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Fringe benefits may be a win – win situation for both employee and employer. If you have a business that employs staff and you provide incentives or remuneration in any form other than salary, you may be assessed for fringe benefit tax (FBT). Your employees will be excited to know that they do not have to pay income tax on the value of the benefits they receive.
FBT is not considered income tax, it is a separate tax, with its own tax year, April 1 to March 31. The deadline for lodging your return is May 21, but can be extended if you use our services (we are located near Malvern).
FBT can be calculated using a “grossed-up taxable value” of the benefit, currently payable at the rate of 47%. Note that the rate increases to 49% due to the Temporary Budget Repair Levy for the 2016 and 2017 FBT financial years.
Examples of fringe benefits include:
- An employee allowed to use a work vehicle for personal purposes
- A loan to an employee with interest charged
- Private expense reimbursement (such as school fees)
Fringe Benefit Categories
The FBT law includes several categories, some of the most common ones are:
- Car fringe benefit
- Debt waiver
- Loan fringe benefit
- Expense payments
- Housing fringe benefits
- Living away from home allowance
- Airline transport
- Room and board (accommodation)
- Entertainment
- Tax-exempt body entertainment
- Car parking
- Property fringe benefit
- Residual benefits (not covered above)
Regular salary and wages are not considered fringe benefits, neither are super contributions or termination payments.
Calculating FBT
There are two types of “gross-up” rates when calculating FBT, a higher and a lower rate. Grossing up simply means to increase the taxable value of the benefit to reflect in the gross salary. It’s the amount the employee would have to earn at the highest tax rate to buy the benefit after paying taxes.
The higher gross-up rate (2.0802 for the 2014-2015 or 2.1463 for the 2015-2016 FBT tax year) is used when entitled to a GST credit, known as a GST creditable benefit. The lower gross-up rate (1.8868 for 2014-2015 or 1.9608 for 2015-2016) is only used when there is no GST credit.
Consequences of increased FBT and gross-up rates
With this temporary increase of FBT rate, employers may need to reconsider their fringe benefit scheme. For some employees on packages under $180,000 per year, it could be beneficial to provide remuneration via salary instead of fringe benefits. In some cases where employers pay private health insurance or other fully taxable benefits, it may be better to provide the additional salary, which would be taxed at a lower rate than 49%.
It is important for employers and employees to consider the tax implications and impact the FBT provides. If you have questions about the increased rate and how it may affect your FBT make sure to call our office and talk to one of our specialists.
Exemptions from FBT
There are many situations where a benefit is exempt from FBT, some of them include:
- Minor benefitswhere the value is $300 or less (GST inc)
- Certain exempt vehiclessuch as private use of a taxi, is exempt if the private use of the vehicle is limited to travel between home and work, travel incidental to performing work related activities, or non-work activity is minor, infrequent, and irregular.
- Certain work related items such as clothing, briefcase, calculator, tools, etc
Can you pay less FBT?
There are many reasons why you may opt to change your employee fringe benefits, one may be to pay less FBT. You could decrease your taxes by replacing fringe benefits with straight salary, or only provide those benefits that are exempt.
Alternatively an employee could share some of the benefit costs – this is called an “employee contribution.” For example with a car, the employee may contribute to some of the operating costs, like fuel. When they are not reimbursed for their expenses, this reduces the taxable value of the benefit.
Common Mistakes
The tax office has compiled a list of common mistakes regarding FBT and the employer obligations, they include:
- Business vehicles garaged at employee’s home may be a fringe benefit
- You must use log books when calculating vehicle benefits under the operating cost method
- The luxury car threshold does not apply when calculating deemed interest and depreciation
- Employee contributions to reduce taxable value of fringe benefit are assessable income and are taxable supplies for GST purposes
- Employee declarations to substantiate fuel or vehicle costs incurred are required
- Directors may also be considered employees of the business and may be receiving fringe benefits, resulting in FBT obligations
- By reporting fringe benefits on an employee’s payment summary, you must lodge an FBT return.
In the past, the tax office issued the annual “Compliance Programme” publication to help clarify any difficult or confusing tax laws. This is no longer available, but guidance on issues can be found through communications to consultation panels and also notices issued to taxpayers. If you have any questions regarding these or any other tax-related areas of concern, our office is located near Malvern can help.
Disclaimer:
Hillyer Riches Management Pty Ltd is a Corporate Authorised Representative (No 466483) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. AFSL / ACL No. 223135.This document contains general advice only and is not personal financial or investment advice. Also, changes in legislation may occur frequently. We recommend that our formal advice be obtained before acting on the basis of this information.
