12th July, 2021
Work perks can attract a Fringe Benefits Tax on your business. Here’s what you should know, as well as how to calculate what you may owe.
Fringe benefits provided by an employer are taxable. They must be included in the employee’s pay unless specifically excluded by the law.
But, as an employer, how do you know exactly what constitutes reportable fringe benefits?
To help you answer that question, this article offers a comprehensive discussion of the fringe benefits tax in Australia.
Fringe Benefits Tax refers to tax paid by employers on specific benefits they provide to their associates, employees, or even employees’ families, such as cars or shares.
According to the ATO (Australian Taxation Office), FBT can apply even in scenarios where the benefits are provided by any third party working with the employer.
For the most part, FBT operates like any other tax, except that the focus here is on what can be counted as a “fringe benefit”.
READ: Understanding business tax
A benefit doesn’t automatically become a fringe benefit simply because it was provided where an employer-employee/associate relationship exists. A discernible link must be established between the provision of the benefit and employment.
Here are a few examples of taxable fringe benefits:
Any fringe benefit provided is taxable but there are always exemptions for nearly all benefits that impact what is considered pay.
FBT is calculated on the fringe benefit’s taxable value. For instance, if an employer offers achievement awards, up to $1,600 is exempt when dealing with qualified plan awards.
A business will have to pay fringe benefits tax if its employees use the business’s assets for their own personal enjoyment and enrichment.
For example, if someone uses a company car for personal use, or if you reimburse school fees, or if you offer discounted loans from the company, you’ll have to pay FBT.
Some of the benefits that are exempt include work-related items such as laptops, software, transport expenses, and more — as long as these benefits are used primarily for employment.
But, although this is obvious in some situations, it can create difficulties where the benefits were not provided with respect to employment.
Issues can sometimes become muddied, particularly when you consider that the benefit recipient might also serve the provider in various other capacities, such as a beneficiary of a trust, a shareholder in the company, and so on, who could also be the company or trust employee.
So if that person were to receive benefits, what would determine whether or not those are fringe benefits?
READ: Giving tax-deductive and FBT-free gifts this holiday season
FBT was introduced in 1986 when the Fringe Benefits Tax Assessment Act was enacted as a way to overcome deficiencies within the country’s income tax law, as well as to provide the taxation system with some equity.
In short, it was introduced as a way to stop tax avoidance and widen the tax base.
In the time leading up to the enactment of the FBT Act, businesses performing an environmental scan would find that taxes were a cost cutting into profits. They would also find that they could legally reduce taxes if they provided benefits like a house or car in lieu of monetary wages. Because these benefits were essentially tax-free, costs were ultimately saved by both employer and employee.
Granted, the 1936 income tax assessment act had a provision designed to capture arrangements such as these and ensure the value of benefits was included in the employee’s assessable income.
However, this was seen to be extremely deficient in many respects. With so many senior employees getting tax-free benefits, it meant that an even greater income tax burden fell on employees who actually weren’t in a position to take full advantage of any of these deficits in taxing benefits.
These types of inequities within the taxation system soon became a source of frustration for a lot of employees and so FBT was introduced as a way to redress these problems and impose a tax on any benefits that were provided in lieu of, or in addition to, wages and salary.
This is what then-Treasurer Paul Keating had to say in his second reading speech to the Fringe Benefits Tax Assessment Bill 1986:
“This Bill introduces another major element of the tax reform package, a system for effectively taxing remuneration obtained as fringe benefits which have been escaping the tax net.” — Paul Keating.
If you provided taxable benefits in the course of the FBT year (April 1 to March 31), you must register for fringe benefits tax.
You can do so in a variety of ways, including:
Here, we take a look at what you need to do in order to calculate, report, and pay fringe benefits tax in Australia.
Fringe Benefits are split into Type 1 and Type 2 benefits. The below steps provided by the ATO to help you calculate your FBT.
Work out the taxable value (pre-gross up) of all fringe benefits you provide to employees.
Identify from 1, the total taxable value of fringe benefits you provide for which you can claim a GST credit (Type 1 benefits).
Work out the grossed-up taxable value of these Type 1 benefits by multiplying the total taxable value by the type 1 gross up rate (currently 2.0802).
Identify from 1, the total taxable value of benefits for which you cannot claim a GST credit, for example, supplies you made that were either GST-free or input taxed (Type 2 benefits).
READ: GST reimbursements and credits: Everything you need to know
Work out the grossed-up taxable value of these Type 2 benefits by multiplying the total taxable by the type 2 gross up rate (currently 1.8868).
Add the grossed-up amounts from steps 3 and 5. This is your total Fringe Benefits Taxable amount.
Multiply the total Fringe Benefits Taxable amount (from step 6) by the FBT rate (currently 47 percent). This is the total FBT amount you are liable to pay.
NB: FBT gross up rates do tend to change every few years, so be sure to check the ATO’s website to make sure you’re up to date.
READ: Understanding the basics of GST for businesses
In some cases, benefits that employers give to their employees are exempt from FBT or receive concessional treatment.
Some exemptions that may apply are:
According to tax agent and chartered accountant, Joe Kaleb of Australianbiz, concessions may apply to some fringe benefits that reduce the taxable value of the fringe benefit.
“This means less FBT, or even no FBT, becomes payable,” said Kaleb.
A reduction in the taxable value of the fringe benefit may apply to:
There are also exemptions and concessions that apply to some not-for-profit organisations and other bodies endorsed by the ATO, like health services or other registered benevolent institutions.
See the ATO’s guides for employers for more.
The easiest way to envisage how FBT works is with an example. This one comes courtesy of Australianbiz’s Joe Kaleb:
“Assume you pay a staff member $100,000 per annum and provide a car benefit with a taxable value of $10,000 during the 2019/20 FBT year.
“The $100,000 is taxed at the applicable PAYG withholding rate, which you withhold and pay to the ATO,” said Kaleb.
The $10,000 car benefit is taxed as follows:
|Multiplied by Gross-up rate x||2.0802|
|Grossed-up taxable value||$20,802|
|FBT Payable (rounded)||$9,777|
READ: 18 commonly overlooked tax deductions
Where the pre-gross up taxable value of the Fringe Benefits provided to an employee exceeds $2,000 within the FBT financial year (1 April to 31 March), the grossed-up taxable value of those benefits must be included on the employee’s Payment Summary for the corresponding payroll financial year (1 July to 30 June).
Some Fringe Benefits don’t need to be reported on payment summaries.
The value of the above car benefit that is included on the employee’s 2020 PAYG payment summary is as follows:
|Multiplied by Gross-up rate x||1.8868|
|FBT Reportable amount||$18,868|
For employers, fringe benefits remain a meaningful way to offer employees more value in return for their dedication and hard work. However, employers need to understand what those benefits are actually costing the business, as well as the additional filing procedures involved.
“Fringe benefits tax is complex and you should always consult your advisor on these matters,” recommended Kaleb.
For simplifying your bookkeeping and tax filing, as well as seamlessly working with your accountant at tax time, find out how MYOB can help your business today.
This article, while written in consultation with accredited tax agent and chartered accountant Joe Kaleb (Australianbiz), does not constitute financial advice. For advice on your specific situation, MYOB recommends engaging a qualified professional directly.