Tax is a challenging subject to write about.
The main challenge is keeping the audience engaged, while also appropriately explaining the impact of tax legislation, which is typically dry, complex and boring.
Today’s topic relates to the increased substantiation requirements for claiming mobile phone expenses as a tax deduction.
While initially designed to limit the deductions available to employees, the substantiation requirements also have ramifications for business owners providing a work phone to their employees or Directors.
When most people go into business, they typically load their business up with personal expenses, thinking they can now claim everything they weren’t able to deduct as an employee.
“My friend at the BBQ said to run all expenses through the business”.
Come tax time, the accountant makes adjustments, takes out personal expenses for reporting purposes and hopefully asks their client to separate their personal expenses from business expenses going forward.
Anyone familiar with the recommendation to keep personal expenses separate from your business will likely have heard of Fringe Benefits Tax.
Fringe Benefits Tax (FBT) is an area of legislation that deals with non-cash benefits paid to staff and Directors of a business.
Where staff and Directors receive a non-cash benefit (which is really anything other than wages), there are complex rules and regulations that come into play.
These complex rules and regulations are essentially the FBT regime.
Non-cash benefits include things such as a trip away for the weekend as a reward for good performance, or paying for your expenses directly instead of as wages.
Let’s say instead of receiving $1,000 as wages, an employee instead receives a weekend away valued at $1,000.
Your employer will need to pay Fringe Benefits Tax on this amount.
The calculation is broadly as follows:
Value of benefit to employee | $1,000 |
FBT gross up factor | 2.0802 |
Gross up Fringe Benefit | $2,080.20 |
Fringe Benefits Tax rate | 47% |
Fringe Benefits Tax Payable | $977.69 |
So that trip away cost your employer $1,000 plus $977.69 in FBT. Ouch.
Given the amount of FBT payable, this represents a massive opportunity for the ATO to collect additional revenue.
The challenge for business owners that provide a paid mobile phone to their staff or themselves, is the ATO’s new substantiation requirements.
Although the intent is to provide a work phone, the mobile phone is now so engrained in society’s use that work use is likely to be contaminated with private use.
This is almost a guarantee for an employee or Director using only one mobile phone, instead of a separate work or mobile phone.
In terms of substantiating that the phone is used for work purposes, the ATO provides the following guidance:
“You need to keep records to show your work-related use. Your records need to show a four-week representative period in each income year. You can then apply this representative period to the whole income year. Records you keep may include diary entries, including electronic records, and bills. Evidence that your employer expects you to work at home or make work-related calls from home will also help you show your entitlement to claim a deduction”.
Further, the ATO states “If you have a phone plan with an itemised bill, you need to work out your percentage of work use over a four-week representative period, which you can then apply to the full year. You need to work out the percentage using a reasonable basis. This could include the:
number of work calls made as a percentage of total calls
amount of time spent on work calls as a percentage of your total calls
amount of data downloaded for work purposes as a percentage of your total downloads”.
And finally, “If you have a phone plan where you don’t receive an itemised bill, you determine your work use by keeping a record of all your calls over a four-week representative period and then calculate your claim using a reasonable basis”.
Why does an employee need to show their work-related use?
Because any private use is a Fringe Benefit.
For most business operators, a potential FBT bill is a risk within their business.
So should we all just stop paying for mobile phone expenses through our businesses?
The answer depends on the likelihood of your employees proving the necessary substantiation, whether there is personal use, and whether employees have separate personal phones.
For most businesses though, the employees won’t want to do the substantiation, there will be personal use, and there won’t be separate personal phones.
In this case, the cost of paying FBT and preparing the returns is likely too high to justify this cost, and the best action is to remove the phone costs from being paid through the business.
So what else can be done as an alternative?
After all, work phones are becoming part of the employee remuneration package, and employers need to remain competitive to retain and recruit staff.
One recommendation that I believe is under-utilised is, instead of providing a work phone, is to pay a phone allowance.
This represents a payment to your employee, say $100 a month, to cover the cost of utilising their phone for work purposes.
For me, this is the best of both worlds:
Your business receives a deduction for the cost of the phone allowance, which should match a comparable phone and connection cost
The employee is responsible for sourcing a phone and managing the contract
The employee is also responsible for claiming the phone costs in their tax return, and therefore they (instead of you) are responsible for the substantiation requirements
No FBT, no FBT risk, no compliance costs
Over the last 5 years, the ATO has made major moves in cracking down on these types of scenarios.
Their power and access to data continues to grow.
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