When an employer provides their employees or employees’ associates with properties or any other cash or non-cash benefits on top of their salaries and wages, such benefits are called fringe benefits. These employees may include former, current or future employees. Certainly it is an awesome reward to every employee for a job well done, however, fringe benefits are subject to tax. The fringe benefits tax (FBT) is the amount paid to the Australian Taxation Office (ATO) by an employer. It is separate from Income Tax and is based on a taxable value of the benefits provided, which is computed according to which category such benefits fall into.
Instances, where an employer is deemed providing fringe benefit to its employees, include but not limited to the following:
Although fringe benefit tax is shouldered by the employer, the cost of providing such benefits and payment of FBT will be claimed as income tax deduction. Fortunately, there are benefits exempted from FBT, generally, these includes certain benefits provided by religious institutions and benefits provided by international organisations and public benevolent institutions (i.e. scientific institution, public educational institution, charitable institutions acknowledged by the Australian Charities and Not-for-profits Commission (ACNC). Nonetheless, it is important to know several types of fringe benefits to properly identify benefits that are under FBT and those that are not, these are the following;
- Car fringe benefit – when employees are allowed to use a company car for personal purposes except if cars are solely used for travel to and from workplace and other activities that are necessary to perform work;
- Debt waiver fringe benefit – when employees’ debt were waived;
- Loan fringe benefit – employees were given cheap loan;
- Expense payment fringe benefit – when employers pay for expenses incurred by employees (i.e. school fees) however travel expense to obtain medical treatment and those in connection with compassionate travel are exempted.
- Housing fringe benefit – when employees are allowed to use a unit of accommodation regardless whether exclusive or not;
- Living-away-from-home allowance benefit – when employees given cash to compensate for additional expenses incurred if employee is living away from home to perform work, excluding expenses that can be claimed as income deduction;
- Airline transport fringe benefit – when employees are given free or discounted air travel on a standby basis;
- Board fringe benefit – when employees are entitled with least two meals a day upon accommodation; However accommodation is deemed free of FBT when criteria for fly-in fly-out are all met; the work location is a remote area in Australia, the accommodation is near or within the vicinity of workplace, work is on a regular continuous days, transport from residence to workplace is provided, and having regard to the location of the two places, it would be unreasonable to expect the employee to travel to and from work on a daily basis.
- Entertainment – when employee is entitled to be given entertainment by way of food, drink or recreation (i.e. free ticket concert)
- Tax-exempt body entertainment fringe benefit – when employees are provided with entertainment expenses that are non-deductible to income tax;
- Car parking fringe benefit – when employees are given free parking;
- Property fringe benefit – when employee are granted free or discounted properties; and,
- Residual fringe benefit – when employees are entitled to benefits not included above (i.e. vacation travel expenses).
Because FBT involves higher rate than income tax, a good way to reduce FBT liability is to include benefits to the employee’s salaries and wages which will then be subject to income tax. Aside from salaries and wages, there are still benefits not subject to FBT and these includes employee share schemes, superannuation, employment termination payments, payments of a capital nature, first home saver account (FHSA) payments, dividends, and payments to associates. FBT rates differ from time to time, for 1 April 2015 to 31 March 2017 the rate is 49% and 1 April 2017 onwards the rate is 47%.
[ctt template=”7″ link=”hagk8″ via=”no” ]FBT rates differ from time to time: for 1 April 2015 to 31 March 2017 the rate is 49% and 1 April 2017 onwards is 47%.[/ctt]
A threshold of $2,000 is determined and the calculation is based on the grossed up amount of fringe benefits. There are two types gross up; Type 1 (higher gross-up rate) which is the rate used for employees who are entitled to a goods and services tax (GST) credits and Type 2 (lower gross up rate) for employees not entitled. Regardless of whether the benefits provided are type 1 or type 2, only the lower gross-up rate is used for reporting on employees’ payment summaries.
FBT may seem to discourage employers from providing benefits to employees but economically speaking, taxes are the bread and butter of the government, and this parallels to the principle of equity of tax system which commends justification for wealthy people to pay more in taxes than poor people.
If you have further questions about fringe benefits tax, our qualified specialists are ready to assist you. Get in touch with us today: