What is FBT? An employer’s guide to Fringe Benefits Tax (FBT)
What is Fringe Benefits Tax (FBT)?
Offering additional benefits and perks beyond regular wages is a common practice among many businesses as a way to motivate and reward employees. However, it is crucial to keep in mind the potential tax implications for both employers and employees. If an employer provides benefits in addition to the normal pay, they may be responsible for paying Fringe Benefits Tax (FBT).
The Australian Taxation Office (ATO) states that Fringe Benefits Tax (FBT) is a tax paid by the employer on the taxable value of specific benefits provided to employees, including those extended to employees' families or associates. It's important to note that the tax is the responsibility of the employer and not the employee.
Just because an employer-employee or associate relationship exists, it doesn't automatically mean that a benefit is a fringe benefit. There needs to be a clear connection between the benefit and employment.
Examples of fringe benefits
Here are some examples of fringe benefits that are subject to taxation:
Car and parking expenses
Housing and food
Loans and debt forgiveness
Employee stock options
Accident and health benefits
Awards for achievement
While all fringe benefits are subject to taxation, there are exceptions for most benefits that affect what is considered as pay. The calculation of Fringe Benefits Tax (FBT) is based on the taxable value of the fringe benefit. For example, if an employer provides achievement awards, up to $1,600 can be exempted when it comes to qualified plan awards.
What is not considered a fringe benefit?
According to the Australian Taxation Office (ATO), certain types of payments are not considered as fringe benefits. These include an employee's salary, employer contributions to a super fund, termination payments, and shares purchased through a share acquisition scheme.
Moreover, dividends, benefits offered to volunteers or contractors, and some benefits provided by religious institutions are also not classified as fringe benefits.
A company or a business does not incur an FBT liability if it gives an employee a benefit that would otherwise be deductible if they themselves had paid for it.
Why do companies offer fringe benefits?
Why do companies bother with offering fringe benefits when it can be quite a challenging administrative task? Well, the answer lies in the fact that these perks and benefits are commonly used to attract, retain, and motivate employees. For instance, if a company aims to hire top-tier employees, they can use fringe benefits to encourage more applications. Employers may also claim as income tax deductions the cost of providing fringe benefits and the amount of FBT paid. By showing employees that they are valued, supported, and cared for, companies can create a better workplace environment that promotes productivity, work-life balance, and other positive outcomes.
In certain situations, fringe benefits can also provide tax benefits to employees, allowing them to pay less income tax.
Who pays Fringe Benefits Tax (FBT)?
If a company's assets are used by its employees for personal enjoyment and enrichment, the business will be liable to pay Fringe Benefits Tax.
For instance, if an employee uses a company car for personal use, if the company reimburses school fees, or if the company offers discounted loans, FBT will have to be paid. Some benefits, such as work-related items like laptops, software, and transport expenses, are exempt as long as they are primarily used for employment purposes.
However, determining whether a benefit qualifies as a fringe benefit can become complicated, particularly if the benefit was not provided with respect to employment. This can be further complicated if the benefit recipient also serves the provider in other capacities, such as a beneficiary of a trust or a shareholder in the company, who may also be an employee of the company or trust.
Therefore, it can be challenging to determine whether benefits provided to such persons constitute fringe benefits.
How do I calculate Fringe Benefits Tax?
In this section, we will outline the process of calculating, reporting, and paying Fringe Benefits Tax (FBT) in Australia.
To begin, it's important to understand that fringe benefits are classified into two types: Type 1 and Type 2. The ATO provides the following steps to help you calculate your FBT:
Step 1: Calculate the total taxable value
Calculate the taxable value (before grossing up) of all fringe benefits provided to employees.
Step 2: Identify Type 1 benefits
Identify the total taxable value of Type 1 benefits, for which you can claim a Goods and Services Tax (GST) credit.
Step 3: Gross up Type 1 benefits
Multiply the total taxable value of Type 1 benefits by the Type 1 gross up rate (currently 2.0802) to determine the grossed-up taxable value.
Step 4: Identify Type 2 benefits
Identify the total taxable value of Type 2 benefits, for which you cannot claim a GST credit. These may include supplies that were either GST-free or input taxed.
Step 5: Gross up Type 2 benefits
Multiply the total taxable value of Type 2 benefits by the Type 2 gross up rate (currently 1.8868) to determine the grossed-up taxable value.
Step 6: Calculate the total FBT taxable amount
Add the grossed-up amounts from steps 3 and 5 to determine the total FBT taxable amount.
Step 7: Calculate the FBT amount to pay
Multiply the total FBT taxable amount (from step 6) by the FBT rate (currently 47 percent) to determine the total FBT amount you are required to pay.
