a deficit $22.6bn 
• 2013 - surplus $3.5bn

So what effect does that have on me? Well, the Australian government funds the majority of its operations through direct tax collection from businesses and individuals just like you. Now, for the full Government release, please click the following link:

The Official 2011 Budget Documents

Alternatively, we've provided a simple list of the changes that we think effect our clients in the SME & Investment entity category and associated individual tax payers. So without further ado, please see below:

• Family Trusts and the distribution of passive income
• Review of Rebates, (Child Care Rebate in particular)
• Review of Negative Gearing on rental properties
• Review of company cards and FBT to try and reduce Australia's carbon footprint
• Government spending cuts & their tax implications
• Superannuation - Contributions, Pension Payments & Excess Contributions

Interactive’s selected budget updates

Family Trusts and the distribution of passive income

There was no clarification of the expected taxation of trust and linked entities (eg. Company beneficiaries). However, the government has made the change to the Low Income Tax Offset for minors to effectively reduce the eligible tax free amount of distribution to a minor to $416 in each Financial year from July 1, 2011.  

Review of Tax Offsets (“rebates in the old language”)

• Removal of the Low Income Tax Offset for minors who earn passive income > $416 from July 1, 2011.
• Removal of the spouse rebate when your spouse is <40, is not working, without children and without disability.

Review of Negative Gearing

After much hype, there were no changes to negative gearing regime imposed by the government.

Review of FBT to reduce Australia’s carbon footprint

The government will phase in a flat rate for statutory method of FBT of 20% over the next 4 years on new contracts from 7.30pm 10^th May, 2011. This has been reduced to discourage unnecessarily travelling more kilometres to achieve a tax benefit available with the current regime and provide a greener solution.

SME specific items

• The Entrepreneurs Tax Offset has been removed from 1.7.11
• The Depreciation on a new car in first year is increased by $5,000 in the first year accelerating the deduction. This additional benefit of $1,300 ($5k x ~30%) will not be realised until lodgement of your 2012 tax return.
• Super Guarantee Charge (9% standard super) will from 1 July 2011 will now present a personal liability for Directors of companies where the employees super contributions are not paid within 3 months of the due date (28 days after the quarter end) with no grace period provided at this time for payment.  
• New rules for payslips – from 1 July 2012 employers will need to provide the total cash payments made to super on employee payslips.
• Company Tax Rate 29% - from 1 July 2012 for eligible small business entities (dependent on the country's financial results)

Superannuation

Superannuation Contribution thresholds for the 2012 financial year

• Concessional Super Contributions thresholds will remain at $25,000 for those taxpayers <50 years of age.
• Taxpayers >50 years of age will be able to contribute up to $50,000 in Concessional Super Contribution providing their member account balance (per member of Superfund) is under $500,000.
• The additional $25,000 for >50 will not be indexed, only the base for all taxpayers of $25,000 will be indexed at intervals of $5,000. At present, there has been no indexation of this amount.

Pension payment rules for 1 July, 2011 and outlook for FY13

Please read the points below in conjunction with the ATOs guidelines on minimum pension payments.

• There has been a increase in the minimum pension amount payable from 50% of the “normal” minimum pension payment to 75% of the “normal” minimum pension payment amount. This applies for the Financial Year commencing 1 July, 2011.
• For the Financial year commencing 1 July, 2012, the minimum pension payment amount will revert to the “normal” rates.

Excess Contributions Penalties – A “minor” relief

A new option will be provided to avoid excess concessional contributions tax, for an excess of up to $10,000, on a once-only basis from 1 July, 2011. <Concessional contribution caps<

Conclusion

After much media hype, there’s been a reasonably conservative budget delivered.

The major point of interest will be whether or not the government blows out proposed expenditure items with natural disasters (let’s hope we don’t have any more!) and whether or not we are able to ride the commodity boom to a surplus in 2013…….?