I have known about this for years—more than a decade, in fact—and I am sure I am not the only one. There are probably thousands of accountants out there who think the way I do.
For years, we have been hoping and, those who are religiously minded, praying that the ATO never get excited. I am convinced that the ATO has stayed away for so long because there has been a lot of black magic voodoo dancing going on in accountants’ offices countrywide.
Now I know what you are thinking. What on earth am I going on about?
Well, it seems the ATO has become excited about a particular type of tax, and usually, that is not good news for you, especially if you are a medical professional.
Why? Well, this tax is all about keeping good records. From experience, medical professionals are not the best when it comes to keeping accounting records.
There’s more bad news. That’s because the ATO is getting excited over a tax that is quite complex and affects pretty much every medical business, even the tiny contractor ones. It is also a tax that is not understood, so the chances of mistakes and poor record-keeping are high.
And this is going to be a real problem over the next few years.
The tax in question relates to the Fringe Benefits Tax (FBT). Our medical clients are aware of my views on FBT. In fact, this year, we thought it was such an issue that we made sure clients became registered and completed FBT returns even if the result was no tax to pay.
We were right to be cautious.
That is because, according to an FBT tax specialist, there is a growing tax gap estimate for fringe benefits tax (FBT), and as a result, the ATO is getting excited—so excited that their audit rates have risen significantly.
There is a belief that the tax gap for FBT reported by the ATO was around $1.3 billion, which accounts for around a 29 percent tax gap. I think that is underestimated. I think it is larger—much larger. And if that is the case, I think the ATO will not be just excited—they are going to become ecstatic.
FBT is a tax relating to benefits. Many of you may think you or your team do not receive a benefit from the business. And many accountants do not understand the tax either. But most employers do inadvertently give out benefits. And doctors, in particular, like to treat themselves and their families via their businesses.
Have you ever taken out a customer for lunch or dinner and ever given them gifts and ever given your team member a gift card? Maybe some flowers? Does the business regularly offer a team lunch or coffee purchases? Have you ever paid for Christmas dinner? Have you been away on a medical conference or overseas visit and taken the family? These are all technically subject to FBT. Then, the biggest one of all. Cars. Yes, many accountants tell you they have dealt with any private portion. Still, you can only do this if the business is FBT registered.
The problem is that most are not registered for FBT.
There are around 950,000 registered employers in Australia. There are more businesses that may not even pay out wages but have cars that are used privately. That means the 950,000 is on the low side. But even then, out of that 950,000, only around 100,000 are registered for FBT. And I believe there are very few registered medical businesses.
Most FBT audits will come about because of cars or privately used motor vehicles. That is because the ATO is going through the lists of motor vehicle registry services and identifying vehicles that are registered in a business name.
They then check whether they are registered for FBT, whether they are lodging FBT returns, and whether they include vehicles in those returns. If they are not, expect an audit. And then they will go through the other benefits to see if FBT is due.
Usually, when the ATO undertakes an audit, it will likely go back three or four years, but I know of situations where it’s gone back as far as 12 years. In that case, the employer reconstructed their logbooks based on diary notes and other records. They lodged FBT returns based on these, but when the ATO did their audit, they found that toll records did not match the logbooks. See what I mean about keeping records?
And FBT is an expensive tax. The rate is at a flat rate of 45%, even if you are paying a company tax rate of 25%. And because cars are expensive assets to hold and run and because doctors like to buy expensive cars, it is easy for private amounts to add up. Private use of motor vehicles for $20,000 a year is not unusual over four years, which is $80,000. You do not need to be Einstein to work out that 45% plus interest plus fines is going to be a big figure. And it is unlikely you will have this figure lying around in a piggy bank to pay it when the ATO comes knocking on your door.
If you are concerned about FBT, what should you do?
- Make sure your medical business is registered! If you are not registered and provide benefits you really are stuffed as you have no defence.
- If you have a motor vehicle, make sure you either
– Completed a 12-week logbook (and do not try to reconstruct it as it will go wrong)
– Declare private use using the 20% operating method
– Keep good (very good records) of all potential benefits given by the business. If you have a bookkeeper, they should be doing this for you. If you do it yourself, be careful. Be very careful.
Paying the least in taxes is step 2 of our 9 steps to working less, earning more and creating wealth. If you want to know more, contact hitesh@medisuccess.com.au or call 07 3172 0819.