FBT exemptions – and how to know if you’re exempt
Employers may be eligible for exemptions or concessional treatment for benefits provided to their employees, depending on the circumstances. Some of the exemptions that may be applicable include:
Work-related items exemption, which applies to items that are primarily used for employment purposes by employees.
Retraining and re-skilling exemption, which applies to employers who provide training or education to employees who are or will soon be redundant.
Minor benefits exemption, which applies when the value of the benefit is less than $300.
Taxi travel expenses exemption, which applies when the travel is a single trip beginning or ending at the employee’s workplace.
Car parking exemptions, which may apply when certain conditions are met.
Living-away-from-home allowance reduction in some cases.
Emergency assistance exemption, which applies when benefits are provided to employees affected by natural disasters, accidents, serious illness, or other serious civil conflicts.
Your not-for-profit organisation can be exempt from Fringe Benefits Tax (FBT) up to a capping threshold if it is a:
public benevolent institution
health promotion charity
public or not-for-profit hospital
public ambulance service
How does an employer report and pay FBT?
The period for FBT is from 1 April to 31 March each year. If you provide benefits to your employees and suspect that your business may be liable for FBT, now might be a good time to determine your obligation and register with the ATO. Your accountant or tax agent can assist you in registering for FBT. Once you have provided fringe benefits to your employees, you must file an FBT return.
The deadline for submitting an FBT return is usually 21 May, but if you use a tax agent, you may be eligible for an extended deadline. If you have never paid FBT before, or if the previous year's FBT payment was less than $3,000, you only need to make one payment for the year when you file your FBT return.
Alternatively, FBT payments are made quarterly through your activity statements for the following FBT year if your liability is greater than $3,000.
Reporting requirements for FBT on income statements (formerly PAYG payment summaries)
As mentioned earlier, only employers are responsible for paying FBT. However, if the value of fringe benefits provided to an employee exceeds $2,000 in an FBT tax year, this amount must be reported on the year-end income statement given to employees and will be included in that employee's tax return as a Reportable Fringe Benefits Amount (RFBA).
This reported figure does not count as taxable income, so there are no direct income tax or Medicare levy implications for the employee. However, these Reportable Fringe Benefits (RFBs) may affect other benefits and responsibilities, such as family tax benefits, the Medicare levy surcharge, private health insurance rebate, child support payments, superannuation co-contributions, HELP repayments, and various tax offsets.
If RFBs would have a negative impact, you can agree to reduce your employer's FBT liability (and thus your RFBs) by contributing a dollar-for-dollar amount from your post-tax salary to cover the fringe benefits provided by your employer.
Does Fringe Benefits Tax affect salary sacrificing?
The primary objective of salary sacrifice arrangements, also known as salary packaging, is to provide employees with a tax-efficient mix of income and benefits that is advantageous for both the employee and the employer. The most common items that can be included in a salary packaging agreement are car fringe benefits (through a novated lease), expense payment fringe benefits (such as mortgage payments, school fees, etc.), car parking fringe benefits, and superannuation contributions.
While certain salary-sacrificed items, like superannuation, generally do not attract FBT, many others, including cars, do. For instance, novated leases result in a car benefit under the FBT rules, and employers usually transfer some or all of this extra cost to employees.
Therefore, even though FBT is the employer's responsibility, it may choose to reduce your salary by the amount of FBT it must pay as part of your salary sacrifice agreement. Because the current FBT rate is 47%, there may be little benefit in salary packaging a car unless you are taxed at the highest rate.
Do you pay Fringe Benefits Tax on superannuation contributions?
If an employee has salary-sacrificed super contributions paid into a complying fund, they are not considered as Fringe Benefits, but they can be liable for FBT if paid for an associate, such as a spouse, or paid into a non-complying superannuation fund. These contributions count towards an employee's concessional (before-tax) super contributions cap of $27,500 per year.
Employees must be cautious that their salary-sacrificed amounts, added to other concessional contributions, such as employer's normal contributions and personal contributions, do not exceed this cap. Otherwise, the ATO warns that they may be required to pay extra tax.
Can an employer reduce its FBT liability?
According to the ATO, you can decrease or completely eliminate your FBT obligation by requesting your employee make a cash contribution towards the cost of the benefit provided to them. The taxable value of the benefit is reduced by each dollar that they pay towards the provision of the benefit.
Another way to avoid paying FBT is to offer employees higher salaries instead of providing them with fringe benefits. Additionally, there are several FBT concessions and exemptions mentioned earlier in this article that can decrease or remove the need to pay FBT.
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Any advice contained in this document is general advice only and does not take into consideration the reader’s personal circumstances. Any reference to the reader’s actual circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances.