What Every Australian SMB Needs to Know for the 2025–26 FBT Year

Every year around this time, we sit down with business owners and have a version of the same conversation: “Do I actually have an FBT obligation?” Sometimes the answer is no. But increasingly, especially with the ATO sharpening its data-matching capabilities, the answer is yes – and many businesses don’t realise until it’s too late.

Fringe Benefits Tax (FBT) is one of the most misunderstood and underreported taxes in Australia. The ATO’s own published data tells the story clearly: the most recent tax gap figures – for the 2022–23 FBT year, published by the ATO in November 2025 – put the net FBT gap at $1.8 billion, or 30.4% of what the ATO would expect to collect with full compliance. In other words, roughly 30 cents in every dollar of FBT owed is not being paid. The ATO acknowledges that more recent years’ data is not yet available, but the direction of travel is not improving. Unreported FBT from SMBs has been trending upward, and enforcement is following.

With the FBT year having ended on 31 March 2026, now is the time to act. Returns are due by 21 May 2026 or 25 June 2026 if you lodge through a registered tax agent. Here’s what you need to know.

The Basics: Why FBT Hurts

FBT is a tax employers pay on non-cash benefits provided to employees (and their associates) in lieu of or in addition to salary. Think company cars, car parking, entertainment, gym memberships, and salary-packaged items. Critically, the employer bears the FBT liability, not the employee who enjoys the perk.

And the rate is steep. At 47%, aligned with the top marginal income tax rate plus the Medicare Levy, FBT is one of the highest-rate taxes in the Australian system. When you apply the gross-up mechanism (which exists to make a pre-tax benefit equivalent to post-tax income), the effective cost to an employer is significant:

A Type 1 benefit (where you can claim GST credits) worth $1,000 grosses up to $2,080.20. Apply the 47% FBT rate and the employer’s FBT cost is $977.69 – nearly as much as the benefit itself.

That’s the reality of FBT. It’s why getting on top of your position, both for compliance and for managing your exposure, matters so much.

What’s Changed: Key Legislative Updates for 2025–26

1. Plug-In Hybrid Vehicles – The Exemption Is Gone

This is the biggest change for many businesses this year. From 1 April 2025, plug-in hybrid electric vehicles (PHEVs) are no longer classified as zero or low emissions vehicles for FBT purposes, meaning they no longer qualify for the electric car FBT exemption.

New PHEV arrangements entered into from 1 April 2025 are fully subject to FBT. The only way to continue claiming the exemption is if:

• The vehicle was in use or available for private use before 1 April 2025, and
• There is a financially binding commitment, entered into before 1 April 2025, to continue providing the vehicle.

Critically, any change to that pre-existing arrangement (a vehicle swap, a refinance, a lease extension, or reallocation of a pool car to a specific employee) will cause the exemption to cease from the date of that change. The ATO is actively reviewing PHEV arrangements in 2026 and is not accepting loose interpretations. If you have PHEVs in your fleet under novated leases or company car arrangements, seek advice now.

Full battery electric vehicles (BEVs) and hydrogen fuel cell vehicles continue to be exempt, provided they are below the luxury car tax threshold ($91,387 for the 2025–26 year) and meet all other eligibility requirements. An important reminder: even exempt EVs must have their notional taxable value calculated for Reportable Fringe Benefits Amount (RFBA) purposes. Failing to do this is an emerging compliance issue the ATO has flagged.

2. Alternative Record Keeping – A Genuine Compliance Simplification

One genuine piece of good news: alternative record keeping rules, finalised through legislative instruments, are now fully in effect for the 2025–26 FBT year onwards. Under these rules, employers can use existing business records in place of formal employee declarations and travel diaries for certain types of benefits.

This applies to a range of benefits including fly-in fly-out and drive-in drive-out arrangements, living-away-from-home allowances, the otherwise deductible rule, temporary accommodation, car travel to work-related activities, and more.

The catch? These alternative records must exist at the time of lodging your FBT return. They must be in writing, in English, and contain the specific information required by the relevant legislative instrument. If you’re planning to rely on this method, review your existing records now – before you lodge.

3. Car Parking – Ongoing Uncertainty from the Courts

The definition of what constitutes a commercial parking station for FBT car parking purposes has been contested, and there is meaningful uncertainty in this area. A February 2025 Federal Court decision in Toowoomba Regional Council v FCT found against the ATO’s broader interpretation. The ATO has appealed to the Full Federal Court, which heard the matter in November 2025, with judgment reserved.

Until that decision is handed down, businesses with car parking benefits – particularly those in suburban locations or near shopping centre car parks – are in an uncertain position. We recommend taking a conservative approach and seeking specific advice if your car parking arrangements are close to a commercial parking station.

