If you own a business that employs staff, and provide remuneration to your employees in a form other than straight salary, you may be up for fringe benefits tax (FBT). The upside for your workers is that they do not then have to pay income tax on the value of the benefits provided to them.
FBT is separate to income tax. The FBT regime has its own tax year, from April 1 to March 31 (with the FBT return lodgement deadline May 21, but longer if you use the services of this office).
FBT is calculated using a “grossed-up taxable value” of the relevant benefit provided and is payable at the current FBT rate of 47% for the FBT year ended March 31, 2015. Note that the rate increases to 49% as a result of the Temporary Budget Repair Levy for the 2016 and 2017 FBT years.
Under the FBT law, a fringe benefit typically arises when one of the categories of benefits (see below) is provided by an employer, an “associate” of an employer, or a third party under arrangement with either of the former.
An employer is providing a fringe benefit if, for example:
- it allows a staff member to use a work vehicle for private purposes
- provides a loan to the employee with interest charged (even a minimal level of interest), or
- reimburses a worker for a private expense, such as school fees.
Fringe benefit categories
The Tax Office has several different categories of fringe benefits, which include:
- car fringe benefit
- debt waiver
- loan fringe benefit
- expense payment
- housing fringe benefit
- living away from home allowance
- airline transport
- board (accommodation)
- tax-exempt body entertainment
- car parking
- property fringe benefit, and
- residual benefits (that is, other benefits not covered by the above).
Salary, of course, is not a fringe benefit, and neither is a super contribution. Entitlements under employee share acquisition schemes are not deemed to be a fringe benefit, nor are termination payments.
The rules for calculating the grossed-up taxable value of a fringe benefit are subject to two separate “gross-up” rates – a higher and a lower gross-up rate.
Grossing-up means increasing the taxable value of benefits you provide to reflect the gross salary employees would have to earn at the highest marginal tax rate (including Medicare levy) if they were to buy the benefits after paying tax.
The higher gross-up rate (2.0802 for the 2014-15 FBT year, and 2.1463 for the 2015-16 FBT year) is used where you are entitled to claim a GST credit for GST paid on benefits provided to an employee, known as GST-creditable benefits. The lower gross-up rate (1.8868 for 2014-15 and 1.9608 for 2015-16) is used where there is no entitlement to a GST credit.
Consequences of increased FBT and gross-up rates
With the temporary increase to the FBT rate, there could be a case for employers to reconsider their current fringe benefit arrangements with affected employees in light of the increase.
For employees on packages of less than $180,000 a year, it may end up that upon examination from April 1, 2015 it will be more beneficial to provide remuneration via salary and allowances rather than fringe benefits. Where employers provide fully taxable benefits, such as paying for an employee’s private health insurance, it may be a better option to provide additional salary, which would be taxed at a substantially lower rate than 49%.
The increase in both the FBT rate and the gross-up factors means that employers should reconsider all current fringe benefits arrangements with their staff to limit the impact of possible additional costs and ensure that any arrangement is still as beneficial as possible, for both employee and employer. Employers should also note that the value of taxable fringe benefits once grossed-up are included in the calculation of taxable wages for payroll tax purposes.
Exemptions from FBT
Minor benefits (that is benefits that have a GST-inclusive value of $300 or less) are generally exempt from FBT. However one of the conditions to maintain this exemption is that minor benefits must be offered with “infrequency and irregularity”. There can also be other conditions (check with us). Examples of minor benefits can include the occasional lunch, birthday gifts, flowers on special occasions, the Christmas party, or a one-off interest free loan. Note also that there can be multiple minor benefits (that is, each can have a value of less than $300).
Certain exempt vehicles
There are also circumstances when private use of a car may be exempt from FBT. An employee’s private use of a taxi, panel van or a utility designed to carry less than one tonne, or any other road vehicle designed to carry a load of less than one tonne (that is, one not designed principally to carry passengers) is exempt if their private use of such a vehicle is limited to:
- travel between home and work
- travel that is incidental to travel in the course of performing employment-related duties
- non-work-related use that is minor, infrequent and irregular – for example, occasional use of the vehicle to remove domestic rubbish.
