What is a Residual Fringe Benefit?
A residual fringe benefit is a type of fringe benefit that occurs when an employer provides their employee with a benefit that doesn’t fit into one of the predefined categories of fringe benefits. In other words, it’s a catch-all category for benefits that aren’t specifically covered elsewhere.
For instance, a residual fringe benefit might arise if an employer offers their employee:
Use of Employer’s Property: This could involve providing access to items like a video camera or television, which aren’t typically considered as common fringe benefits.
Services: If an employer offers services to employees that don’t fit into the usual fringe benefit categories, such as legal advice provided by a solicitor, it could be classified as a residual fringe benefit.
Insurance Coverage: If an employer extends insurance coverage to their employees under a group policy, especially for something like health insurance, it falls into the residual fringe benefit category.
Private Use of Non-‘Car’ Vehicles: When an employee is granted the private use of a motor vehicle that doesn’t meet the criteria for a ‘car’ under fringe benefits tax (FBT) regulations, such as a one-tonne utility vehicle, it is considered a residual fringe benefit.
Separating Goods and Services
When a benefit includes both goods (physical items) and services, the typical practice is to assign separate values to each component.
The goods component is considered a property fringe benefit, while the services component falls under the category of residual fringe benefits.
However, in specific circumstances, benefits are valued solely according to the rules of residual fringe benefits.
This exception applies when the employer or another provider is in a business where goods and services are typically supplied together, such as during repairs that involve providing spare parts.
In cases where a benefit qualifies as a residual fringe benefit, it is exempted from the regulations governing property fringe benefits, allowing for different valuation and treatment.
Timing of Receiving Residual Fringe Benefits
Residual fringe benefits are typically considered to have been received by an employee during the period when these particular benefits are provided to them. This means that the timing aligns with when the benefits are actively offered and used.
Exception for Benefits Linked to Regular Payments
There is, however, an exception to this rule when employers offer benefits in exchange for regular payments, usually associated with periodic invoices or billing cycles.
To qualify for this exception, employers must provide the same benefits, such as discounted services, to their employees on the same terms as they do to the general public.
In other words, the benefits offered to employees should mirror those available to regular customers.
In such cases, the benefits are treated as received by the employee when the periodic payment becomes due.
For example, if a company provides electricity at a reduced rate and bills customers on a quarterly basis, the benefit is considered to have arisen for each quarter at the time when the relevant billing is scheduled.
Taxable Value of Residual Fringe Benefits
In the context of residual fringe benefits, there are two main categories:
- in-house residual fringe benefits
- external residual fringe benefits
Each of these categories are subject to specific valuation rules.
The taxable value of a residual fringe benefit is essentially the total value of the benefit, including Goods and Services Tax (GST), as determined by the relevant valuation rules. This value is then reduced by any contribution made by the employee toward the benefit.
In-House Residual Fringe Benefits
In-House Residual Fringe Benefits are those benefits provided by an employer or their associate that closely resemble rights, services, or facilities offered to the general public in their ordinary business operations.
Here are some key points to understand:
- These benefits are essentially perks that mirror what the employer or their associate provides to the public. For instance, a law firm might offer its employees professional advice for free or at a discounted rate, similar to what they offer their external clients.
- Another example could involve a television rental company giving its employees access to video recorders at a discounted rate, akin to what they provide to their regular customers.
Benefits related to investment insurance contracts, such as life assurance policies that pay out if the insured person is alive on a specified date, do not fall under these rules. They have their own valuation rules, as outlined for external residual fringe benefits.
Calculating Taxable Value for In-House Residual Fringe Benefits (Not Under Salary Packaging)
- The taxable value for these benefits is determined as 75% of the lowest price that the employer charges the public for identical benefits at the time.
- This value is then further reduced by any amount paid by the employee for the benefit.
- Identical benefits are considered the same in all respects except for minor or insignificant differences or differences related to the benefit’s value.
When Identical Benefits Aren’t Publicly Offered
In cases where the employer does not provide identical benefits to the public, the taxable value is still calculated as 75% of the amount the employee would reasonably be expected to pay to obtain the same benefit in a typical arm’s length transaction. This value is then reduced by any contribution made by the employee.
