A Comprehensive Guide to Fringe Benefits Tax in Australia

Navigating the maze of Fringe Benefits Tax in Australia? Unravel the complexities and unlock the secrets with Driva’s comprehensive guide.

What is Fringe Benefits Tax (FBT)?

Fringe Benefits Tax (FBT) is a separate tax from income tax and is levied on employers who provide fringe benefits to their employees or employees' associates (typically family members). 

Fringe benefits are essentially perks or extras given to employees on top of their salary or wages. The Australian Taxation Office (ATO) is responsible for administering FBT, and employers are liable for paying any FBT due.

Why Do Companies Offer Fringe Benefits?

Offering fringe benefits can give companies a competitive edge by attracting and retaining high-quality employees. These benefits can enhance employee satisfaction and create a more positive work environment. 

Employers can generally claim the cost of providing fringe benefits and the amount of FBT paid as income tax deductions.

Examples of Fringe Benefits

Some common examples of fringe benefits include:

• Company cars for personal use
• Discounted personal and commercial loans
• Gym or health club memberships
• Entertainment expenses, such as concert tickets or meals
• Private health insurance
• Childcare costs and school fees

Salary Sacrifice and Fringe Benefits

Salary sacrifice arrangements can include various types of fringe benefits, such as additional superannuation contributions, car leasing, and additional leave. To set up a salary sacrifice arrangement, an employee must discuss their desired benefits with their employer and agree upon the terms of the arrangement.

Once the arrangement is in place, the employer will deduct the agreed-upon amount from the employee's pre-tax salary and provide the corresponding fringe benefits. 

It's essential for both the employee and employer to review the terms of the salary sacrifice arrangement regularly to ensure it remains compliant with tax laws and continues to provide the intended benefits.

Taxable Value of Fringe Benefits

FBT is calculated on the taxable value of fringe benefits provided to employees or their associates. The taxable value is generally the cost to the employer of providing the benefit. However, for some benefits, such as car fringe benefits, the taxable value is determined using a statutory formula that may not reflect the actual cost to the employer.

Grossing Up and FBT Rate

Employers are required to "gross up" the taxable value of benefits provided to employees to determine the amount of FBT payable. Grossing up reflects the gross salary employees would have to earn at the highest marginal tax rate (including the Medicare levy) to purchase the benefits after paying tax.

There are two different types of gross-up rates:

Type 1: Applies to benefits where the employer is entitled to a Goods and Services Tax (GST) credit for GST paid.

Type 2: Applies when there is no GST credit entitlement.

The FBT rate, currently at 47%, is applied to the grossed-up taxable value of benefits to calculate the tax payable or tax paid.

FBT Year

The FBT year is different from the financial year and runs from April 1 to March 31. Employers must lodge an FBT return and pay any FBT due by May 21 each year.

Exempt Benefits

Certain benefits are exempt from FBT, such as:

• Minor benefits (less than $300 in value and infrequent)
• Meal entertainment benefits provided on business premises
• Car parking on business premises

In addition to the FBT exemptions mentioned above, there are several other specific exemptions that may apply to certain fringe benefits. For example, employee relocation expenses, remote area housing benefits, and certain types of work-related items (such as portable electronic devices) may be exempt from FBT.

Employers seeking to take advantage of FBT exemptions or reductions should ensure they meet the eligibility criteria and properly document their fringe benefits. To apply for FBT exemptions or reductions, employers must submit an application to the Australian Taxation Office (ATO), providing relevant details about the fringe benefits and the reasons for the exemption or reduction request.

FBT Reduction Strategies

Employers can reduce their FBT liability by:

1. Providing exempt fringe benefits instead of taxable benefits
2. Replacing fringe benefits with additional salary or wages (subject to income tax)
3. Implementing a salary sacrifice arrangement that lowers employees' taxable income

If the taxable value of fringe benefits provided to an employee in an FBT year exceeds $2,000, it is considered a Reportable Fringe Benefits Amount (RFBA) or Reportable fringe benefit amount and must be featured on the employee's financial year income statement or payment summary. 

