Contents
- Types of fringe benefits
- FBT on fringe benefits
- Determining FBT payable
- Eliminating FBT liability
- Exempt fringe benefits
- How FBT interacts with GST
- Fringe benefits reported on a payment summary
- Record keeping requirements
FBT was introduced into Australia in 1986 by the Fringe Benefits Tax Assessment Act 1986 (“FBT Act”). The FBT Act provides that where a benefit is provided by an employer to an employee (or associate) in respect of his or her employment, the employer (not the employee) must pay a tax of 47% on the benefit.
As a general rule, the cost incurred in providing a fringe benefit and the amount of FBT paid is deductible to the employer. A fringe benefit is not taxable to the recipient.
The FBT year runs from 1 April to 31 March. FBT is imposed on the taxable value of benefits provided during the FBT year.
Types of fringe benefits
The FBT Act lists different types of benefits and specifies how to work out the taxable value for each one. There is a type of benefit called a residual fringe benefit to catch those that do not fall within a particular category. The categories are:
- Car fringe benefit
- Loan fringe benefit
- Debt waiver fringe benefit
- Expense payment fringe benefit
- Housing fringe benefit
- Living away from home allowance (LAFHA) fringe benefit
- Board fringe benefit
- Entertainment fringe benefit
- Tax exempt body entertainment fringe benefit
- Car parking fringe benefit
- Property fringe benefit
- Residual fringe benefit
FBT on fringe benefits
Once the taxable value of all the benefits provided is determined, the employer pays an FBT of 47% on the total. However, the total is grossed up to ensure that the Government gets the same amount of tax as it would if the benefits had been paid as salary instead of assuming the employees were on the top marginal rate.
Example (ignoring the impact of GST):
If you want to buy $1,000 worth of groceries, if you are on the top marginal rate, you need to have $1,886.80 pre-tax to have $1,000 after tax as the income tax on a salary of $1,886.80 is $886.80.
If you packaged your salary so that instead of salary, you received $1,000 worth of groceries, the $1,000 is grossed up to $1,886.80 (achieved by using a gross-up factor of 1.8868) and FBT is payable at 47% on $1,886.80 = $886.80.
Determining FBT payable
The steps involved in determining FBT payable are:
1. Determine first whether the benefit is subject to FBT (i.e. is it one listed in the FBT Act and not specifically made exempt).
2. Determine the taxable value of the benefit as prescribed by the FBT Act.
3. Gross up the benefit by the gross-up factor. The gross-up is applied to the GST-inclusive value – Taxation Ruling TR 2001/2.
There used to be only one gross-up factor. However, the introduction of GST resulted in a second higher gross-up factor. This is because if it were not for a higher gross-up factor, employees could save on GST by getting their employers to buy items on their behalf. For example, where a business pays for something related to the business, it will usually get back the GST paid on the item as an input tax credit. However, employees paying for the same item will not be able to recover the GST. The higher rate applies in respect of benefits provided as fringe benefits (and subject to FBT) where the employer can claim back any GST paid in respect of that benefit.
Taxation Ruling TR 2001/2 explains the operation of the higher gross-up formula and provides that employers must classify the fringe benefits they provide into 2 types:
- Type 1 benefits: those where the employer is entitled to an input tax credit
- Type 2 benefits: those where the employer is not entitled to an input tax credit (e.g. fringe benefits that are wholly GST free or input taxed, or where no GST has been charged).
Type 1 benefits are grossed-up using the higher gross-up rate of 2.0802. The actual amount of GST input tax credit available is irrelevant. It is the entitlement to an input tax credit that triggers the higher gross-up factor.
Gross up the benefit by the gross-up factor. The gross-up is applied to the GST-inclusive value – Taxation Ruling TR 2001/2.
Type 2 benefits are grossed up using the lower gross-up rate of 1.8868.
4. Multiply by 47%. The final step in determining the FBT on a benefit is to multiply the grossed-up amount of the benefit by the FBT rate of 47%.
