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FBT for small business is probably the most cumbersome area of tax law. The reason for this is that it requires record keeping above and beyond the numbers reported in the accounting system and relies on staff keeping detailed records every time they pay for something that may fall within the net of the FBT regime. This is especially relevant to meals and drinks consumed off premises.

The reason for this is the complexity of the FBT legislation and the number of variables that exist to calculate which components of a payment are subject to FBT. As an example, below is a table that outlines how FBT is calculated on business lunches and dinners at a restaurant or similar venue:

Given the tax treatment varies depending on who the benefits are provided to, a business needs a mechanism for recording who attended and whether they were travelling each time a payment is made in relation to meal entertainment.

Unfortunately, we are yet to find an expense payment recording software that allows the capture of all the information required to accurately calculate the FBT liability on these types of expenses. This is because most expense reimbursement software originates from the US or UK where we understand the corresponding FBT laws are simpler and don't require the level of information capture needed in Australia.

As such, this burden generally needs to fall on the employee who makes this payment as they are best placed to know who attended each event. In practice we find this can only be achieved by requiring employees to complete additional spreadsheets when completing their expense claims to record:

• How many non-travelling employees and associates attended
• How many travelling employees and their spouses attended
• How many clients or contractors attended

Generally a travelling employee is somebody who has been required to stay away from their home overnight for business purposes.

The most important thing to establish is an internal process with the necessary checks and balances to ensure the required data is being captured. We find the following two key elements are required for this to occur:

1. Ensure that staff re-imbursements do not get approved unless the additional FBT information spreadsheet is completed; and
2. Monthly cross-checks against the "Meals and Entertainment" general ledgers to ensure that for each transaction listed, the corresponding information has been provided by the employees to calculate the FBT, income tax and GST treatment.

Using the alternate 50/50 method

The main advantage of using the alternate 50/50 split method is its simplicity. Unlike the actual method, employers are not required to dissect their meal entertainment expenditure between employees and non-employees (e.g., clients and contractors). Instead, employers simply identify all their meal entertainment expenditure and FBT is then levied on half of that expenditure. This means the additional record keeping burden required your employees is reduced, however it is still important to keep a record of the travelling employee vs non-travelling employee components as the travelling employee's component does not get included in the 50/50 method calculation.

However, before an employer elects to apply the 50/50 split method, they should consider the following disadvantages with using this valuation method:

(a) The minor benefit exemption does not apply to meal entertainment where the 50/50 split method is used. Under the actual method explained above, the minor benefits exemption applies to benefits provided to staff infrequently that cost less than $300. We find for most clients this can significantly reduce FBT exposure on meal entertainment provided to non-revenue generating staff, as they typically don't attend client lunches or events on a regular basis. As such, when they attend staff events such as Christmas parties or end of financial year dinners, as long as their costs are below $300 per head then this amount can be exempt from FBT.

(b) The clients or contractors component of the meal entertainment costs will be included in the meal entertainment costs, whereas they are excluded under the actual method.

Choosing the right method for your business

Choosing the right method for your business will depend on the different types of entertainment costs incurred, the number of staff incurring them and how regularly they are incurred. While the actual method will generally (but not always) result in lower FBT to pay, this needs to be weighed up against the reduced record keeping requirements under the 50/50 method to determine which best suits your business.

WLM's tips for reducing FBT

• Maintain all records required to calculate FBT using the actual method for at least 1 year so you can compare the two methods to see the difference in your FBT bill
• Record which staff attend each event. Those staff who do not incur meal entertainment costs regularly can be excluded under the minor and infrequent method
• If meals relate to staff trainings or meetings, consider having them provided on your business premises as these can be excluded from FBT
• Ensure you exclude any meal entertainment relating to travelling employees
• Keep the cost of Xmas parties and other staff events to under $300 per head

How can WLM help?

WLM Financial specialises in providing FBT services to businesses, so should you require any further clarification on how your business can pay less FBT then please don't hesitate to contact us.