Fringe Benefits Tax (FBT)

Fringe Benefits Tax (FBT) is a tax payable by employers for benefits paid to an employee (or an employee’s associate e.g. a family member) in place of salary or wages. This is separate to income tax and is calculated on the taxable value of the fringe benefits provided. In simple terms, it is a tax paid by employers for non-cash benefits provided to an employee.

Examples of Fringe Benefits:

• Car Fringe benefits tax – Employers may be providing a car fringe benefit if they make available a car they own or lease to an employee for their private use.
• Car Parking Fringe benefit – A car parking fringe benefit will generally arise if an employer provides car parking to an employee subject to certain conditions.
• Entertainment Fringe benefit- Benefit in terms of Food, Entertainment or Drink provided to the employees or their associates. Please click here for more information .
• Expense payment Fringe benefit- Expenses incurred by the employee for private purposes and employer reimburses them.
• Property Fringe Benefits tax- A property fringe benefit may arise when you provide your employee with property, either free or at a discount.

Exempt Benefits are those that the employer doesn’t need to pay Fringe Benefits Tax. It includes:

• Portable Electronic devices
• Tools of trade

Why was it introduced?

Fringe Benefits Tax was introduced in 1986 to overcome deficiencies in the income tax law that allowed benefits other than salary and wages to be tax-free income.

How is it Calculated?

Unlike the financial tax year (1 July – 30 June), the FBT year is 1 April – 31 March. The rate of tax may vary from year to year. For the FBT year beginning 1 April 2019, the rate of FBT is 47% (equivalent to the top individual marginal tax rate plus the Medicare levy) of the aggregate of the grossed-up taxable values of fringe benefits provided by the employer.

Taxable Value of Fringe Benefit- It is the value of Benefit provided to the employee. For example, if an employer-provided a Television valued at $1000 to an employee, the taxable value of that the benefit is $1000.

Grossed up Taxable value of fringe benefit- Depending upon the type of benefit provided to an employee, the taxable value is grossed up by a factor of 1.8868 (type 2 benefits that do not have GST for example) or 2.0802(Type 1 benefits that have GST for example).

Where the pre-gross up the 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).

For example, if the taxable value of the benefits provided to an employee is $2000, then the employer is required to report $$3773 ($2000*1.8868) in the employee’s payment summary.

Steps to Calculate Fringe Benefit Tax

1. Work out the taxable value (pre-gross up) of all Fringe Benefit you provide to employees.
2. Identify from 1, the total taxable value of Fringe Benefits you provide for which you can claim a GST credit (Type 1 benefits).
3. 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).
4. 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).
5. 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).
6. Add the grossed-up amounts from steps 3 and 5. This is your total Fringe Benefits Taxable amount.
7. Multiply the total Fringe Benefits Taxable amount (from step 6) by the FBT rate (currently 47 per cent). This is the total FBT amount you are liable to pay.

How to Reduce Fringe Benefits Tax Liability

1. Replacing it with Cash salary or a cash bonus
2. Employee contributions
3. Providing benefits that are income tax deductible or exempt

There are certain benefits that are exempt from FBT like provision of work-related equipment to employees, minor benefits exemption, etc. For more information, please refer to this link .

How Non-Profit Organizations Differ from for Profit Entities in Terms of FBT

Non-profit organizations are exempt from Fringe Benefits tax up to certain limits, depending on the type of organization.

Not-for-profit Capping Threshold and FBT Rebate Rate

For example, you are a not for profit organization and eligible for FBT exemption. Let say you want to hire an employee with a CTC of $66000. The basic Salary of$60k and super of $6k.This means not-for-profits can provide non-cash benefits to employees more cost-effective than many other companies. Not-for-profits can also provide cash benefits such as entertainment and loan repayments from pre-tax income, which makes salary packaging attractive to their employees.

Option 1

Pay a salary of $60k, he will end up a cash salary of $49k after tax.

Option 2

You pay a salary of $45k and $15k as non-cash benefits. As the employee only pays Tax on $45k, his cash salary comes down to $39k and another $15k as non-cash benefits. The employee ends up with the net cash flow of $54k. That’s an extra $5k

FBT rebatable organizations are entitled to have their FBT liability reduced by a rebate equal to 47% of gross FBT payable and it is subject to a $30,000 capping threshold per employee. Types of FBT rebatable organizations

How is Salary sacrificing/Packaging linked to Fringe benefits tax?

Salary Sacrificing or packaging is an arrangement between an employer and an employee, where the employee agrees to forgo part of their salary for some non- cash benefit of similar value

Any benefit that an employer provides to an employee is subject to Fringe Benefits Tax. One of the most common uses of Salary sacrificing is Novated leasing. For more information, please see this article.

Christmas Parties and FBT

It is a common misconception that Christmas parties are normal business expenses for the employers. Unfortunately, it is an entertainment benefit and needs to be dealt with correctly. Please see the treatment in the matrix below:

Christmas Party at Business Premises

Income Tax Treatment

As a general rule, when providing taxable fringe benefits to employees or their associates, an employer may be able to claim GST credits and income tax deductions in respect of expenses incurred. However, no GST credits or tax deductions may be claimed when providing FBT exempt benefits.

More specifically, the income tax and GST treatment will depend on whether the benefit is an entertainment or non-entertainment benefit:

• If the benefit is an entertainment benefit (e.g. a movie ticket or a Christmas meal) – the employer may not claim income tax deductions or GST credits on the cost of providing this benefit;
• If the benefit is not an entertainment benefit (e.g. a Christmas hamper <$300 Minor benefit exemption) – the employer may claim income tax deductions and GST credits on the cost of providing this benefit. No FBT is payable

Party at Off Business Premises

Client Gifts

Also, please note that if the employer pays for the current employee’s taxi trip home after the party, this will also be an exempt transport fringe benefit because the trip is a single trip that begins at work and ends at the employee’s home.

Client gifts will not be subject to FBT. Most client gifts will be deductible for tax purposes unless the gift represents “entertainment”.

The above blog gives you a brief overview of the Fringe benefits tax. If you have any questions about how FBT impacts your business, please book an appointment .