The fringe benefit tax maze

Client's meal is business expense, yours isn't.

In Australia, you invite your client to a meal but what you spend on your own lunch will attract fringe benefit tax (FBT), and not what you spend on your client's lunch, which is marked as business expense.

A meal in an in-house canteen or ordered in office is, however, exempted from tax. But reimbursements for a party at home is not.

In case of transport, the Australian rules for small businesses provide for two methods of calculation of FBT (levied at 10 per cent rate).

While in the operating cost method, the taxable value is the total operating cost, the cents per kilometre method provides for 10 per cent tax on the total distance travelled for personal use multiplied by the rate specified for various category of vehicles.

If this sounds confusing, what may add to your worries is that the FBTrules proposed in the Budget is modelled on the Australian system.

These are only a couple of the rules that the government and Corporate India are grappling with to clear all doubts over one of India's most talked-about tax proposals in recent times.

The US has the most clear rules on FBT and even specify the foods, the beverages and events on which you can spend without having any fear of attracting tax. The rules exempt expenses on coffee, doughnuts or soft drinks, or occasional parties and picnics for employees and their guests. The rules also leave many areas out of tax purview.

For example, any benefit extended to an employee who has to continuously attend emergency calls, say a nurse or someone on 911 duty, and is in no position to get coffee or water for himself, will not attract tax. Similar is the case for tellers in banks or with expenditure on moves to boost staff morale.

Similarly, there are other areas like company transport for a group of employees that can be kept out of the fringe benefit tax net.

The US rules also allow discounts to employees for merchandise and services up to a certain limit to be kept out of the scope of fringe benefit tax.

Similarly, in the UK, holidays are taxable for senior employees and directors, who also fall in the tax net if they have a company vehicle and are paid fuel expenses.

For senior executives, the UK government also levies taxes on interest-free loans, private medical insurance and shares transferred to an employee at a discount.

If English rules are followed, then all calls to home while on assignment will have to be taxed. For instance, overnight expenses by journalists, such as laundry and personal calls made from a hotel by a correspondent are taxed if the expense crosses £ 5 on domestic trips and £ 10 on foreign tours.

The rules may differ, but what is common in the practices followed in Australia, the US and the UK is that the FBT has a greater impact on senior executives and company directors than it has on staff lower down the ladder.

Different strokes

Food for thought: US rules exempt expenses on coffee, doughnuts or soft drinks, or occasional parties and picnics for employees. In Australia, reimbursements for a party at home is not .

One for the road: Australia has a complex system when it comes to travel allowances. In one case, the taxable value is the total operating cost while the cents per kilometre method entails a complex calculation

Home truth: In the UK, all calls to home while on assignment will have to be taxed