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Welcome to the tenth edition of the Flint Forensics Pty Ltd semi-annual newsletter. This newsletter is to help keep you informed of the latest developments or topical issues for further discussion and consideration. It is a free service provided by Flint Forensics Pty Ltd.
Over the last six months expense payment fringe benefits have been topical in my everyday work. I have had cases where a claimant stated that he earned no income, however, after my audit, I identified in excess of $100,000 in personal expenses being paid from the company and no FBT return lodged or paid. Another example was something I did not have to uncover, it was the ATO who did it for me. These types of expenses are often hard to identify and validate unless a field audit or other investigations are undertaken. It is an important aspect that requires due considering when determining income in accordance with any contract or common law claim.
What relevance does it have to the claims assessor?
When determining income the expenses that can be offset against earnings are those which were incurred in generating that income. With self-employed persons, it is common for them to recognise personal expenses in their financials but if they do there are implications. I have extracted the need to know bits to help obtain a better understanding of the concepts.
What is a fringe benefit?
Basically, a fringe benefit is a benefit provided to an employee (or their associate) because that person is an employee. Benefits can be provided by an employer, an associate of the employer, or by a third party under an arrangement with the employer. An employee can be a current, future or former employee.
The ATO tip is when making the benefit, you need to decide if a benefit is provided in relation to employment, ask yourself whether you would have provided the benefit if the recipient had not been an employee.
Who pays FBT?
As an employer, they have to pay FBT, even if the benefit is provided by an associate or by a third party under an arrangement with them. For example, they may deal with a supplier who, in turn, provides free goods to your employees.
It makes no difference whether the business structure is a sole trader, partnership, trust, corporation, unincorporated association or government body, or that other taxes have to be paid such as income tax.
FBT rate?
The current FBT rate is 46.5 per cent.
Reporting benefits
If a fringe benefit is provided with a total taxable value of more than $1,000 to an employee in an FBT year, the employer must report the grossed-up taxable value of the fringe benefit on the employee’s payment summary for the corresponding income year (1 July to 30 June).
The government has announced that from 1 April 2007, the fringe benefits reporting exclusion threshold will increase from $1,000 to $2,000.
Expense Payment Fringe Benefits
An expense payment fringe benefit happens when an employee incurs expenses and the employer:
· reimburses them for the expenses, or
· pays a third party for the expenses.
The expenses can be business or private expenses, or a combination of both, but they must be incurred by the employee.
The relevance for determining income is that these expenses along with the FBT can be adjusted against earnings as these expenses are not incurred in generating money from the business activities. I will introduce a new term, “ELIGIBLE ADJUSTMENTS”. The question is, how are these identified?
1. Forensic Accountant identification
2. Insured’s Accountant identification
3. Insured identification
4. Fringe Benefit Tax Return and workpaper identification
5. Review of source documents
These expenses are sometimes hidden in the financials and unless the reviewer fully understands the insured’s business structure and activities the identification process is hard. Reviewing income and expenses over a period is also a good process.
If they are identified in the Fringe Benefit Tax Return then the task is simply. If they are identified by the other methods and Fringe Benefits Tax has not been paid, then there are implications under the Financial Transactions Reports Act 1988 to consider.
Some common examples are:
· Car expenses,
· Car parking,
· Health insurance premiums,
· Home or desktop computer expenses,
· Home mortgage,
· Home telephone expenses,
· Laptop computer expenses,
· Personal credit card payments,
· Home rental expenses,
· School fees, and
· Self-education expenses.
Exempt Expense Payment Benefits
These are expenses where FBT is not payable. Some examples are:
· Taxi travel expenses – a single trip beginning or ending at the employee’s place of work or arises as a result of sickness or injury to the employee.
· Mobile phone expenses – payment of mobile phone expenses where the mobile is primarily for use in the employee’s employment is an exempt benefit.
· Laptop Computer – one per employee per year.
· Newspapers and periodicals – the costs of providing newspapers and periodicals to employees for business purposes are exempt benefits. The exemption does not apply where the business use is merely incidental.
Minor Benefits
Some minor benefits the employer provides may be exempt from FBT. This may be the case where the value of the benefit is less than $300 and the benefit is not provided on a regular basis. The amount changed from $100 to $300 on 1 April 2007.
The Otherwise Deductible Rule
This rule provides that the taxable value of a benefit may be reduced by the amount of the income tax deduction that would have been allowable to the employee if the employee had met the expense and not been reimbursed.
