In this article, we cover:
- What is fringe benefits tax (FBT)?
- Which fringe benefits are exempt?
- Does fringe benefits tax affect salary sacrificing?
- Do you pay fringe benefits tax on super contributions?
- How is fringe benefits tax calculated?
- How can an employer reduce its FBT liability?
- How does an employer report and pay FBT?
- What are reportable fringe benefits for employees?
What is fringe benefits tax (FBT)?
If you provide benefits to your employees on top of their normal pay, you could find that your business is liable to pay fringe benefits tax (FBT). According to the Australian Taxation Office (ATO), this is a tax paid by the employer – not the employee – on the taxable value of certain benefits paid to employees. When we refer to employees in this context, this also covers benefits provided to the family of employees or to associates (such as friends) of employees.
Examples of fringe benefits
Amongst the most commonly provided benefits that can give rise to FBT in Australia are:
- Providing a car for your employee that can also be used for private purposes
- Providing free or subsidised car parking for your employees
- Providing your staff with “entertainment”, such as meals, drinks, sporting or leisure pursuits (e.g. buying them a round of golf, tickets to a sporting event, theatre tickets or holidays)
- Either reimbursing an employee for private expenses or paying for such expenses directly to a third party (for instance, paying your employee’s domestic utility bills or health insurance premiums)
- Giving your employee a loan and charging no interest or a reduced rate of interest
- Providing accommodation to an employee rent-free or at a reduced rent
Which fringe benefits are exempt?
Some benefits are free from FBT, such as the provision of tools or electronic devices (e.g. laptops) that are mainly used for work purposes. So-called ‘minor benefits’ are also FBT-free. A minor benefit is one with a notional taxable value (what it would be valued at if it were taxable) of less than $300 and could include things like the annual staff Christmas party, provided the cost per head is less than $300.
There are also a number of FBT concessions and exemptions available to certain not-for-profit organisations like charities, public hospitals and religious institutions.
FBT concessions and exemptions may also apply if you need to offer your employees benefits you do not usually provide because of COVID-19, such as if you’re now paying for items that allow your employees to work from home (e.g. a monitor, keyboard or internet access). The ATO has further information on its website regarding COVID-19 and fringe benefits tax.
Does fringe benefits tax affect salary sacrificing?
The main aim of most salary sacrifice arrangements (or salary packaging, as it is sometimes called) is to enable an employee to receive a combination of income and benefits in a tax-effective manner, ideally both for the employee and the employer.
→Related article: Salary sacrifice: What is it and how does it work?
Some common salary packaging items are:
- Car fringe benefits (i.e. novated lease)
- Expense payment fringe benefits (such as school fees, mortgage payments, etc.)
- Car parking fringe benefits
- Superannuation contributions
Some salary-sacrificed items (such as superannuation) generally do not have FBT implications but many do, including cars. Novated leases, for example, give rise to a car benefit under the fringe benefits tax (FBT) rules, and employers typically look to pass some or all of this additional cost to employees. So while FBT is payable by your employer, it may opt to reduce your salary by the amount of FBT it has to pay as part of your salary sacrifice agreement. This would mean that as the current FBT rate is 47%, there may be little benefit in salary packaging a car unless you pay tax at the highest rate.
Do you pay fringe benefits tax on superannuation contributions?
Whilst salary-sacrificed super contributions are not fringe benefits when paid for an employee into a complying fund, these contributions are liable for FBT if paid for the benefit of an associate, such as an employee’s spouse, or paid to a non-complying superannuation fund.
Salary-sacrificed super also counts towards your concessional (before-tax) super contributions cap of $25,000 per year. So if you’re an employee, you need to be careful that the salary-sacrificed amounts, when added to other concessional contributions such as your employer’s normal contributions plus any personal contributions for which you want to claim an income tax deduction, do not exceed this figure. If they do exceed it, the ATO warns you may have to pay extra tax.
How is fringe benefits tax calculated?
FBT is payable based on the grossed-up ‘taxable value’ of the benefit provided. This ‘grossing up’ process is intended to reflect the gross, before-tax salary employees would have to earn in order to buy the benefits provided by an employer after paying tax. Fringe benefits are split into Type 1 and Type 2 benefits. The actual calculation can be complex and you may want to seek the assistance of an accountant, but the process from an employer’s perspective is summarised as follows by the ATO:
- Work out the taxable value of each fringe benefit you provide to each employee. The rules for calculating the taxable value of a fringe benefit vary according to the type of benefit.
