What the ATO Is Watching: Fringe Benefits Tax Mistakes Small Businesses Are Getting Wrong

Tax season is just around the corner, but honestly, if you’re running a business, you’re always living in tax season. That means keeping your records clean, logging your deductions and making sure your business expenses are captured correctly so nothing catches you off guard when it matters.

Fringe Benefits Tax (FBT) is one of the areas businesses most commonly get wrong and typically it’s out of carelessness. The word “benefit” sounds like a good thing, and in a way it is — it’s a perk provided to employees. But from the ATO’s perspective, it’s simply a way of making sure the right tax is being paid on those perks and that’s where many businesses fall short.

A good accountant should have this covered. But as we walk through this blog, you’ll start to see how a lack of day-to-day awareness, or simply not digging deeper into the details, can leave elements of FBT overlooked. And before you know it, you might just find yourself on the ATO’s radar for all the wrong reasons. 

Entertainment Expenses

Want to make life easier for the ATO? Claim your entertainment expenses incorrectly and you just might.

Mismatches between what’s claimed on a tax return and what’s reported for FBT purposes are one of the most common areas the ATO picks up on and entertainment is right at the top of that list.

Employers are often quick to claim a deduction for entertainment, a business lunch, a client dinner, end of year drinks, but this is where things can quietly go wrong. A meal at a restaurant is generally not deductible and GST credits can’t be claimed (it would be nice if it were!), unless the expense is subject to FBT.

Take this common scenario…

Say you take a client out for lunch and the cost per head comes in under $300. If your business uses the actual method for FBT purposes, there are generally no FBT implications, benefits provided to clients are not subject to FBT and minor benefits under $300 provided to employees on an infrequent and irregular basis are typically exempt. However, and this is the part many businesses miss, no deduction should be claimed for that meal and GST credits would not normally be available either.

If your business instead uses the 50/50 method, then 50% of your meal entertainment expenses would be subject to FBT and the minor benefits exemption would not apply. The trade-off is that 50% of the expenses would be deductible and you could claim 50% of the GST credits.

Where businesses come unstuck

The problem the ATO consistently sees is businesses claiming the deduction and the GST credits, without recognising or reporting the entertainment as a fringe benefit. That mismatch between what’s claimed on the tax return and what’s reported on the FBT return is exactly what draws scrutiny. Getting the method right and applying it consistently matters more than most small business owners realise.

Employee Contributions

Did you know that if your FBT is wrong, your own employees could inadvertently flag it to the ATO without even knowing they did!? The ATO are always watching and one of the ways this gets flagged is by looking for discrepancies between the employee contribution amount reported on a business’s FBT return and the income recorded on the employer’s tax return.

What is an employee contribution?

An employee contribution is when an employee pays something out of their own pocket towards a fringe benefit. For small businesses, the most common examples are contributions towards a company car or expense reimbursements, but it can also extend to employer-provided housing, low-interest loans, or goods sold to an employee below market value.

Using a company car as an example: if an employee contributes $50 per week towards their vehicle, that payment is an employee contribution. It does two things:

• It reduces the FBT your business owes, because the benefit is worth less if the employee is partially covering the cost
• It becomes income on your business tax return, because you have received money

So where does the risk come in?

This is a common example of how we see it go wrong: an employer records a $5,000 employee contribution on their FBT return to reduce their FBT liability, but that same $5,000 never appears as income on their regular tax return. To the ATO, that is a red flag! Either the contribution was recorded to reduce FBT without basis, or the income was overlooked or left off the return entirely. Both are a problem for the employer and the employee.

Should employers inform their employees about this?

Employers are not legally required to explain the personal tax implications of fringe benefits to their staff; that is a matter between the employee and their own accountant or tax agent. That said, it’s just good practice and honestly, good people management, to at minimum:

• Let employees know that a reportable fringe benefit will appear on their income statement
• Encourage them to speak with their own accountant about how it may affect their personal tax position
• Avoid giving personal tax advice themselves, as that falls outside their role and could create unintended liability

The small business owner problem

In larger businesses, fringe benefits are typically spread across many employees and they have the luxury of a finance or HR team managing the obligations. In a small business, the owner is often the primary and sometimes only recipient of fringe benefits. This can include the company car used for personal travel, a business-paid phone or laptop, low-interest loans from the business, business-owned property used personally, and entertainment or meals run through the business.

Because the business owner is generally also an employee of their own company, those benefits flow back to them personally as reportable fringe benefits on their income statement, which can affect their personal income tax assessment, Medicare levy surcharge, HECS repayments, and eligibility for certain government payments or tax offsets.

The common assumption is “the company paid for it, so it’s the company’s problem.” The ATO sees it differently. If you are personally benefiting from something the business is paying for, there are consequences on both sides: the company’s FBT return and your personal tax return.

