Fringe Benefits Tax Explained
The competition for hiring the best employees continues to get tighter, which is why businesses are providing more benefits to candidates aside from good salary rates. These additional employee packages may fall under what’s called fringe benefits which are subject to a fringe benefits tax.
What is a Fringe Benefit?
A fringe benefit is a non-cash benefit that a business provides to its employees outside salary and wages. Employees utilising company assets for personal use is an example of a fringe benefit.
Companies often provide fringe benefits to attract top employees who are looking for more work advantages aside from a good salary. A private car, low-interest loans, discounted goods, and reimbursement on private expenses like gym memberships, school tuition fees, or entertainment costs are some of the most commonly awarded fringe benefits that companies offer.
The definition of a fringe benefit according to the Fringe Benefits Tax Assessment Act 1986 (FBTAA) is very broad that it can include almost anything like a car, a computer, a desk, a chair, a flowerpot, or a toilet, so long as they’re not in the form of cash. These can be awarded to employees, including a company director, a trust beneficiary who works for a company, or a current, former, or future employee, as stated in the FBTAA’s definition.
What is a Fringe Benefits Tax?
A fringe benefits tax (FBT) is a form of tax the employer pays on non-cash benefits given to employees. The amount taxed is based on the value of the provided benefit and is separately paid from income tax.
According to the FBTAA, a benefit is still subject to FBT so long as one of the reasons it’s given is related to employment. Third-party arrangements like novated car leases are subject to FBT.
Since there are more items covered by FBT, it’s faster to take note of the exemptions to the rule. According to the ATO, the following items are not counted under fringe benefits:
- Salary and wages
- Benefits obtained from share acquisition programs
- Employer contributions to super funds
- Payments for contract termination
- Compensation for personal injury
- Excessive remuneration and deemed dividends
- Benefits given to contractors and volunteers
Shareholding can be difficult to classify whether it’s subject to FBT or not, especially in a family business where employees are relatives and are not within arm’s length. To avoid putting the benefit under the FBT radar, it’s best not to associate the benefit in any way with employment terms.
Calculating and Filing for FBT
For employers, calculating the FBT depends on any of the following categories the benefit belongs to:
- Board fringe benefits
- Car fringe benefits
- Car parking fringe benefits
- Debt waiver fringe benefits
- Entertainment-related fringe benefits
- Expense payment fringe benefits
- Housing fringe benefits
- Living away from home allowance fringe benefits
- Loan fringe benefits
- Property fringe benefits
- Residual fringe benefits
Work-related items such as computer software, protective clothing, portable electronic devices, and tools of the trade are exempted from FBT so long as they comply with the limitations set by the ATO.
In calculating FBT, there are two gross-up rates to use depending on eligibility for GST credits:
- Higher gross-up rate (Type 1)
Used when the company or third-party benefit providers are eligible for GST credits on fringe benefits.
- Lower gross-up rate (Type 2)
When the fringe benefits provided aren’t entitled to GST credits.
The tax payable is computed using the taxable value of the benefit multiplied by either of the two gross-up rates. Employers can lessen their FBT liability through cash bonuses, employee contributions, and tax-deductible benefits.
Employers must register for FBT if they provide fringe benefits to employees. This can be done online, through phone, with the help of a tax agent, or by directly filing the FBT return to designated government offices.