- Identify the total taxable value of the fringe benefits you provide for your employees for which you can claim a GST credit, such as cars, car parking, entertainment and gifts (Type 1 benefits).
- Work out the grossed-up taxable value of these Type 1 benefits by multiplying the total taxable value by the type 1 gross-up rate (currently 2.0802).
- Identify the total taxable value of benefits provided for your employees for which you cannot claim a GST credit, for example, supplies you made that were GST-free, such as school fees, loans, health insurance and gift vouchers (Type 2 benefits).
- Work out the grossed-up taxable value of these Type 2 benefits by multiplying their total taxable value by the type 2 gross-up rate (currently 1.8868).
- Add the grossed-up amounts from steps 2 and 4. This is your total Fringe Benefits Taxable amount.
- Multiply the total Fringe Benefits Taxable amount (from step 5) by the FBT rate (currently 47%). This is the total FBT amount you are liable to pay.
Note: if you are not sure if a benefit you provide is a Type 1 or Type 2 benefit, check with your accountant or contact the ATO.
Let’s assume you provide a car to a member of staff which they can use privately (Type 1 benefit). The taxable value of the benefit is $10,000 during the 2020/21 FBT year. The FBT you would have to pay as an employer would be worked out as follows:
Taxable Value $10,000
Multiplied by Gross-up rate x 2.0802
Grossed-up taxable value $20,802
FBT Rate 47%
FBT Payable (rounded) $9,777
If you are an employer you can find more information on how to calculate your FBT liability on the ATO website.
Can an employer reduce its FBT liability?
It’s possible to reduce your FBT liability, or even eliminate it altogether, by asking your employee to make a cash contribution towards the cost of the benefit provided to them, according to the ATO. Each dollar that they pay towards the provision of the benefit reduces the taxable value of the benefit by the same amount. Offering employees higher salaries instead of giving them fringe benefits is another way to avoid paying FBT.
There are also various FBT concessions and exemptions available that can reduce or eliminate FBT, as mentioned earlier in this article.
How does an employer report and pay FBT?
The FBT year runs from 1 April to 31 March, so now could be a good time to determine if your business needs to register for and pay FBT.
If you provide benefits to your employees and think you might have an FBT liability, the first step you need to take is to register for FBT with the ATO. Your tax agent or accountant can help you with that process.
If you have provided fringe benefits for your employees, you must then lodge an FBT return. The latest date for lodging an FBT return is normally 21 May, though if you use a tax agent you may qualify for an extended deadline.
If you haven’t paid FBT before, or if the amount of FBT you had to pay for the previous year was less than $3,000, you only make one payment for the year when you lodge your FBT return. Otherwise, FBT is payable quarterly through your activity statements for the next FBT year.
What are reportable fringe benefits for employees?
As pointed out earlier, FBT is payable only by employers. However, if the amount of fringe benefits provided to an employee exceeds $2,000 in an FBT tax year, the figure must be reported in the year-end income statement provided to employees and is then included on that employee’s tax return.
This isn’t taxable income, so there are no direct income tax or Medicare levy consequences for the employee. However, these reportable fringe benefits (RFBs) can be taken into account in working out a number of other benefits and obligations, including family tax benefits, the Medicare levy surcharge, private health insurance rebate, child support payments, superannuation co-contributions, Higher Education Loan Program (HELP) repayments, and various tax offsets.
Remember, if RFBs would impact you negatively, you can agree to reduce your employer’s FBT liability (and hence your RFBs) by making a dollar-for-dollar contribution out of your post-tax salary to your employer to pay for the fringe benefits it provides you.
→Related article: Private health insurance and tax: How does it work?
For more information on fringe benefits tax and reportable fringe benefits, you can head to the ATO website or contact the ATO directly. If you are an employer, you may also like to discuss your FBT liability with a registered tax agent or accountant.
Main image source: Blue Planet Studio/Shutterstock.com
About Mark Chapman
Mark Chapman is Director of Tax Communications at H&R Block and is a regular commentator on tax matters for a variety of Australian broadcast and print media outlets, including; Money Magazine, My Business magazine, The Australian Financial Review, The Daily Telegraph, The Age and The Business Spectator. Mark is an author, Chartered Accountant, CPA and Chartered Tax Adviser and holds a Masters of Tax Law from the University of New South Wales. Follow him on LinkedIn.