Wages
Thursday, 31 May 2007
Last Updated: Monday, 13 August 2007
Providing fringe benefits is all part of the process of keeping good employees and attracting new ones. It is usually perceived as being more common for big business, but SMEs also provide many of these benefits.
Fringe benefits bring the inevitable issue of tax, fringe benefits tax (FBT) to be precise. FBT has been around since 1986 and remains a compliance headache for most employers. It’s great to reward employees with fringe benefits such as a car, loan, etc, but be mindful of the FBT consequences.
FBT is payable by the employer on benefits, other than salary or wages, paid to employees. It is deductible to the employer as a business expense, but there are some compliance headaches and traps to be wary of. Fringe benefits can also be paid to former employees and to the spouse or child or relative of an employee.
If a fringe benefit is paid to an employee and it is subject to FBT, its value must be determined so the correct amount of tax to pay can be calculated. That’s where the complexity and compliance costs can become an issue.
Cars are the most common benefit
The most commonly provided fringe benefit is the company car. There are two methods that can be used to work out the taxable value of that car: the “statutory formula” method or the “operating costs” method. The statutory formula method is the most common because it is simpler to use. The FBT is worked out by multiplying the base value of the car by a percentage determined by how many kilometres the car is driven in a year, remembering of course that the FBT year starts on April1. Those percentages are:
Total annual kilometres travelled |
% |
Less than 15,000 |
26 |
15,000 to 24,999 |
20 |
25,000 to 40,000 |
11 |
More than 40,000 |
7 |
So, the further the car is driven, the less FBT is payable. Under this method, it doesn’t matter if the car is driven totally for business use, totally for private use, or somewhere in between.
The operating costs method requires working out the total operating costs of the car (fuel, oil, servicing, etc) and reducing that total by the proportion of total distance that is for private use. It is most often used where business kilometres travelled are high, but is more complicated and requires more records (logbooks) to be kept and calculations to be made. That said, a sample calculation of the FBT payable under the two methods might convince an SME that the operating costs method will produce a significant enough saving in FBT to warrant its use.
If the statutory formula is used, there are a number of traps to be wary of, and the tax office warns that it regularly comes across these errors.
The cost price (which includes GST and dealer delivery) is obviously part of a car’s base value for FBT purposes, but registration and stamp duty are not included.
The base value of the car also includes accessories fitted at the time of purchase such as air conditioning, window tinting, and rust-proofing. However, the cost base does not include accessories fitted to meet the special needs of a business, such as a two-way radio in a salesperson’s car.
When, for example, an employee is on holiday, the FBT on the car can be reduced provided the car is garaged at the employer’s premises while the employee is away.
If the employer has owned the car for more than four years, there is an FBT saving because its base value is reduced by one-third. This is a once-only reduction and applies only to the original base value of the car.
Actual kilometres travelled (not an estimate) must be recorded on March 31 each year in order to work out how many kilometres were travelled in the FBT year.
Some fringe benefits are exempt from tax
It’s important to note that SMEs can provide their employees with a number of work-related items that are not subject to FBT; that is, they are exempt from FBT. These include:
- Car phones.
- Mobile phones (where used primarily for use in the employee’s employment).
- Protective clothing.
- Briefcases.
- Calculators.
- Laptop computers. Printers designed for use with laptops are also exempt from FBT.
- Subscriptions to professional journals.
Car parking for employees can get messy from an FBT point of view. Generally, it is exempt, unless there is a commercial car park within a one-kilometre radius that charges more than $6.62 a day. More useful for SMEs is that the provision of car parking on their premises is exempt from FBT.
Fringe benefits are part of the employment scene for many businesses. SMEs contribute just over 20% of all FBT collected, so it is a significant issue for them. For FBT purposes, working out the tax payable on fringe benefits is something of a mechanical exercise, but it does require the keeping of certain records and information.
It is important for SMEs to get that right. The tax office provides an FBT guide for employers, available on its Website www.ato.gov.au, and, of course, if things get complicated, SMEs should consult their accountants or advisers.
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By Mike Preston
Wage costs are rising and sales are slowing: it’s a nightmare scenario, and one that many businesses are likely to face for at least six months.
Businesses need to think creatively to attract and retain staff, keep a lid on wages, and to ensure the maximum possible benefit is achieved from any pay increases.
The St George Bank/Australian Chamber of Commerce and Industry business expectations survey, published this week, says December growth was the highest in the survey’s 12-year history.
The NAB Monthly Business Survey, also out this week, pointed to the mining, construction, manufacturing, recreation, finance, property and business services sectors as the most likely to face significant wage growth.
The NAB report showed wages grew 1.8% between November 2006 and January 2007, the highest growth rate since 1998.
Like the St George/ACCI survey, NAB’s report suggests a slowing economy, with business confidence, trading conditions and expectations for new orders all flat.
Resisting pressure to raise wages
One of the key principles of staff retention, experts say, is that it’s not all about pay.
For most employees, pay is just one factor that determines how much they value their job, says Leah Bombardiere, senior workplace adviser with the New South Wales Business Chamber.
“You can’t get away from the fact that you have to pay market rates, but every one else is doing that too, so it’s about the other things you can offer to make yourself a more attractive employer,” she says.
The real challenge is to create a work environment where staff genuinely want to stay with you. Increasingly, employees are seeking flexibility as much as higher wages.
She recommends offering more flexible (not necessarily shorter) working hours, good maternity and paternity leave, work from home options, or work-based social activities to create an environment employees won’t want to leave.
Generations X & Y
Hayes Knight senior partner Greg Hayes says a first step to making your business a better place to work is to understand how workers of different generations may have different priorities.
Generation X and Ys might want a wide diversity of experience. “You have to keep redefining their jobs to give them that experience. They value constant performance feedback, good training and career progression.”
When an employee asks for a pay rise, it is also important to find out whether they are really seeking increased status. “It’s surprising how often people will be satisfied with soft benefits, such as a change to their role and a better job title,” Hayes says.
Win-win wage rises
If you do have to pay more to attract and keep the right staff, make the most of it.
Hayes says that when an employee asks for a rise, your first step should be to determine what the market is paying for similar roles, what you can afford to pay, and, most importantly, the importance of the employee to your business.
If you decide a pay rise is warranted, then your should consider how to structure the remuneration package.
Hayes says that although cost minimisation strategies such as salary packaging can be useful, the most important thing is to ensure an increase in benefits works to the advantage of your business.
“Especially with higher-paid employees, it is crucial to line pay up with outcomes, rather than adopting a process-based approach,” he says. “Staff need to know they’re not being paid just to be there 40 hours a week; they’ll get the money if they produce the results.”
A performance component will be particularly helpful in keeping high-performing staff who are dissatisfied about being paid the same amount as less-productive colleagues. “You build in performance incentives that reward the people who outperform their peers,” Hayes says.
But incentive systems will only work if there are proper performance measurement systems supporting them, Bombardiere says.
“It won’t help your business if you don’t give the money no matter what the increase in performance is,” she says. “If you don’t put the work in to make sure it’s a meaningful process, it can have a negative effect – employees will know if you’re not really walking the walk on wages and conditions”.
The outlook for wages
The good news is St George’s Milch believes the cycle will turn and businesses just need to hang on. “Pressure on wages will continue over the next six months, but if you can hang on beyond that, the softening in the economy should lead to moderating wage levels,” Milch says.
NAB chief economist Alan Oster agrees. “We are likely to see wages pressure come off, but it could be six months or so.”
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