Where the ATO Is Looking

The ATO has been transparent about where it’s directing its compliance resources. If you provide any of the following, expect scrutiny:

• Company vehicles: The ATO cross-references state motor vehicle registry data with payroll records and FBT lodgements. If your business has a car registered in a company name and hasn’t lodged an FBT return, you’re already on their radar. Vehicles garaged at an employee’s home are treated as being available for private use, regardless of any internal policy saying otherwise.
• Dual-cab utes: One of the most persistent myths in small business is that dual-cab utes are automatically exempt from FBT. They’re not. The exemption only applies where there is no private use other than minor and incidental use, and the ATO has been challenging businesses on this point.
• Meal entertainment and client hospitality: Entertainment expenses are a common source of data mismatches between income tax returns and FBT returns. If you’re claiming a tax deduction for meals and client entertainment, the ATO expects to see a corresponding FBT analysis.
• Salary packaging arrangements: The ATO is reviewing whether benefits are correctly valued, whether packaging agreements are in writing and signed before benefits are provided, and whether reportable fringe benefits are being accurately included in employee income statements.
• Not lodging at all: The ATO’s data analytics can identify businesses that have never lodged an FBT return despite providing benefits. Non-lodgement attracts significant penalties.

Real example: A Melbourne restaurant that failed to maintain valid logbooks and lodge FBT returns ended up with a total liability of $938,000, including base tax, a 75% penalty for reckless behaviour, and significant interest. This is not a hypothetical.

How to Reduce Your FBT Exposure – Practically

FBT often feels like a tax businesses can’t avoid. But there’s meaningful scope to manage and reduce your position if you’re proactive. Here’s how:

Use Logbooks – and Use Them Properly

The operating cost method (logbook method) for car fringe benefits almost always produces a lower FBT liability than the statutory formula method, because it only captures actual private use. A valid logbook covers a continuous 12-week period, must be no more than 5 years old, and records each journey. If your employees’ vehicles are used predominantly for business, a logbook can dramatically reduce your FBT bill. The time to start a new logbook is during the FBT year, not after it ends.

Employee Contributions

If an employee makes an after-tax contribution towards a fringe benefit (for example, contributing to the running costs of a company car), this directly reduces the taxable value of that benefit. For many businesses, formalising employee contributions is one of the simplest ways to reduce FBT liability.

Use the Minor Benefits Exemption

Benefits with a taxable value of less than $300 per benefit that are provided infrequently and irregularly are exempt from FBT. This covers things like occasional gifts, bottles of wine, and one-off entertainment. The key word is occasional, if you’re providing the same benefit regularly, the exemption won’t apply.

Shift from Entertainment to an Exempt Format

Meal entertainment is a notoriously complex area of FBT. Rather than providing entertainment to employees, consider restructuring how you celebrate and reward staff. Work-related training events, for example, may be exempt. The nature, frequency, and location of the benefit all matter.

Prioritise Work-Related Items

Items primarily for work use are generally exempt or at least concessionally treated. Laptops, mobile phones, tools of trade, and portable electronic devices provided primarily for work use attract no FBT. The key is ensuring these items are genuinely work-focused and that this is documented.

Consider Salary Packaging Carefully

Salary packaging can be effective but also complex. The benefit must be structured correctly, agreed in writing before the benefit is provided, and reviewed regularly. For certain employees, particularly those in not-for-profit organisations or those approaching the $2,000 RFBA threshold, packaging may have secondary effects on means-tested government benefits, child support, and Medicare levy surcharge calculations. This is worth modelling before implementing.

Embrace the New Record Keeping Rules

The alternative record keeping instruments that came into effect from 1 April 2024 are a genuine opportunity to reduce the administrative burden of FBT compliance. If your business has been relying on paper declarations, now is a good time to assess whether your existing HR, payroll, and expense systems can generate the records the ATO requires, and document your process accordingly.

Key Dates for the 2025–26 FBT Year

• FBT year end: 31 March 2026 (already passed – if you haven’t reviewed benefits for the year, do this now)
• Lodgement and payment deadline (paper): 21 May 2026
• Electronic lodgement and payment deadline (via a Registered Tax agent): 25 June 2026
• Quarterly instalments: Required if your last FBT liability was $3,000 or more

The Bottom Line

FBT doesn’t have to be a tax you simply absorb. With the right systems in place – good record keeping, regular reviews of the benefits you provide, and a clear strategy for managing your exposure – it can be managed effectively.

But the window to act on the 2025–26 year is closing. And with the ATO actively investing in data analytics and targeted audits aimed squarely at SMBs, the cost of getting it wrong has never been higher.