What is fringe benefits tax?
Employers have to pay a tax on certain benefits that they give to their employees, as well as benefits they may give to the employee’s family or other people they are associated with.
A benefit is something that the employer gives an employee as an extra perk, or that can be seen as subsidising their salary. Some of the most common fringe benefits include paying for car parking while they are at the office every day, allowing an employee to use a work car for private purposes, providing an employee with a discounted loan, or reimbursing an expense incurred by an employee for a family member, such as school or childcare fees. Fringe benefits may also include recreational perks that are not directly related to work, such as providing free tickets to a concert or a gym membership.
There are some benefits that employers may want to provide to reward their employees who are not considered to be fringe benefits. These include shares, payments that are deemed to be dividends under certain conditions, or employment termination payments such as the gift or sale of a company car to the employee who has been driving it on their termination.
If the value of the benefit is less than $300, it typically will be exempt from tax. For example, giving a box of chocolates to an employee does not attract fringe benefits tax. If an employee receives, for example, a night’s accommodation, a meal and a taxi fare as a one-off benefit, each item is assessed separately. However, if the employee is provided lunch to the value of $50 each week, the regularity of the benefit and the annual total being greater than $300 means it attracts fringe benefits tax.
Other things that are exempt from fringe benefits tax include many work-related items such as a mobile phone, laptop, tablet, GPS device, calculator, briefcase, tools, computer software and protective clothing. One extra item per employee per year is allowed before it attracts fringe benefits tax, such as if an employer wants to gift an extra laptop on top of the existing one that the employee uses.
A taxi or ride-share fare that begins or ends at the workplace is exempt; however, public transport is not exempt if it is considered to be part of the salary package.
Employers need to assess their own fringe benefits tax liability, and pay the amount they owe annually at the end of May. The fringe benefits tax that an employer needs to pay is calculated on the tax value of the benefit.
However, sole traders, or partners in a partnership, are not subject to fringe benefit tax.
How much is fringe benefits tax?
To calculate the value of the benefit, employers need to ‘gross up’ the taxable value of the benefits that are provided. This will reveal the gross salary the employee would have had to earn to buy the benefit(s) themselves.
There is a simple formula that employers can use to easily make the calculation:
- Determine the taxable value of the benefit. If it includes GST, include this value. For example, an annual gym membership that costs $1100.
- Multiply that value by the gross-up rate. If the value includes GST, multiply it by 2.0802. If the value does not include GST, multiply it by 1.8868. For example, the FBT value of the gym membership would equal $2288.22.
- Once each benefit value has been multiplied, add up all the GST-inclusive and GST-exclusive values.
- Determine 47% (the FBT rate) of the total value. For example, 47% of $2288.22 equals $1075.46. This is the amount of fringe benefits tax an employer would need to pay in this example.
The ATO also has online tools that can help employers to make the calculations, such as its car calculator tool.
Why would an employer provide fringe benefits to employees?
Fringe benefits can be a great way to reward good employees, top up their remuneration when increasing salary is not an option, boost morale, or attract good workers to the business by providing them with something that their competition may not. In some cases, it may lead to the employee being charged income tax at a lower rate than if they had received the value of the benefit as part of their salary, so it can be an attractive lure for employees.
Employers must register for FBT, keep records and source an employee declaration as well as lodge an FBT return.
Employers can claim an income tax deduction for fringe benefits tax. The deduction available may vary if the employer can claim GST credits, so providing fringe benefits and paying the tax may be more financially viable for employers than many may realise.
FBT mistakes to avoid
The ATO reports that many employers are not complying correctly with motor vehicle FBT requirements, particularly when an employer provides a company car specifically for their private travel or lets them use the company vehicle for their private use.
For example, many employers treat all eligible commercial vehicles as FBT-exempt, without considering whether they have limited any private use by the employee who drives it. They treat cars as only being for business use, even though they may be available for or used for private purposes and the employee may not keep a valid or accurate logbook.
Employers also often make mistakes by completing their FBT return but not reporting it in their income tax return, or vice versa.
Some employers may be caught out by providing a benefit that they do not realise attracts fringe benefits tax, such as a staff Christmas party or awards function. Now that the Covid-19 pandemic is largely behind us, employers may also need to check that they are not providing employees with benefits that they did not usually provide in the past, such as paying for items to allow employees to work from home. This includes rewards and incentives for employees to receive their Covid-19 vaccination or booster dose. However, if a company vehicle was garaged at the employee’s home because of the pandemic, there may not be an FBT liability.
Employers also should remember that the reporting year for fringe benefits tax differs from the financial year, and employers need to calculate the benefits provided during the period from 1 April to 31 March of the following year.
However, the ATO understands that errors can be made when submitting an FBT return, and in those situations, employers can voluntarily disclose their mistake or amend it.
Some employers may be FBT-exempt. If unsure, all employers should seek advice from an accountant to ensure they are meeting their obligations correctly.
What about salary sacrificing?
Some employees opt to pay for benefits themselves through salary sacrificing, such as leasing a car, and employers may have to pay fringe benefits tax on these benefits provided.
Concessional super contributions – the extra contributions an employee makes into superannuation that are on top of the employer’s required contribution, and are deducted from their salary before income tax is applied – are another common salary sacrificing benefit that is exempt from fringe benefits tax.
It is best that employers and employees analyse the positive and negative implications for each type of fringe benefit before entering into this type of arrangement.
To find out more information about fringe benefits tax
The Australian Tax Office has issued a guide for employers to learn more about their obligations for fringe benefits tax.
Employers can also subscribe to a free email bulletin regularly issued by the ATO to stay up to date on its advice and guidance.
With a little research and expert guidance, employers can quickly get their head around fringe benefits tax, and ensure that both they and their employees reap the beneficial gains from the arrangements.
