For many business owners, fear of incurring a Fringe Benefits Tax (FBT) bill has kept them from retraining and re-skilling their employees to perform different roles or activities within the business.
But a new exemption announced by the government as part of last year’s Federal Budget is changing all that.
If COVID-19 has meant you need to transform your business and the responsibilities of some of your employees, now could be a great time to consider reskilling your existing staff.
Training and the FBT burden
Traditionally, if you provide training to your employees that is not sufficiently connected to their current role, you could find yourself facing a hefty FBT bill at the end of the year.
Say you have someone currently performing an administrative role, but you decide you want to redeploy them into a sales position; to give them every chance of success they will need to be trained in sales techniques.
As these skills are not required in their current role, the ATO would normally deem this type of training to be a fringe benefit you provided to your employees. This means you will have to pay FBT at the 47 per cent tax rate on the total cost of their training.
Not surprisingly, this has been a major disincentive for most employers to retraining or upskilling their workforce into new roles.
Budget announcement
All this changed in the October 2020 Budget, when the government announced it was exempting employer-provided retraining activities from FBT to encourage employers to re-skill their existing staff for new roles within the business. Or even outside the business if the pandemic meant they were to be made redundant.
With the impact of COVID-19 forcing many small businesses to continue reshaping their business to cope with a rapidly changing market, FBT-free training could be a valuable way to retain your staff within the organisation, or to help them transition to new opportunities outside.
The government believes the new incentive will encourage more Australian business owners to retrain and redeploy their existing workers into new roles within their company.
Limits on the exemption
As always, the devil is in the detail.
The new FBT exemption does not extend to retraining acquired by way of a salary packaging arrangement, or training provided through Commonwealth supported places at universities, as this already receives a benefit.
It also does not cover repayments towards Commonwealth student loans.
Where the new exemption does apply, it can be claimed for training costs incurred from 2 October 2020.
This is how it works.
Case study
Jane owns two small specialist record and DVD stores in Melbourne. Due to the pandemic and subsequent lock-down, she decided to close her physical stores and make her three sales assistants redundant.
Despite this, Jane is keen to help her employees find new employment and offers them $2,000 each in retraining assistance. During the pandemic Jane’s online sales grew substantially and she now needs three new staff for web design roles.
She has decided to take advantage of her existing employees’ specialist knowledge of her business and is providing them with training in web design so they can take up these new roles.
Previously, if it cost $2,000 each to retrain her three employees, she would have been liable for 47 per cent FBT on the $6,000 cost to her for the training. With the new exemption, she will be able to retrain her staff without incurring any FBT liability.
Personal training deductibility proposal
As part of its statement on the FBT exemption, the government also announced it was planning to consult on a potential reform for individuals who undertake training at their own expense.
The government is considering allowing individuals undertaking training that relates to their future employment to deduct the cost from their income.
This would represent a major change, as the current tax rules limit deductions for personal training to training related to your current employment – not future employment.
Consultation on this reform is yet to be carried out but, if implemented it will provide a great opportunity for employees at all levels to undertake tax-deductible training.
If you have any questions about fringe benefit tax liabilities when retraining your staff or more broadly in your business, please don’t hesitate to give us a call.