When you employ staff, there’s more tax to pay than the Pay-As-You-Go (PAYG) that you set aside each pay period as a part of regular personal income tax for your employees. Fringe Benefits Tax (FBT) is a tax paid on top of regular income tax that is different to salary or wages.
A fringe benefit can be provided to your staff because they are an employee. This may even be a former or future staff member that is entitled to receive salary or wages because you have employed them. Fringe benefits are other benefits you provide to your staff over and above salary or wages and can include rights, privileges, services, payments, car fringe benefits, loan and debt waiver fringe benefits, expense payments, housing fringe benefits, living away from home benefits, airline transport benefits or entertainment.
It’s important to note that you as an employer pay the Fringe Benefits Tax on behalf of your employees.
If you make a payment to an employee, company director or office holder that is subject to PAYG withholding obligations or if you provide benefits in lieu of payments to an Australian resident or employee working oversees, you will be considered to be an employer. FBT applies to sole traders, partnerships, corporations, unincorporated associations, and government or a government authority. FBT is liable regardless if you are liable to pay other taxes such as income tax.
Fringe benefits paid by an employer are considered to be a wage or salary and therefore will need to be taxed. You may claim an income tax deduction for the cost of providing fringe benefits to your employees and for the amount of FBT you pay.
Are You Providing Fringe Benefits?
You want to reward your staff for extra duties they’ve taken on, extra hours they’ve worked or perhaps you’d like to gift them a something extra at Christmas, but you’re not sure if your gift would be considered to be a fringe benefit.
If any of the following apply, you may have an FBT liability:
- If your employees use company cars or vehicles privately
- If your employees use a car garaged at their place of residence and uses the car privately
- If your employee receives reduced loans and interest rates from your business
- If you have released your employee from debt
- If you have paid for or reimbursed an employee’s private, non-business expense
- If you have provided an employee a house or other accommodation
- If you have provided your employee with a living away from home allowance
- If you provide entertainment, including food, drink or recreation to your employees
- If you provide salary package arrangements for your employees
- If you have provided your employees with goods at a lower price than is normally available to the public
Fringe benefits have been categorised into 13 different types. How an employer calculates and reports the taxable value of the FBT provided to employees depends on the type of benefits provided. These categories include:
- Car fringe benefits
- Car parking fringe benefits
- Entertainment-related fringe benefits
- Expense payment fringe benefits
- Debt waiver fringe benefits
- Loan fringe benefits
- Housing fringe benefits
- Board fringe benefits
- Living away from home fringe benefits
- Property fringe benefits
- Residual fringe benefits
- Airline transport fringe benefit
There are a number of tax exempt benefits which include benefits provided by religious institutions and benefits provided by some international organisations and public benevolent institutions. Concessions are also available that will reduce the taxable value of the benefit partially or to nil.
How To Reduce Your FBT Liability
There are a number of ways FBT can be legally reduced, sometimes to nil.
Cash: An employee plays tax in their salary or wages – including cash. Replacing the fringe benefits with a cash equivalent in the form of salary or wages will reduce your FBT.
Exempt benefits: There are items that are exempt from FBT. By paying your staff with exempt items, you will not incur FBT.
Tax-Deductible benefits: You may pay your employee with a benefit that would be normal tax deduction.
Employee contribution: In most cases, FBT can be reduced if your employee makes payments towards the fringe benefit. This is called an employee contribution. This can be made towards a car by paying a third party for some of the operating costs.
There are further items to consider if your employee makes contributions:
- It must be paid from your employees after-tax income
- It cannot be used to reduce the taxable value of another fringe benefit
- It may be used to offset against owed amounts to your employees
- A contribution paid directly to an employer must be included in your assessable income
- A contribution paid to a third party is not deductible
- An employee contribution may be treated as a taxable component of the GST. There are rules for the GST component of an employee’s contribution
What Items Are Not Subject To FBT?
FBT exclude certain benefits from being classified as a fringe benefit. This includes:
- Salary or wages
- Employee share schemes
- Termination payments
- Payments of a capital nature
What Are The GST Consequences Of FBT?
You are able to claim back the GST credits on GST incurred as a part of the FBT expense. You’ll need to be registered to collect GST and will be able to claim it back when you lodge your BAS. If you are entitled to claim back the GST credit, you’ll need to shoe the higher grossed-up rate (called type 1) to calculate the payable FBT.
FBT As A Tax Deduction
As an employer, the cost you have incurred by providing a fringe benefit or an exempt benefit is usually a normal allowable income tax deduction. The amount of FBT an employer has paid is generally an allowable income tax deduction, although an employee may not claim FBT as a tax deduction when they lodge their income tax return.
Employees who choose to forgo their future entitlement to salary or wages in return for a fringe benefit of similar value is commonly known as salary packaging or total remuneration packaging. In this instance, the employee will need to pay income tax on the reduced salary or wages.
You as an employer may be liable to pay FBT on the fringe benefits provided, but will be able to claim the GST credits you incur.
The types of non-cash benefits that may be provided under such an arrangement include:
- Superannuation contributions
- Fringe benefits that include car and expenses paid
- Expense payments, property or residual benefits that arise from work-related items
ITP Accounting Professionals have been helping Australian individuals and business with their tax for 50 years. Phone a friendly professional today to chat about your FBT obligations and how to reduce your businesses overall tax bill. Phone 1800 367 487 today.