Defining a Property Fringe Benefit
Property fringe benefits refer to non-monetary benefits provided by employers to their employees, which can include physical items, real estate, or shares in a company. These benefits are subject to fringe benefits tax (FBT). Property, for FBT purposes, includes various forms:
- Goods: This category includes tangible items like clothing or electronic devices, such as televisions.
- Real Property: This includes assets like land and buildings, which can be provided to employees as part of their compensation package.
- Financial Assets: This category covers intangible assets like shares, bonds, or even cryptocurrencies that employers may offer to their employees.
It’s important to note that property fringe benefits do not cover items that fall under other specific fringe benefit types, like company cars or food provided for entertainment purposes. These specific benefits have their own tax treatment and rules separate from property fringe benefits.
Taxable Value of a Property Fringe Benefit
The taxable value of a property fringe benefit is determined by specific valuation rules, each tailored to different circumstances. These rules also allow for the reduction of taxable value by considering employee contributions.
The factors taken into account by these rules include:
1. Type of Property Fringe Benefit: The first factor to consider is whether the benefit falls under the category of an in-house property fringe benefit or an external property fringe benefit.
2. In-House Property Fringe Benefits: For in-house property fringe benefits, additional considerations come into play:
- Whether the property was acquired for resale or was manufactured by the business.
- Whether the property is identical to, or merely similar to, goods sold by the business or another provider around the time the benefit is provided.
- Whether the property is typically sold directly to the public or to customers who sell to the public.
3. External Property Fringe Benefits: In the case of external property fringe benefits, factors include:
- Whether the benefit was provided by the employer or an associate (rather than a third party).
- Whether the employer or associate incurred expenses in providing the benefit.
Each of these circumstances is taken into account to determine the taxable value of the property fringe benefit.
Taxable Value for In House Property Fringe Benefits
To be classified as an in-house property fringe benefit, certain criteria must be met:
- Property Consistency Requirement: If the benefit is provided by you or an associate, the property offered should closely resemble items regularly sold by your business in its normal operations.
- Source of Property: The property should be acquired by the provider (you or an associate) from your business or another associate. Moreover, it should closely resemble the items sold by both your business and the provider during their regular course of business around the time when the benefit is provided.
- Nature of Property: In this context, property refers to tangible items like animals, non-reticulated gas, and electricity. However, it excludes items such as real estate, buildings, or shares.
Determining Property Identity or Similarity
- Property is deemed identical to your business offerings when there are negligible differences between the provided item and the items your business typically sells.
- Property is considered similar when it closely resembles and generally bears a likeness to the items sold in your regular business operations.
Calculation of Taxable Value for Salary-Packaged
For in-house property fringe benefits provided through a salary packaging arrangement, the taxable value is calculated based on the amount an employee could reasonably expect to pay for the property when purchasing it from the provider under a standard arm’s length transaction. This amount typically aligns with the market or fair value of the property.
Salary Packaging Arrangements
Salary packaging arrangements, often known as salary sacrifice or total remuneration packaging, refer to specific agreements in which one of the following scenarios occurs:
- Agreement to Reduce Salary: You and your employee enter into an agreement where the employee’s salary or wages are intentionally decreased (sacrificed) in exchange for receiving a particular benefit.
- Benefit Included in Employment Contract: In this case, there may not be a formal negotiation to reduce the salary, but you provide the employee with a benefit as part of their employment agreement.
It’s reasonable to assume that the employee’s total compensation, including salary and wages, would have been higher if the benefit had not been offered.
In both scenarios, the employee essentially chooses to receive a benefit, either by consciously sacrificing a portion of their salary or by accepting a benefit that forms part of their employment contract, with the understanding that their overall compensation package includes this benefit.
Salary packaging arrangements can have various tax implications and are often used to provide employees with non-cash benefits as part of their total remuneration.
Valuation of Goods Manufactured or Produced
These valuation rules pertain to in-house property fringe benefits that involve goods manufactured, produced, processed, or treated by you or another provider as part of your business operations.
The specific valuation rules vary depending on several factors, including whether you typically supply the goods on a retail or non-retail basis, and whether the provided goods are identical or merely similar.
Non-Retail Goods (Identical)
Non-retail goods refer to items that are typically supplied to manufacturers, wholesalers, or retailers rather than directly to the general public.
For these fringe benefits, the provided goods must be identical to the goods regularly sold by your business during its usual operations around the time when the benefit is offered.
The taxable value is determined by the lowest arm’s length selling price at which your goods are sold, or could reasonably be expected to have been sold, at or around the time when the benefit is provided. This taxable value is reduced by any contributions made by the employee.
If your business offers early payment discounts, the discounted price is taken into consideration when calculating the taxable value of the goods for fringe benefits tax purposes.
Retail Goods (Identical)
Retail goods are those typically sold to the general public. In cases where your business supplies goods both on a retail and non-retail basis, you should apply the valuation rules for non-retail goods, as explained previously.
For in-house property fringe benefits involving retail goods that are identical to the items you usually sell to the public during your regular business operations around the time of the benefit, the taxable value is calculated as follows:
- The taxable value is set at 75% of the lowest selling price you normally charge the public for these goods during your regular business activities, specifically at or around the time when the benefit is provided.
