Fringe Benefits Tax and AP

Fringe Benefits Tax (FBT) is a tax paid by employers on certain non-cash benefits provided to employees. For accounts payable, FBT is relevant because many expenses paid through the AP system -- meals, entertainment, accommodation, travel, vehicles -- may be fringe benefits if they are provided to or for the benefit of employees rather than being ordinary business expenses. Correctly identifying and coding FBT-relevant expenses at the AP stage prevents costly miscoding that affects both FBT returns and income tax deductibility.

FBT applies at a rate of 47 percent (for the 2024/25 FBT year) on the grossed-up taxable value of fringe benefits. It is one of the highest effective tax rates in the Australian system, making FBT compliance particularly expensive when errors occur. The FBT year runs from 1 April to 31 March, which is different from the income tax year, creating timing issues when AP coding does not align with FBT reporting periods.

FBT-relevant expenses in AP

The most common categories of FBT-relevant expenses processed through AP are: entertainment expenses (meals, restaurant bookings, event tickets, hospitality), accommodation provided to employees, car expenses for employee-use vehicles, and gifts above the minor benefit threshold (AU$300 per person per occasion). Each of these can qualify as a fringe benefit if provided in connection with employment.

The critical distinction is who benefits from the expense. A business dinner where the attendees are all employees (or employees and their associates) is likely an entertainment fringe benefit. A business dinner where employees are hosting clients or suppliers may qualify as a deductible entertainment expense under different rules. The ATO's entertainment and FBT rules are notoriously complex, and the same dinner can have different tax treatment depending on who attended, where it was held, and whether any clients were present.

Income tax deductibility and FBT interaction

Expenses subject to FBT are generally deductible for income tax purposes (the employer can deduct the FBT-liable expense and the FBT itself). Expenses that would be FBT-liable but for an exemption (such as the minor benefit exemption or the otherwise deductible rule) retain their income tax deductibility. However, entertainment expenses that are not subject to FBT because they are excluded from the definition of a fringe benefit (rather than exempt from FBT) are typically not deductible for income tax purposes under section 32-20 of the ITAA 1997.

AP coding needs to distinguish between: fully deductible business expenses (no FBT implications), entertainment expenses subject to FBT (deductible, FBT payable), entertainment expenses not subject to FBT by exclusion (not deductible), and entertainment expenses exempt from FBT (deductible, no FBT). These distinctions cannot be made from the invoice alone in many cases -- they require information about who attended, the nature of the event, and the business purpose. Building a process for capturing this information at approval stage, rather than trying to reconstruct it at FBT return time, is the practical solution for businesses with regular entertainment spend.