For many small business owners who use the same accountant for both, this is exactly where things fall through the cracks if that accountant isn’t looking across the full picture. It is one of the more common areas where small business owners find themselves exposed, not through any deliberate action, but simply because the connection between the two returns was never made. 

Car Parking 

Car parking Fringe Benefits is one of the ATO’s known compliance focus areas, and it’s regularly underreported, particularly by mid-sized businesses and small businesses that assume they qualify for an exemption when they may not.

What qualifies as a car parking fringe benefit?

Car parking becomes a fringe benefit when all of the following apply:

• Your employee parks at a work car park you provide or arrange, whether on-site or nearby
• They drove to or from home that day (not as part of a work trip)
• They park for more than four hours between 7:00am and 7:00pm
• There is a commercial paid car park within 1km of your work car park
• That commercial car park charges above the ATO’s car parking threshold, which can change annually, so we recommend checking the ATO’s current rates each year

Which organisations are exempt?

Some employers are fully exempt from car parking FBT obligations, including registered charities, public schools, scientific institutions, and government bodies connected to education. Additionally, motorcycles and e-bikes fall outside the definition of a “car” entirely, disabled employees displaying a valid permit are excluded, and ad hoc benefits under $300 may qualify as a minor benefit exemption.

Small businesses under $50 million in revenue may also be exempt… But this is where many businesses get caught out!

Do small businesses need to pay FBT on car parking?

Not always, but it’s not as simple as looking at your revenue figure and moving on. Meeting the small business exemption requires all three of the following conditions to be satisfied:

1. Your revenue was under $50 million in the previous income year, or you qualify as a small business entity under the tax act
2. You are not a listed public company, a subsidiary of one, or a government body
3. Your car park is not itself a commercial parking station — meaning you are not operating a paid public parking facility as part of your business

When does a small business still owe FBT?

Even under $50 million in revenue, FBT on car parking can still apply if:

• You lease spaces in a commercial parking station for your staff, for example, renting spots in a Wilson Parking building
• Your own car park has characteristics of a commercial facility, such as boom gates, public signage, or charging fees to some users

The most common reason small businesses miss this obligation is that they see the $50 million threshold, assume they’re covered, and don’t look any further. The nuances matter.

A good accountant who understands how your business operates day-to-day will flag whether car parking FBT applies to you. But if they don’t have visibility over how parking is arranged at your business and aren’t asking the right questions, this is exactly the kind of area that can quietly create tax risk and result in an unwelcome call from the ATO down the track. 

Not Lodging Any FBT Returns

The biggest flag of all… Not lodging any FBT returns! It’s actually quite rare for a business to have absolutely no fringe benefits, and the ATO knows it. If your returns show nothing year after year, that alone can be enough to trigger a closer look.

If your business employs staff, including closely held staff like family members and isn’t registered for FBT, it’s worth taking the time to review whether your business could potentially have an FBT liability. You might be surprised.

So what should you do if you haven’t lodged FBT returns and know you should have?

The worst thing you can do is nothing.

The ATO’s data matching is increasingly sophisticated. Payroll data, bank transactions, car registrations, property records, it’s all being cross-referenced. FBT mismatches are one of their known focus areas, and the longer something goes unreported, the larger the potential penalty.

The honest reality of fixing it

The ATO has a process called voluntary disclosure, which allows businesses to come forward and correct past errors before the ATO finds them first. Coming forward proactively generally results in:

• Reduced penalties compared to being caught in an audit
• Lower interest charges in some circumstances
• A far more cooperative relationship with the ATO going forward

What that process generally looks like

First, get an accountant across your situation before you contact the ATO. You need to understand what you actually owe, an accountant can review the past few years and calculate the FBT exposure across each benefit type.

From there, you’ll need to determine which FBT years are in question. The FBT year runs 1 April to 31 March, and the ATO can generally go back four years for standard reviews and further if fraud is involved.

Your accountant can then help you lodge the voluntary disclosure with the ATO on your behalf, and if the liability is significant, negotiate a payment arrangement. The ATO will generally work with you on a plan if you’ve come to them first. 

Fringe Benefits Tax has a lot of nuances, and it’s easy to feel out of your depth, especially when you’re running a small business and already have a hundred other things demanding your attention. Worrying about whether your FBT obligations are in order shouldn’t have to be one of them.

That’s why having the right team behind you makes all the difference.

At The Practice, we offer business advisory services that support businesses with accounting and compliance oversight, as well as individual tax advisory for your personal tax and finances. As you’ve seen throughout this blog, the two are more connected than most people realise and getting both right matters.

Take the first step towards peace of mind for both your business and personal tax compliance and get in touch with our team today.