Apportionment for Benefits Extending Beyond FBT Year
If the period during which the benefit is provided spans across the end of the Fringe Benefits Tax (FBT) year, the taxable value is allocated proportionally between the two years on a pro rata basis.
Thus, these rules ensure that employees are taxed on the actual value of in-house residual fringe benefits, either based on what the public pays for similar benefits or what the employee would reasonably be expected to pay for them in a typical transaction, taking into account any employee contributions.
Calculating Taxable Value for In-House Residual Fringe Benefits Accessed through Salary Packaging
The taxable value of an in-house residual fringe benefit accessed through a salary packaging arrangement is calculated based on its notional value at the comparison time, after accounting for any contribution made by the recipient.
Salary Packaging Arrangements
Salary packaging arrangements, also known as salary sacrifice or total remuneration packaging, involve one of the following scenarios:
- Employers and employees enter into an agreement where the employee’s salary or wages are intentionally reduced (sacrificed) in exchange for receiving a specific benefit.
- Alternatively, in cases where a reduction in salary is not explicitly negotiated, the employer still provides the employee with a benefit as part of their employment contract.
It is reasonable to assume that the employee’s overall compensation, including salary and benefits, would have been higher if the benefit were not provided.
Thus, when an in-house residual fringe benefit is accessed through a salary packaging arrangement, its taxable value is determined by assessing its notional value at the comparison time (the time when the value is assessed), and then reducing this value by any contribution made by the employee.
Salary packaging arrangements involve employees agreeing to lower their salary in exchange for benefits, and the taxable value is calculated based on this adjusted value, which is typically lower than the market rate.
External Residual Fringe Benefits
External residual fringe benefits are those fringe benefits that do not fall under the category of in-house residual fringe benefits. Here are some key points to understand about external residual fringe benefits:
Scenarios Where External Residual Fringe Benefits Arise
1. Benefit Not Provided to the Public
External residual fringe benefits often occur when employers provide fringe benefits that are not typically offered to the general public as part of their regular business operations.
For example, if a hairdresser offers health insurance coverage to their employees through a group policy not generally available to customers, it falls into this category.
2. Third-Party Arrangements
Another common scenario involves employers arranging for a third party to provide fringe benefits to their employees.
For instance, a solicitor may arrange for an accountant to offer discounted services to their employees. In such cases, the benefits are external residual fringe benefits.
Calculating Taxable Value for External Residual Fringe Benefits
The calculation of taxable value for external residual fringe benefits depends on the circumstances:
If Purchased at Arm’s Length
When an employer purchases the service, right, or privilege associated with the fringe benefit through an arm’s length transaction (i.e., a transaction conducted fairly between unrelated parties), the taxable value is the cost price paid by the employer.
This cost price is then reduced by any contribution made by the employee.
If Arm’s Length Transaction Doesn’t Apply
In cases where the above rule does not apply, the taxable value is determined based on what the employee could reasonably be expected to pay to obtain the same benefit in an arm’s length transaction.
This value is then reduced by any amount contributed by the employee.
Apportionment for Benefits Spanning FBT Years
If the benefit period extends beyond the end of the Fringe Benefits Tax (FBT) year, the taxable value is allocated proportionally between the two years on a pro rata basis.
Hire Cars and the "Otherwise Deductible Rule"
When an employer hires a car for less than three months and makes it available for an employee’s private use, it may result in a residual fringe benefit.
The taxable value of this benefit is typically equal to the arm’s length hire fees, which can be reduced under the “otherwise deductible rule.”
To apply this rule, the employer must obtain a Residual Benefit Declaration from the employee, following substantiation requirements in the law.
In situations where the hire car is provided as a replacement for an unavailable company car (e.g., due to repairs), the employer can rely on the logbook kept for the employee’s usual car to establish the business use of the short-term hire car, provided there is a similar pattern of use.
Reducing Taxable Value Using the Otherwise Deductible Rule
You can reduce the taxable value of a residual fringe benefit by applying the “otherwise deductible” rule, but this rule only applies if the recipient of the benefit is the employee.
Conditions for Applying the Rule
- The rule comes into play if the benefit provided is not itself a fringe benefit and the employee acted as a regular consumer or member of the public when purchasing the service or privilege that makes up the residual benefit.
- For instance, if an employee rented an item of property and used it exclusively for work-related tasks, the entire rental cost would be tax-deductible for them.
In such cases, if you, as the employer, rented the same item and made it available to the employee for their work-related use, the taxable value of this residual fringe benefit would be zero, regardless of any employee contribution.
The Otherwise Deductible Rule and Jointly Provided Residual Fringe Benefits
The “otherwise deductible” rule applies when the recipient of a benefit is the employee. The Fringe Benefits Tax (FBT) law includes a provision that treats residual fringe benefits provided jointly to an employee and an associate as if they were solely provided to the employee.
Here’s a how this rule applies:
Application of the Otherwise Deductible Rule
The “otherwise deductible” rule is relevant when an employee is the recipient of a fringe benefit. This rule allows certain expenses to be deducted if they would have been deductible had the employee paid for them themselves.
Jointly Provided Benefits
In cases where residual fringe benefits are provided jointly to an employee and an associate (such as a family member or related party), the law treats these benefits as if they were solely provided to the employee. This design feature simplifies the application of the rule.
Calculation of Otherwise Deductible Amount
When the “otherwise deductible” rule applies to jointly provided benefits, it only applies to the portion of the deductible amount that relates to the employee, excluding the associate’s share. The formula to calculate this otherwise deductible amount is as follows:
Otherwise Deductible Amount = Taxable Amount × Employee’s Percentage of Interest
- The “employee’s percentage of interest” refers to the employee’s interest in the asset that is connected to the residual fringe benefit.
- This asset is typically used for the purpose of generating assessable income for the employee.
Thus, the “otherwise deductible” rule is applicable when an employee receives a fringe benefit.
In cases where residual fringe benefits are jointly provided to an employee and an associate, the rule is applied only to the portion of the deductible amount related to the employee’s interest in the asset.
The associate’s share of the deductible amount is excluded from this calculation.
Substantiation Requirements for the Otherwise Deductible Rule
When using the otherwise deductible rule to determine the taxable value of a residual fringe benefit, there are specific substantiation requirements that must be met. Here’s an overview:
Documentation for Hypothetical Deductible Amount
You must have documentation that supports the extent to which the purchase price of the residual benefit would have been deductible to the employee.
This documentation should be obtained from the employee before you submit the relevant Fringe Benefits Tax (FBT) return.
If the documentation is in the form of a Residual Benefit Declaration by the employee, it must comply with the format approved by law.
A travel diary is necessary in certain situations:
- If the residual benefit involves travel within Australia for more than five consecutive nights and the travel is not exclusively for performing employment-related duties. Note that the requirement for a travel diary still applies even if the business travel requires the employee to stay away over a weekend, as long as the primary purpose is employment-related.
- For travel outside Australia that spans more than five consecutive nights.
The travel diary should include details such as the location of activities, dates, approximate starting times, duration, and the nature of the activities.
You should obtain a Residual Benefit Declaration from the employee in an approved format. However, there are exceptions where this declaration is not required:
- When the residual benefit is used solely for performing employment-related duties, such as protective clothing and tools of trade.
- When there is a need to keep a travel diary.
- When the requirement to keep a travel diary is waived because the employee is a member of an international aircrew.
- When the provision of the fringe benefit is covered by a recurring fringe benefit declaration.
Additional Reductions in Taxable Value
Certain fringe benefits are eligible for concessional treatment, which leads to a reduction in their taxable value. This reduction can result in a lower amount of Fringe Benefits Tax (FBT) being payable or, in some cases, no FBT at all.
Here’s a list of reductions that may apply specifically to residual fringe benefits:
- Remote area residential fuel
- Remote area holiday transport
- Overseas employment holiday transport
- Relocation – temporary accommodation
- In-house fringe benefits – tax-free threshold
- Overseas employees – education of children
Exempt Residual Benefits
If a residual benefit is considered exempt, such as a minor benefit or a portable electronic device provided to enable remote work, you are not required to pay Fringe Benefits Tax (FBT) on it. In some cases, you may also be eligible for an exemption for benefits provided due to COVID-19.
It’s important to note that exempt benefits are distinct from reductions and concessions that can be applied to reduce the taxable value of a residual fringe benefit. When a benefit is exempt, you are not obligated to calculate its taxable value for FBT purposes.
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.