FBT was introduced into Australia in 1986 by the Fringe Benefits Tax Assessment Act 1986 (“FBT Act”).  It 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 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 exempt income in the hands of the recipient.

(Please note the figures used in this article are accurate for the FBT year ending 31 March 2018).

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. Some benefits are specifically made exempt from FBT.

The categories are:

  • Car fringe benefit
  • Loan fringe benefits
  • Debt waiver fringe benefits
  • Expense payment fringe benefits
  • Housing fringe benefits
  • Living-away-from-home fringe benefits
  • Board fringe benefits
  • Meal Entertainment
  • Tax-exempt body entertainment fringe benefit
  • Car parking fringe benefits
  • Property fringe benefits
  • Residual fringe benefits.

The FBT year

The FBT year runs from 1 April to 31 March.  FBT is imposed on the taxable value of benefits provided during the FBT year.

FBT on the fringe benefits

Once the taxable value of all the benefits provided is determined, the employer pays 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 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 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 the 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.
  4. 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 is able to 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.

Eliminating an employer’s 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 where 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 had he/she had paid for the benefit.

Exempt fringe benefits

Benefits that are exempt from FBT when provided by an employer include the following:

  • property provided to employees that is 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).

Car fringe benefits

Car fringe benefits get concessional FBT treatment.  As well their taxable value can be reduced to zero with the effect that no FBT is payable.

A car fringe benefit arises where in respect of the employment of an employee a car owned or leased by the employer (associate or arranger) is either:

  • applied to a private use by the employee or associate; or
  • is taken to be available for the private use of the employee or associate.

A car is taken to be ‘available for private’ use if it is garaged or kept at or near a place of residence of the employee or of an associate of the employee at any time on a day. Where the employer’s premises are located at the same place as the employee’s accommodation, for example a farm or home office, the vehicle will usually be treated as being available for private use.

To value the benefit:

The taxable value of a car fringe benefit may be calculated using a statutory formula method or the operating cost method.

  •  Statutory formula method – Minimal record keeping is required. The taxable value is determined using a statutory rate (calculated by reference to total kilometres travelled during the year) and multiplying that by the cost of the car.  This method applies automatically.
  •  Operating cost method – This method requires log books, odometer and other records. The taxable value is equal to the private percentage of the operating costs of the car for the year.   An election must be made for this method to apply.

In both cases the amount of any recipient contributions will decrease the taxable value of the car fringe benefit.

It is possible for an employer to choose different methods for different cars and to change the methods from year to year.  However, whenever a switch is made from the statutory formula method to the operating cost method, the rules relating to log books will recommence.

Statutory formula method

The formula for calculating the taxable value of a car fringe benefit under the statutory formula method is found in section 9 FBT Act and is:

A x B X C, divided by D, minus E.

Where:

A is the base value of the car;

B is the statutory fraction;

C is the number of days during the year of tax in which the car fringe benefits were provided by the provider;

D is the number of days in the year of tax; and

E is the amount (if any) of the recipient’s contribution.

 “A” – The base value of the car

The base value of the car is generally calculated as follows:

Where the car is originally owned by the provider Where the car was originally leased by the provider
· if the car has been owned for <4 years prior to the commencement of the year of tax, the cost price of the car; and

· if the car has been owned for >4 years, 2/3 of the cost price of the car;

· the amount of any additional expenditure (net of reimbursement) incurred by the person for or in relation to the fitting of non-business accessories to the car at or about the time of purchase.

 

 

· if the lessor purchased the car at or about the time the lease was taken out, the cost price to the lessor;

· if not recently purchased, the amount the person could reasonably be expected to have been required to pay to purchase the car under an arm’s length agreement;

· reduced by 1/3 if the car has been held for >4 years prior to the commencement of the year of tax;

· the amount of any additional expenditure (net of reimbursement) incurred by the person for or in relation to the fitting of non-business accessories to the car at or about the time of purchase.

Cost price includes:

  • the GST inclusive expenditure on acquisition of the car;
  • the cost of non-business accessories
  • dealer delivery
  • customs duty even where entity is exempt.