Where a benefit is exempt from FBT, there will be no need to gross it up and it will not fall into either of the categories above.
See our FBT rebate article for details of the FBT rebate, which is a benefit offered to certain organisations, allowing them to receive a rebate based on a percentage of the gross FBT they are liable to pay.
Eliminating FBT liability
An employer can provide fringe benefits and not have an FBT liability by:
- providing benefits not subject to FBT (e.g. employer contributions to a complying superannuation fund)
- providing benefits that are exempt from FBT – some of these are discussed below
- providing benefits where the taxable value is reduced to nil. For example:
- using employee contributions were provided for by the formula for determining the taxable value of the benefit – this is illustrated below with car fringe benefits
- relying on the otherwise deductible rule – where the taxable value of the benefit is reduced by the amount of any deduction the employee would be entitled to have he/she had paid for the benefit.
Exempt fringe benefits
Benefits that are exempt from FBT when provided by an employer include the following:
- the property provided to employees that are both provided and consumed on a working day on the business premises
- a range of relocation benefits
- several categories of work-related health and counselling benefits (e.g. work-related counselling).
How FBT interacts with GST
The GST legislation provides that GST applies to a fringe benefit where it is provided as a taxable supply (i.e. a supply made for a consideration that is not GST free or input taxed).
The GST payable is 1/11th of the amount of the recipient’s payment or recipient’s contribution received by the employer.
GST is only payable where there is:
- a taxable supply; and
- a recipient’s contribution back to the employer.
Example
Sarah receives a car benefit from her employer, the taxable value of which is $7,000 before taking into account any recipient contributions. Sarah pays $5,500 to her employer and $1,000 in petrol costs and $500 car insurance to an insurance company during the year.
The taxable value of the car fringe benefit will be $0
As the supply of the fringe benefit is a taxable supply and there is a contribution paid to the employer, Sarah’s employer will have a GST liability of 1/11 x $5500 = $500.
GST Ruling GSTR 2001/3 states that the GST is to be attributed to the tax period in which the contribution is received (if cash basis). If on an accruals basis, remit when the contribution is received, or an invoice is issued, whichever is the earlier.
Where the contribution is made by a General Journal or Special Journal entry, the GST is remitted in the tax period the journal entry is made.
Fringe benefits reported on a payment summary
The grossed-up value of fringe benefits that are subject to FBT must appear on the employee’s payment summary where the value (not grossed up) exceeds $2,000– these are referred to as reportable fringe benefits.
Note that the lower FBT gross-up factor of 1.8868 is used when calculating an employee’s reportable fringe benefits amount for a year of income.
The employee does not pay tax on these benefits. However, they are considered in determining the employee’s entitlements and obligations in relation to a range of payments including Child Support, HECS, Medicare Levy Surcharge, and Centrelink payments.
There are some exemptions from the FBT reporting requirement (e.g. pooled or shared vehicles. A pooled or shared car is a car that is provided by an employer for the private use of 2 or more employees).
FBT record keeping requirements
There is a general requirement that employers must keep records that are adequate to enable the FBT liability to be assessed. These records must be kept for five years from the date they are prepared, obtained or the transactions completed.
Examples of these records are:
- all documents required to be obtained from employees, such as declarations, invoices and/or receipts, bills of sale, lease documents, travel diaries, copies of logbooks, and odometer records
- where the benefit is a car fringe benefit valued under the operating cost method, fleet management records, logbook records and odometer records.
For some concessions and exemptions, ‘documentary evidence’ of expenditure by an employee must be obtained. Broadly, employers are required to obtain the original invoice and/or receipt from the employee. This must show the date of the receipt or invoice, the date of the expense, the name of the supplier, what was bought, and the amount paid.
If employers use the otherwise deductible rule, they must have certain documentation to substantiate the extent to which the benefit provided would have been ‘otherwise deductible’ to the employee.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.