If you’re not familiar with fringe benefits tax, you might have seen it on your tax return and wondered what it’s all about.
In this article, we’ll walk you through what fringe benefits tax actually is, how it applies to your business, and your reporting obligations under this legislation.
Contact Liston Newton Advisory today to discuss whether or not your business is required to pay fringe benefits tax.
What is fringe benefits tax?
Fringe benefits tax (FBT) is a tax that’s levied on employers who provide specific benefits to their employees, or employees' associates, such as family and friends. These are benefits or extras that are included outside of standard salary or wage payments.
FBT is lodged separately to income tax, and operates under a financial year that runs from 1 April to 31 March.
FBT came about from instances of employers providing their employees with benefits outside of their regular salary or wages. These benefits were then claimed as a tax deduction by the employer, and also reduced their employees’ taxable income. FBT was implemented as a way to boost oversight of what employers and employees can claim on tax.
For example: say an employer paid their employees’ vehicle costs throughout the financial year, for a total of $10K. This means that they’re paying $10K that can be claimed as a tax deduction, rather than being considered salary payments. The employee would then only report the cash received and not the benefit of the vehicle expenses. This effectively allows the employer to pay their employee additional amounts without the employee being required to pay income tax on that amount.
FBT legislation was created as a way to counteract this and gain back this lost tax revenue, while moving the tax burden to the employer.
Common types of fringe benefits
There are a number of common on-the-job benefits that can fall under FBT:
- Employees using business assets, such as a company car or other assets, for personal purposes
- Providing gym memberships for employees
- Paying for an employee's children's school fees
- Free entertainment items, such as concert or event tickets, meal costs
- Providing discounted or interest-free loan options
What's not considered a fringe benefit
Fringe benefits are just that: benefits. Fringe benefits are not:
- Salary or wages
- Employer contributions to an employee's super funds
- Termination payments for employees
- Benefits provided to contractors or volunteers
How are fringe benefits taxed?
FBT liability sits squarely on you as the employer, not on your employees. The taxable amount for each item is calculated on the value of the fringe benefit itself.
The FBT rate generally falls in line with the top marginal tax rate. This currently sits at 47% and is made up of the 45% tax rate, plus the 2% Medicare levy.
As a business, you’re required to self-assess your FBT liability. Companies can typically claim GST credits on fringe benefits, and can also claim tax deductions on the cost of providing these benefits.
To calculate the tax on your fringe benefits, you need to determine your grossed-up taxable benefits. Depending on the type of benefits you provide, there are a number of different calculations that must be made. These are calculated based on the current ATO tax rates.
To do this, the benefit amount is multiplied by either 2.0802 or 1.8868, depending on whether or not you’re entitled to a GST credit on the payment.
Once you begin this process, the results can be eye-opening. You’ll soon see that a simple fringe benefit payment can result in as much tax payable as the cost of the benefit itself.
Your company has one employee who has been working extra hard over the past few months. By way of thanks, you choose to pay their $1,200 gym membership for them. You can claim a GST credit on this purchase as part of your March BAS.
As this is classed as a fringe benefit, your business must declare and pay FBT on this benefit. This $1,200 fringe benefit is grossed-up by 2.0802, taking the taxable value to $2,496.24. We then apply the FBT rate to this taxable value.
$2,496.24 x 47% = $1,173.23 of FBT payable.
As you can see, this can make your fringe benefits a costly choice for employers.
Exemptions and concessions on fringe benefits tax
There are a number of specific exemptions that apply to fringe benefits.
- Any expenses considered to be business-related are not considered fringe benefits. For example, vehicles that are purely used for work purposes. If this vehicle is ever used for personal purposes, this portion of use can be considered a fringe benefit.
- Taxi or rideshare travel is considered exempt from FBT if the trip begins or ends at your place of work.
- The ‘otherwise deductible’ rule outlines that any benefit provided to your employees that they could otherwise have paid for and claimed on their personal tax return is exempt from FBT. For example, say your business provides an interest-free loan to an employee, which they use to invest in shares that derive a taxable income. The employee would have otherwise paid the interest, and claimed that interest as a tax deduction on their personal tax return had they taken out this loan themselves. Therefore, this is considered exempt from FBT.
- Minor or infrequent benefits are exempt from FBT. Any amount under $300 is considered minor, and any purchases that don’t follow a particular pattern are considered infrequent. This covers ad hoc, or incidental purchases. For example, the occasional staff lunch, event, or Christmas party.
Your fringe benefits tax obligations
While calculating your fringe benefits can be difficult, the obligations you face are rather straightforward.
- Determine if any exemptions or concessions apply.
- Calculate the taxable value of the benefits provided.
- Report this amount on your annual fringe benefits tax return.
Depending on the value of the benefits you provide, you may be required to report these benefits as part of your Single Touch Payroll year-end reports.
Don’t forget too that individuals are assessed for particular tax offsets based on their adjusted taxable income, which includes any fringe benefits they enjoy. This requires you to accurately report the fringe benefits you provide your employees as part of your year-end payroll processing.
Is my business exempt from paying fringe benefits tax?
Some businesses are exempt from FBT. This includes businesses like hospitals and charities. They are able to provide fringe benefits to their employees, up to a certain threshold each year, without being required to pay FBT.
The final word on fringe benefits tax
FBT can be a minefield to deal with. Therefore it’s important to accurately assess your business’ potential FBT liabilities every year. Your tax accountant is invaluable in this process and will help you take the FBT stress off your plate.