In other words, the value of the benefit is reduced to the extent the cost could have been a tax deduction to the employee. For example, if an employee gets reimbursed for business calls only on their mobile, these would ordinarily be a tax-deductible expense to the employee. The 'otherwise deductible' rule reduces the taxable value to nil (no FBT). If reimbursed for an expense, no income tax deduction is available to the employee. An employee declaration is also required to support the business use claim.
I have had this article on my notice board since 6 March 2007 waiting to share it with you. It talks about achieving real value in problems. Flint Forensics conducts its business in an open and transparent manner and encourages free flowing communications and continual improvement.
“THERE’S REAL VALUE IN PROBLEMS
Solving problems improves performance, and to solve problems you need to know them, writes Christina Bielaszka-DuVernay.
One of the more counterproductive things a manager can say is: “Don’t bring me problems – bring me solutions!”
According to Frances Frei, an associate professor in the Technology and Operations Management Unit at Harvard Business School, sending out that message does not encourage people to solve problems.
“It actually encourages employees to turn a blind eye to problems they see, but cannot figure out how to fix.
“When you say, ‘Don’t bring me problems – bring me solutions’, what you’re saying, in effect, is ‘Of all the problems you find, I only want to know about the ones you can solve’.”
Frei says that identifying problems can be a “solo sport” but finding solutions rarely is. This is especially true when the problems have any degree of complexity.
“If you’re giving people permission to tell you about just those problems they can solve, you’re missing out on many opportunities for improvement. You’re leaving performance boosters on the table simply because the problem and the solution aren’t collocated.”
So why is this management chestnut so popular?
Frei says that, at first blush, it sounds empowering: “Hey, go out there and solve some problems.
You’re smart, you’re able – I trust you to do it”
“But as well intentional as it is, it’s misguided. I always cringe a little bit when I hear managers say it – and I hear it a lot.”
Frei says one of the reasons for the approach’s popularity is that managers often use it to quiet chronic complainers. But any good they’re realizing by silencing squeaky wheels is more than offset by the damage they’re causing by stifling collective solutions.
“Managers need to find another way to deal with the whiners – one that doesn’t prevent observant, well-intentional people from pointing out problems that limit performance.”
So, do some company cultures prevent problems from surfacing when they should?
Frei says companies that emphasise doing things right the first time are culprits.
“Companies that pride themselves on attaining straight-from-the-gate operational excellence often make it feel dangerous to point out problems, especially when the person doesn’t see an immediate solution.
“In an environment where it’s not safe to talk about problems, we know that performance lags.”
Companies that do a good job in unearthing problems are those with a relentless focus on performance improvement.
“For them, problems are good things in that they offer opportunities to get better. Toyota is a great example,” says Frei.
“Toyota’s strong culture of improvement not only makes it safe to bring up problems, [but] the culture actively encourages workers to do so.
“On the assembly line, for instance, there’s something called the andon cord. If anyone sees a problem on the line, he is supposed to pull the cord to summon a manager to look into immediately, before the car or components on the line go any further.
“Assembly-line employees at Toyota aren’t told, “Only pull the cord if you see a problem you can fix!’ They’re encouraged to identify problems – period – and they’re honoured for doing so.
“This is one reason among many that Toyota outperforms its competitors so consistently.”
Frei says organisations should create a culture of accountability that doesn’t limit recognition only to those who find both the problem and its solution.
“Of course, you want to reward creative problem solving. But you also want to celebrate the person who brings a problem to light, however big or small. That person is as much part of the solution as the people who actually formulate the fix.”
The bottom line, she says, is that you can’t improve performance if you’re not solving problems, and you can’t solve problems you don’t know about.”
Harvard Business Review Update Newsletter
Source: The Australian Financial Review, 6 March 2007, Harvard Business Review Update Newsletter
I have available a series of instruction forms which also have guidelines as to what information may be required for specific tasks. This is a valuable resource and I can only stress the importance of requesting the right information the first time to make the financial assessment the most efficient and effective as possible. Please feel free to review these at our leisure.
There is a new addition, being the Workers Compensation Instruction Form.
You can either print them out or simply unprotect the document by using the password "FLINTFORENSICS" and save the document to your desktop.
In the next edition, look forward to more.
Talk to you soon,
Bruce Flint
Managing Director
FLINT FORENSICS PTY LIMITED - Assessment of Economic Loss, Expert Witness, Financial and Other Investigations, Income Protection Risk Management, Regulatory Investigation and Assessment, Training and Valuations
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