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TAX •  2 FEBRUARY 2022 • 4 MIN READ

What is fringe benefit tax (FBT)?

Hand holding a set of car keys

Employers are becoming increasingly competitive in what they offer to attract and retain the best employees. Some perks like free food, discounted gym memberships, in house barista, tickets to events are becoming more common - some of these may or may not attract fringe benefits tax.

Also, companies in their day to day operations could have employees receiving all types of benefits especially relating to entertainment and food (like an office arvo tea or a farewell lunch for a colleague), which result in multiple (and complex) calculations. We won’t get into that, but ATO has all the details here.

We’re not going to get too technical here – just the basics and some figures to show the impact.

Fringe Benefit Tax (FBT)

A fringe benefit is where an employee (or their family member) receives an extra benefit in their role as an employee, in addition to their wages or salary. It can also be a benefit in return for foregoing some of their salary under a salary sacrifice arrangement. 

The most common non-cash benefits are:

  • Private use of a company vehicle
  • A leased vehicle for your personal use (under a ‘novated lease’ arrangement)
  • The company paying health and other insurances
  • The company paying for gym membership
  • Low-interest (or interest-free) loans
  • Entertainment expenses – free/discounted food, cinema tickets, accommodation
  • Private Health Insurance
  • Living-away-from-home allowance (LAFHA)

These benefits are subject to fringe benefits tax (FBT) which is separate to income tax and calculated on the taxable value of the fringe benefit. The benefit needs to be private or personal in nature and not related to the person undertaking their day to day job.

Employers are liable for the FBT that applies to the benefits an employee receives.

Example

Here’s a simple example showing the difference between two employees receiving the same remuneration value, but in different forms.

Jane receives a gross salary of $85,000. Before it gets into her hands, the employer has deducted $18,092 PAYG and pays it directly to the ATO.

  • Jane receives the net amount of $66,908, and the employer claims the expense of $85,000.

I think we’re all OK with this.

What if John receives a salary of only $65,000 and has the use of a company vehicle valued at $20,000?

  • Under the PAYG system, John pays $11,592 tax, receiving a net salary of $53,408. He also has the use of the vehicle.
  • The company can claim expenses for his $65,000 wages and costs associated with owning the vehicle – including fuel, insurance, loan and interest payments, maintenance, and repairs.

Fair? We think not, and more importantly, the ATO thinks not.

The whole purpose of Fringe Benefits Tax legislation is for the government (ATO) to receive the tax that would have been paid, if the employee paid for the benefit out of their own salary from take-home pay.

Who pays and how much?

FBT is a tax paid by the employer and only applies to companies, not sole-traders. 

Unlike the financial tax year (1 July – 30 June), the FBT year is 1 April – 31 March.

The ATO provides a step-by-step as to how to calculate the FBT payable

Taxable Value of benefit provided x Gross Up Rate (Type 1 or Type 2) x FBT Rate of 47% = FBT Payable to ATO by Employer

There are two different gross-up rates to calculate fringe benefits taxable amounts:

  • Type 1 - GST paid on benefit provided to employee 2.0802
  • Type 2 - No GST paid on benefit provided to employee 1.8868

However, for some benefits, the taxable value is calculated using a statutory formula (e.g. car benefits), which doesn’t necessarily reflect the actual cost to your employer (it’s used simply to work out FBT and any reportable fringe benefit amount). 

Let’s work through a simple example - if an employee receives a gym membership worth $,1000 (including GST) during the year from their employer, the employer would calculate the FBT payable as follows

Taxable Value = $1000

Gross Up Rate (Type 1) = 2.0802

FBT Rate = 47%

$1,000 x 2.0802 x 47% = $977.69 - This is what the employer pays to the ATO

Minor benefit exemption

A minor benefit is one that is provided to an employee or their associate (e.g. spouse) on an “infrequent” or “irregular” basis, which is not a reward for services, and at a cost less than $300 (inclusive of GST) “per benefit”. The employer will not need to pay FBT on these benefits. You’ll need to use some discretion as to what is considered infrequent and irregular - your accountant will be able to give you some guidance on this.

When is FBT payable?

An annual FBT return needs to be lodged and paid by 21 May each year. If you have a tax agent that lodges your return electronically, the due date to lodge and pay is 25 June.

If your FBT liability for the last year was $3,000 or more, you will need to pay 4 quarterly instalments. Quarterly instalments are determined based on your prior years lodged FBT return.

What is Reportable Fringe Benefits Amount (RFBA)?

If you provide certain fringe benefits with a total taxable value of more than $2,000 during the FBT year, these are Reportable Fringe Benefits Amounts - you must report:

  • the grossed-up taxable value of the fringe benefits on the employee's income statement or payment summary
  • for the corresponding income year.

Not all benefits are reportable (e.g. car parking).

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