FBT 2025–26: Key Issues, Risk Areas and What Employers Need to Know

The Fringe Benefits Tax (FBT) year ends on 31 March. As we approach year-end, it’s critical for employers to review their arrangements and ensure compliance.

We’ve outlined the key updates, problem areas and risk hotspots for 2025–26.

FBT Updates and Problem Areas

• The FBT exemption for electric cars
• Plug-in hybrids no longer qualifying for exemption
• Does FBT apply to your contractors?
• Overlooking or misreporting FBT on private use of work vehicles
• Reducing the FBT record keeping burden
• The top FBT risk areas

Important FBT Issues

FBT Exemption for Electric Cars

Employers that provide employees with the use of eligible electric vehicles (EVs) can potentially qualify for an FBT exemption.

This should normally apply where:

• The employer owns or leases the car and allows a current employee to use the car
• The car is a zero or low emission vehicle (battery electric, hydrogen fuel cell or plug-in hybrid electric)
• The car is both first held and used on or after 1 July 2022
• The value of the car is below the luxury car tax threshold for fuel efficient vehicles ($91,387 for the 2025–26 financial year)

Plug-in Hybrid Vehicles No Longer FBT Exempt

From 1 April 2025, plug-in hybrid electric vehicles will no longer qualify for the FBT exemption unless:

• The use of the vehicle was exempt before 1 April 2025, and
• There is a financially binding commitment to continue providing private use of the vehicle on and after 1 April 2025

If there is a break or change to that commitment on or after 1 April 2025, the exemption will generally no longer be available.

Overlooking or Misreporting FBT on Private Use of Work Vehicles

The ATO is actively using sophisticated data analytics to target employers who fail to report or incorrectly report fringe benefits.

Compliance teams are specifically looking for businesses that:

• Fail to lodge FBT returns despite providing vehicles for private use
• Misunderstand exemptions, particularly the misconception that dual-cab utes are automatically exempt from FBT
• Neglect record-keeping, such as failing to maintain valid logbooks or odometer readings
• Incorrectly apportion usage, often treating private travel — including garaging a vehicle at an employee's home — as business use

Importantly, a vehicle is considered “available for private use” if it is garaged at or near an employee’s home, regardless of whether they have permission to use it.

Employers are expected to:

• Correctly identify the vehicle type (car benefit vs residual benefit)
• Maintain robust documentation
• Ensure logbooks are valid and current

Invalid or missing records can result in the ATO applying the statutory formula method, often leading to higher tax liabilities.

The ATO highlights the severity of non-compliance through real case studies. In one example involving a Melbourne restaurant, failure to maintain valid logbooks and lodge returns resulted in a total liability of $938,000, including base tax, a 75% penalty for reckless behaviour, and significant interest charges.

Does FBT Apply to Your Contractors?

FBT typically applies to benefits provided to employees and certain office holders (such as directors).

It should not apply where benefits are provided to genuine independent contractors — however, determining whether a worker is truly an employee or contractor can be complex.

Are Your Contractors Really Contractors?

The ATO’s ruling TR 2023/4 provides guidance on determining whether a worker is an employee or independent contractor.

Where a written contract exists, the terms of that contract are critical in establishing the nature of the relationship. Simply labelling a worker as an “independent contractor” does not guarantee that they won’t be treated as an employee if the contractual terms indicate an employment relationship.

PCG 2023/2 outlines four risk categories. Arrangements are viewed more favourably where:

• There is evidence both parties agreed on the classification
• A comprehensive written agreement governs the relationship
• Both parties understand the consequences of the classification
• The arrangement operates consistently with the contract terms
• Specific advice has been obtained confirming the classification
• Tax, superannuation and reporting obligations are being met correctly

Businesses engaging contractors should implement a formal review process to confirm the correct classification and assess ATO risk ratings. These arrangements should also be reviewed periodically.

Even where a worker is a genuine contractor, certain obligations may still apply. For example, some contractors are deemed employees for superannuation guarantee or payroll tax purposes.

Reducing the FBT Record Keeping Burden

FBT record keeping can be onerous. However, recent developments allow businesses to:

• Continue existing FBT record keeping methods
• Use existing business records where they meet legislative instrument requirements
• Use a combination of both

Recent legislative instruments cover areas including:

• Travel diaries (LI 2024/11)
• Living-away-from-home allowance – FIFO/DIDO declarations (LI 2024/4)
• Maintaining an Australian home declaration (LI 2024/5)
• Otherwise deductible rule declarations (LI 2024/6 and LI 2024/7)
• Interview and work-related travel declarations (LI 2024/9 and LI 2024/14)
• Holiday transport declarations (LI 2024/10 and LI 2024/13)
• Relocation transport and temporary accommodation declarations (LI 2024/12 and LI 2024/8)

FBT Housekeeping

Maintaining records for fringe benefits can be challenging, particularly when relying on employees to provide documentation.

For example, if your business provides cars and needs odometer readings at the start and end of the FBT year (31 March and 1 April), consider implementing a simple process:

Ask employees to take a photo of the odometer and email it to a central contact person. This reduces the risk of missing records and avoids last-minute scrambling.

The Top FBT Risk Areas

Mismatched Entertainment Claims

One of the easiest ways for the ATO to detect problems is through mismatches.

Employers often claim deductions for entertainment expenses but fail to recognise FBT implications.

Entertainment expenses (such as restaurant meals) are generally not deductible and GST credits cannot be claimed unless the expenses are subject to FBT.

For example:

If you take a client to lunch and the amount per head is under $300:

• Under the “actual” method, there may be no FBT (client benefits are not subject to FBT and minor employee benefits may be exempt).
• However, no deduction should be claimed and no GST credits are generally available.

If the business uses the 50/50 method:

• 50% of meal entertainment expenses are subject to FBT
• 50% of the expenses become deductible
• 50% of the GST credits can be claimed

Employee Contributions by Journal Entry

Many businesses use after-tax employee contributions to reduce fringe benefit values. Sometimes these are processed purely by journal entry.

While this can be acceptable, the ATO has raised concerns — particularly where journal entries are made after the end of the FBT year.

For a journal entry to be effective:

• The employee must be obligated to make a contribution (e.g., under a remuneration agreement)
• The employer must have an obligation to make a payment to the employee (such as a bonus or loan)
• Both parties agree to set-off the obligations
• The journal entries are made no later than when the financial accounts are prepared

Poor documentation can lead to significant FBT liabilities. Additionally, if a loan is involved, separate loan fringe benefit issues may arise.

Not Lodging FBT Returns

The ATO is concerned that some employers are not lodging FBT returns when required.

If your business employs staff — including closely held or family members — and is not registered for FBT, you should review whether an FBT liability could arise.

If your business provides:

• Cars or car spaces
• Reimburses private expenses
• Provides entertainment (food and drink)
• Offers employee discounts

You may be providing fringe benefits.

Some benefits are exempt, such as portable electronic devices (e.g., laptops), protective clothing, and tools of trade. If your business only provides exempt items or infrequent minor benefits under $300, FBT may not apply.

Final Reminder

The FBT year ends on 31 March. Now is the time to review your arrangements, documentation and reporting processes.

Make sure you have completed the FBT client questionnaire we sent you.

If you would like assistance reviewing your FBT position or identifying potential risk areas, please contact our team.