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.

Improvements to small business concessions - Bill introduced into parliament

From 2012-2013 the small business low value asset immediate write-off will increase from $1,000 to $6,500. The general business pool and long life small business pool will be consolidated into a single pool to be written off at one rate. The 25 per cent Entrepreneurs Tax Offset will be cancelled. Small Businesses will be able to claim $5000 initially in accelerated depreciation for motor vehicles acquired in the 2012-2013 and later tax years. 

(Reminder: a small business has aggregated turnover less than $2 million)

Off-Market Share Buy Backs - Release of exposure draft and explanatory memorandum

The amendments aim to define the appropriate method used to work out the capital/dividend split of share buy-backs and 
provided that where the approved method is used to determine the dividend/capital split certain tax avoidance measures will not apply (i.e. streaming rules). Where a listed company undertakes an off-market buyback notional losses on the disposal of the shares/interests will be denied. The market value uplift will be removed and the time to provide a distribution statement will be extended. 

Increase in Superannuation Guarantee - Bill introduced into Parliament 

From 1 July 2013 the Superannuation Guarantee percentage will gradually be increased from 9 per cent to 12 per cent in the 2019-20 financial year and the Superannuation Guarantee age limit will increase from 70 to 75 years.

The big news this month is centred around the two-day Tax Forum which kicked-off in Canberra today. The forum brings together around 200 representatives of the community, business, unions, government, academics and other tax experts, to discuss priorities and directions for further tax reform in light of the Henry Tax Review. The outcome of day 1 is that small business, big business and unions have failed to find common ground on most issues including cutting the corporate tax rate to 29% however most agree that simplifying the tax system is the way forward.


Tax Update

Tax Law Amendment to Research and Development has received Royal Assent. 
From 1 July 2012 The R&D tax concession will be replaced with the new R&D tax incentive.

The R&D tax incentive provides a:
 
• 45 per cent refundable R&D tax credit for eligible companies with aggregated turnover of less than $20m; 
• 40 per cent non-refundable R&D tax credit for other entities.

This equates to 150% tax deduction for eligible companies. The eligibility criteria for amounts that can be claimed has been restricted. Click here for more details


Proposed Changes to claiming GST upfront on Hire Purchase Agreement for small businesses who are on a cash-basis 
An Exposure draft titled GST financial supply provisions from 1 July 2011 allows small businesses accounting on a cash basis to access full input tax credits upfront when they enter into hire purchase agreement

 
Draft legislation for Small business tax law amendments
 The amendments are due to be effective from 1 July 2012 but will only be introduced if the mineral resources tax passes. If the Government is defeated in the Carbon Tax the existing rules will stay in place:
 
• increase the small business instant asset write-off threshold from $1,000 to $6,500
• consolidate the long life small business pool with the general small business pool, resulting in a single pool
• enable small businesses to claim an initial deduction of $5,000 for motor vehicle purchases
• abolish the Entrepreneurs Tax Offset  

Ever wonder what happens after the Government announces Tax Reforms in the May Budget? 

The Government releases Discussion Papers to allow the opinions of members of the public and its stakeholders to be considered.Once the discussion period is complete a Bill will be introduced into Parliament to be voted on. If the bill is passed it receives Royal Assent and becomes law.  In the last few weeks a number of Discussion Papers have been released. Here's the ones that we think are likely to impact you and should be considered as part of your future tax planning.

Business

• Reduction of the company tax rate to 29 per cent from the 2013-14-income year, with small companies starting from the 2012-13-income year.
• Replacement of the Entrepreneurs’ tax offset with a depreciation scheme allowing small businesses to immediately write-off assets valued at under $6,500 and the first $5,000 of a motor vehicle. 
• Fringe Benefits Tax Introduction of one statutory rate (20 per cent) regardless of the number of kilometers travelled by a car.

Individuals

• Increasing the tax-free threshold from $6,000 to $18,200 in 2012-13.
  
• A standard personal tax deduction for work-related expenses of $500 for 2012-13, increasing to $1,000 for 2013-14 onwards. 
• Introducing a 50 per cent tax discount on up to $500 of net interest income from 1 July 2012, increasing to $1,000 from 1 July 2013.

Superannuation

• The $50,000 concessional superannuation contributions cap to remain post-1 July 2012 for over 50s with balances below $500,000.
• Superannuation Guarantee will be increased to 12 per cent by 1 July 2019
• A $500 government contribution to super will be introduced for low-income earners