While RFBA is not considered taxable income, it can affect an employee's entitlement to various government benefits and tax offsets.

Implications of RFBA on Government Benefits and Tax Offsets

The RFBA may impact an employee's:

• Medicare Levy Surcharge
• Family Tax Benefits
• Child Support Payments
• Private Health Insurance Rebate
• Superannuation Co-contributions
• Repayment obligations for government loans, such as the Higher Education Loan Program (HELP), Student Financial Supplement Scheme (SFSS), and Trade Support Loan (TSL).

ATO's Role in FBT Compliance

The Australian Taxation Office (ATO) is responsible for overseeing the administration and collection of Fringe Benefits Tax. Employers must lodge an FBT return and pay any FBT due by May 21 each year. The ATO also provides guidance and support for employers regarding FBT compliance.

Record-Keeping Requirements

Employers must keep records of fringe benefits provided, their taxable value, and any FBT paid. Records must be maintained for five years from the date of the relevant FBT return's lodgment.

Small businesses have unique considerations when it comes to offering fringe benefits and dealing with FBT. While offering fringe benefits can help small businesses attract and retain talented employees, the administrative burden of managing FBT obligations can be challenging for smaller operations.

In recognition of these challenges, the ATO provides several concessions for small businesses regarding FBT. For example, small businesses may be eligible for the Small Business Entity Concessions, which include simplified reporting, extended deadlines for lodging FBT returns, and the ability to pay FBT in instalments.

To qualify as a small business for FBT purposes, the business must have an aggregated turnover of less than $10 million. Small business owners should consult with a tax professional or the ATO for guidance on how to take advantage of these concessions.

Electric Vehicle Exemptions

The Federal Government is currently considering a major reform that would exempt many electric vehicles provided through business arrangements from Fringe Benefits Tax, even if they have no business usage. 

This change would create new planning opportunities for employers and employees in designing remuneration packages as electric vehicle availability grows in the Australian market.

Understanding Fringe Benefits Tax is essential for both employers and employees in Australia. By being aware of FBT implications and compliance requirements, employers can make informed decisions about providing benefits, while employees can better assess their remuneration packages' overall value.

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How can I reduce my company's FBT liability?

Companies can reduce their FBT liability by providing exempt benefits, replacing fringe benefits with additional salary, or implementing salary sacrifice arrangements that lower employees' taxable income.

Are there any exemptions for FBT on electric vehicles?

The Federal Government is currently considering a reform that would exempt many electric vehicles provided through business arrangements from Fringe Benefits Tax, even without business usage.

What is the difference between Type 1 and Type 2 gross-up rates?

Type 1 gross-up rate applies to benefits where the employer is entitled to a GST credit for GST paid, while Type 2 applies when there is no GST credit entitlement.

How does the Reportable Fringe Benefits Amount (RFBA) affect my entitlement to government benefits?

RFBA can impact your entitlement to the Medicare Levy Surcharge, Family Tax Benefits, Child Support Payments, Private Health Insurance Rebate, Superannuation Co-contributions, and repayment obligations for government loans.

What are some examples of exempt fringe benefits?

Exempt fringe benefits include minor benefits (less than $300 in value and infrequent), meal entertainment benefits provided on business premises, and car parking on business premises.

Can I claim a tax deduction for FBT paid by my employer?

No, employees cannot claim a tax deduction for the FBT paid by their employer. FBT is a tax liability for the employer, and the employee is not directly responsible for paying FBT.

How does FBT affect my HELP (Higher Education Loan Program) debt repayments?

Your Reportable Fringe Benefits Amount (RFBA) can affect your HELP debt repayments, as it is taken into account when calculating your repayment income. A higher RFBA may result in higher HELP debt repayments.