Certain work-related items
Providing certain work-related items to staff will not make a business liable for FBT. These include protective clothing, a briefcase, calculator or tools of trade, portable computer (limited to one per year for each employee) and other items. There are other benefits that escape the FBT net, which you can ask this office about, but generally a condition of exemption is that the benefit or item is primarily used to enable your employee to do their job.
The Tax Office has relaxed the FBT record keeping regime for small businesses to some extent by creating a value of benefits threshold under which full records need not be kept. You will still however need to show the value of benefits on employee payment summaries.
The threshold for the 2014-15 FBT year is $7,965, but it increases each year. As long as benefits paid do not exceed 20% on top of the previous year, the exemption can still apply for subsequent years.
For businesses, it makes no difference whether you are a sole trader, partnership, trustee, corporation, unincorporated association or government body, or whether you pay other taxes such as income tax – as an employer providing taxable benefits by way of remuneration to an employee, you are required to cover FBT. And remember your business will be liable even if that benefit is provided by an associate or by a third party – for example, you may deal with a supplier that, in turn, provides free goods to your employees.
All that is required is that the employee receives the benefit in their capacity as an employee of the business. Also an employee is deemed to have received a fringe benefit if that benefit is directly received by the employee’s “associates” – in the main, these would be family members and relatives. So this catches the school fees paid for an employee’s children or the interest-free loan made out in a spouse’s name.
While an item’s “primary use” is important to determine if a taxable benefit has been provided, the Tax Office bases its decisions on the employee’s “intended use” at the time the benefit is provided. This means that you do not have to record the actual use of every item – you must however be able to provide a “reasonable basis” that would show that a benefit has been provided to facilitate employment; for example via job descriptions, duty statements or employment contracts.
Other documentation and declaration requirements can seem very particular. For travel, for example, a diary of the trip will need to be kept only if the employee is away for six continuous nights or more, but documentary evidence of travel expenses need to be kept no matter the duration of travel. If the trip is within Australia and not entirely for business purposes, receipts must be kept for food, drink, accommodation and incidentals. But if the trip is deemed to be entirely for business, these are not needed. And if overseas and solely for business, only accommodation receipts are required.
Can you pay less FBT?
There are options for businesses wanting to reduce the amount of FBT they are required to pay. The most obvious of course is to replace fringe benefits with straight salary, or simply focus on providing only those fringe benefits that are deemed exempt under FBT law.
Alternatively, FBT could be reduced if the employee shares some of the cost of the benefit provided with their employer. This is commonly referred to as an “employee contributions”.
With a car fringe benefit, for example, an employee could agree to contribute to some of the operating costs, such as fuel, that you do not then reimburse. This then reduces the taxable value of the fringe benefit to the business.
You can also provide a benefit that your employee would normally be able to claim as an income tax deduction, had they paid for it themselves. Referred to as the “otherwise deductible” rule, you can reduce the taxable value of the fringe benefit by the amount your employee would have been able to claim. Say a staff member incurs a work expense, for example, that would have been a one-off wholly deductible amount for the employee in their own tax return. If you reimburse the employee for this expense (as an expense fringe benefit) the taxable value would be nil (but the employee won’t get the deduction).
The Tax Office has released what it says are the most common mistakes regarding FBT obligations:
- business vehicles garaged at an employee’s residence may be a car fringe benefit
- you must keep logbooks when using the operating cost method for calculating vehicle benefits
- when you use the operating cost method, the luxury car tax threshold does not apply when calculating the deemed interest and depreciation
- contributions an employee makes to the employer to reduce the taxable value of a fringe benefit
- are assessable income for income tax purposes
- are possibly taxable supplies for GST purposes
- if your employees have incurred any fuel and oil expenses they need to provide you with a declaration to substantiate these expenses
- directors running their business through a company may be regarded as employees. This may mean that fringe benefits provided to directors result in the company having FBT obligations, and
- when you include reportable fringe benefits on an employee’s payment summary, you must lodge an FBT return.
Note also that while the Tax Office has in the past published an annual “compliance program” spelling out areas of tax it deems to be complex or where it has detected a lot of errors being made, this is no available. Guidance on issues of concern to the Tax Office can now be found through its communications to consultation panels and notices issued to taxpayers.
The latest consultation with key stakeholders with regards to FBT concerns guidance around travel versus living-away-from-home allowance claims. The 21-day rule is of particular focus, with attention being given to whether this still fits with current work trends. Consult this office if this is an area of concern.