Some employers recognise that employees use their home telephone and internet services for work purposes. Some employees may connect remotely from their home to their employer’s server in order to continue working after hours or on weekends; this may be because the office is closed during those times or the employees are conveniently working from home during part of the working week.
In such cases, some employers reimburse their employees, in part or in full, the cost of phone and internet services. The question is whether such reimbursement is subject to tax.
The fringe benefits tax (FBT) law was enacted by former Treasurer Paul Keating in 1986 to tax non-cash benefits as distinct from cash benefits such as salary and wages. The reason why the FBT law was enacted was because the then existing income tax law was incapable of successfully taxing fringe benefits; in that knowledge, many people simply swapped taxed cash salary for untaxed fringe benefits – called the glory days by some!
The FBT law prescribes how certain fringe benefits must be taxed. Where an employer reimburses an employee for an expense that the employee incurs, the reimbursement is generally regarded under the FBT law as an expense payment fringe benefit subject to the FBT rate of tax of 47%.
The law allows the taxable value of the expense payment fringe benefit to be reduced if the employee could have obtained a tax deduction for the expense; the question should be asked whether the expense would have been an allowable tax deduction to the employee if the employee had not received the employer’s reimbursement. This is called the otherwise deductible rule in the FBT law.
If the expense (in whole or in part) would have been tax deductible to the employee, the taxable value of the expense payment fringe benefit is reduced by any amount that the employee would have been able to claim a tax deduction. This raises the question of how much would the employee be able to claim as a tax deduction relating to the business use of the internet or phone services.
Usually, there will be some private usage of the home phone and internet services. The ATO expects that some record be kept of the private and business usages to ascertain the tax deductible amount. That record may be in the form of a diary over a reasonable period of time such as 12 consecutive weeks. By so doing, the business use percentage can be ascertained.
The employee is then required to make a declaration to their employer of the business percentage before the end of each FBT year on 31 March. On the basis that the whole of the cost of the phone and internet services have been reimbursed by the employer, the FBT taxable value will be equal to the private use component of that cost.
The ATO advises that if the reimbursement by the employer is:
- up to $50 – the employee need only to supply the declaration stating the business use percentage.
- over $50 – the employer and the employee must keep records of the actual expenses and the record to support the business usage percentage.