- This taxable value is further reduced by any contributions made by the employee.
If your business offers early payment discounts for these goods, the discounted price is considered when determining the taxable value of the goods for fringe benefits tax purposes.
Other Goods (Similar but Not Identical)
In cases where the goods provided as an in-house property fringe benefit are similar but not identical to those regularly sold as part of your business operations at or around the time when the benefit is offered, a specific valuation approach is applied.
This situation might occur, for instance, with goods categorized as manufacturing seconds or items with slight variations.
The taxable value is determined as follows:
- The taxable value is established at 75% of the notional value of the goods.
- The notional value, often referred to as market value, represents the amount an employee could reasonably expect to pay in a standard arm’s length transaction for these goods.
- This taxable value is then further reduced by any contributions made by the employee.
This approach allows for a fair and standardized calculation of the taxable value of goods when they are similar but not identical to those sold in your business, ensuring equitable treatment for fringe benefits tax purposes.
Valuation of Goods Purchased and Sold
These valuation rules are applicable when determining the taxable value for an in-house property fringe benefit that involves goods purchased for resale as part of your business operations.
The taxable value is determined based on the lesser of the following two values, both of which should be adjusted for any contributions made by the employee:
- Arm’s Length Purchase Price: This represents the price at which you acquired the goods for the purpose of resale. The taxable value is calculated based on this purchase price.
- Market Value of the Goods: If the goods have depreciated or lost value by the time they are provided to your employee (for instance, due to obsolescence or deterioration), then the taxable value is determined using the market value.
Market value is essentially what the employee could reasonably expect to pay for the goods in a typical arm’s length transaction.
Any Other In-House Property Fringe Benefits
For in-house property fringe benefits that do not fall into the previously described categories (such as goods not accessed through salary packaging, not purchased for resale, or not manufactured or processed), specific criteria must be met as per tax laws.
Valuation of External Property Fringe Benefits
An external property fringe benefit encompasses any property fringe benefit that does not fall within the category of an in-house property fringe benefit.
This typically occurs when the provided property is not composed of goods that closely resemble or are identical to the ones regularly sold by your business in its usual operations.
Here are some examples and corresponding valuation rules for external property fringe benefits:
1. Property Purchased Under Arm’s Length Transaction
If you or an associate purchased the property in question through a standard arm’s length transaction at or around the time when the benefit is offered, the taxable value is calculated as the cost price to you, reduced by any contributions made by the employee.
2. Expenditure Incurred to a Provider Under Arm’s Length Transaction (Benefit Not Provided)
If you or an associate incurred expenditure in an arm’s length transaction to a provider but did not directly provide the benefit to the employee, the taxable value is determined based on your expenditure amount, reduced by any contributions made by the employee.
When neither of these rules is applicable, the taxable value is calculated as the amount the employee could reasonably be expected to pay for the property in a standard arm’s length transaction, further reduced by any employee contributions.
In situations where early payment discounts are granted, the discounted price is taken into consideration when determining the taxable value of the property for fringe benefits tax purposes.
Property Benefits Exempt from FBT
Certain property benefits are exempt from fringe benefits tax (FBT). These exemptions include:
- On-Site Employee Food: If you provide food to your employees, and they consume it on your business premises during a regular working day, you are not required to pay FBT for this benefit.
- COVID-19 Assistance: During the COVID-19 pandemic, if you provide goods to your employees to aid them in dealing with the challenges posed by the situation, this benefit is exempt from FBT.
- Worker Entitlement Funds: Payments made to worker entitlement funds are exempt from FBT, provided they meet specific conditions set forth in the tax regulations.
- FBT Exempt Property: Some work-related items may also be exempt from FBT.
What Are Worker Entitlement Funds?
Worker entitlement funds, also known as redundancy trusts or redundancy funds, serve as a means to handle various employee benefits such as long service leave, sick leave, or redundancy payments.
These funds may have different operational approaches but share the common objective of managing and safeguarding employee entitlements while ensuring their portability.
Contributions to these funds qualify as exempt benefits when they fulfill the following conditions:
- Approved Fund: The contributions must be made to an approved worker entitlement fund.
- Industrial Agreement: These contributions should be made in accordance with an industrial agreement.
- Purpose: The contributions should be designated for purposes such as funding employee leave, covering redundancy expenses, or managing reasonable administrative costs related to the fund.
What Work Related Items are Exempt From FBT?
Certain work related items are exempt from FBT.
These include portable electronic devices and other related items primarily used for work purposes. To qualify for this exemption, a portable electronic device must meet the following criteria:
- Portability: The device should be easily portable and designed for use outside of a traditional office environment.
- Size and Weight: It should be small and lightweight.
- Independence: The device must be capable of operating without relying on an external power supply.
- Completeness: It should be designed as a self-contained unit, which means that software, protective clothing, or tools of trade are included as part of the device.
The following work related items are also exempt from FBT when they are primarily used for work purposes:
- Computer Software
- Protective Clothing
- Tools of Trade
However, an essential element here is that there is a limitation of one item per employee during an FBT year for items that are essentially the same, unless the item is a replacement.
This exemption helps reduce the tax burden on employees and employers when these items are used predominantly for work related tasks.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.