There is a reduction for the employer’s fleet discount.

The ‘cost price’ of the car does not include stamp duty, insurance, the cost of business accessories nor registration.

‘Non-business accessories’ are those not required to meet the special needs of the business operations for which the car is used.

“B” – The statutory fraction

Generally, “B” will be 0.20.  However, for vehicles acquired before 1 April 2014, refer to the table below to determine “B”.

Distance travelled during the FBT year
(1 April – 31 March)
 
Pre 10 May 2011-contracts New contracts entered after 7:30pm (AEST) on 10 May 2011
From 10 May 2011 From 1 April 2012 From 1 April 2013 From 1 April 2014
0 – 15,000 km
0.26
0.20
0.20
0.20
0.20
15,000 – 25,000 km
0.20
0.20
0.20
0.20
0.20
25,000 – 40,000 km
0.11
0.14
0.17
0.20
0.20
More than 40,000 km
0.07
0.10
0.13
0.17
0.20
“E” – Recipient’s contribution

Recipient’s contributions are any payments made by a recipient (including non-reimbursed car expenses) in consideration for the benefit.

The employee contribution includes:

  • amounts the employee pays directly to the employer for the use of the car, and
  • any car operating costs (for example, fuel) paid by the employee.

These amounts will be GST–inclusive as appropriate.

Recipient’s contributions can be used to cash out the FBT liability at year end.  This means that no FBT is payable on the car fringe benefit.  However, there may be GST liability issues as a result.  This is discussed later.

Operating Cost Method

The calculation of the taxable value under the operating cost method is made using the following formula:

C x (100% – BP) – R

Where:

C is the operating costs of the car during the holding period;

BP is the business percentage use of the car; and

R is the recipient’s contribution for the benefit.

“C” – Operating cost

‘Operating cost’ is the sum of the GST inclusive costs of:

  • car expenses;
  • registration and insurance expenses as they relate to the holding period, regardless of who incurs them
  • where the vehicle is owned, deemed depreciation and interest on both the depreciated value of the vehicle and on any non-business accessories
  • if the car is neither owned by nor leased to the provider the amount of deemed depreciation and interest is based on what would have been incurred if the provider had purchased the vehicle at that time for consideration equal to its leased car value.
“BP” – Business percentage

The business percentage can be obtained from the log book, odometer or any other relevant records.  All that is necessary is that the percentage be based upon a reasonable estimate of business kilometres.

“R” – Recipient’s contribution

This is the same as for the statutory formula method.

Records

To use the operating cost method, an employee must keep and retain log book records and odometer records.  In a log book year, a log book must be maintained for 12 continuous weeks.

A log book year is any year:

  • that is the first year the employer uses the operating cost method;
  • where none of the previous four years was a log book year;
  • the employer elects to do a new log book; or
  • the Commissioner requires the employer to treat the current year as a log book year.

The period during which the log book is kept must be specified. A log book can be kept for up to five years (assuming there is no major change in the pattern of use).

Entries in the log book must specify

  • the date on which the journey began and ended;
  • odometer readings at the beginning and end of the journey;
  • number of kilometres travelled during the journey; and
  • purpose(s) of the journey.

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 consideration which 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 prior to 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 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).

General record keeping requirements

There is a general requirement that employers must keep records that are adequate to enable the FBT liability to be assessed. According to the ATO, 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 log books, and odometer records
  • where the benefit is a car fringe benefit valued under the operating cost method, fleet management records, log book 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.

How we can help

At Bristax, individual and business tax accounting are two of our specialist areas. We would be happy to speak or meet with you to discuss your situation.We’ll take the time to understand your circumstances and provide advice that maximises your financial position.

You can contact us on 1300 883 597. We have offices in Brisbane, Sydney and Melbourne and provide full tax and accounting services Australia wide via internet, email and phone.

For other tips on fringe benefits tax, you can also check out our other articles on FBT.

This article is for general information purposes only and has not been prepared with reference to the circumstances of any particular person. You should seek your own independent financial, legal and taxation advice before making any decision in relation to the material in this article.