Fringe Benefits Tax Fringe benefits tax is a tax paid on certain benefits employers provide to their employees or their employee s associates (typically family members). FBT is separate from income tax and is based on the taxable value of the various fringe benefits provided. Fringe Benefits Tax is payable by any employer who provides employees with benefits, regardless of the type of business structure. The FBT year runs from 1 April to 31 March. A fringe benefit is a benefit provided in reward for employment. This effectively means a benefit provided to an employee (or their associate) because they are an employee. An employer can provide these benefits, or they can be provided by: An associate of theirs A third party under an arrangement with the employer. An employee can be a current, future or former employee. FBT was established when the government realised that people were being paid in benefits rather than as salary. Employers had been creative with ways of paying their people: provision of cars when they did not really need them for work, payment of expenses (mortgage, school fees, holidays, long lunches etc.), that had nothing to do with the expenses of the business other than it was paid as part of the reward for the employee. History When employees are paid a salary/wage, it is caught in the PAYG Withholding system: i.e., you pay money to the employee then you need to withhold tax. Development Increase the reward to the employee by paying their expenses for them. Why Company tax rates are only 30% compared to personal tax rates, which can be as high as 47%. As an example, an employee had a $100 non-deductible expense to pay e.g., mortgage or school fees and was paying 47% tax. If the employee had to pay it out of after tax salary then they had to earn $189 before tax ($89 as tax to government, $100 to employee for expense). If the company paid the $100 for the expense then it costs the company only $130 ($100 for the expense and $30 for the additional company income tax because it was not a tax deduction). Government response Fringe Benefits Tax was created so that the cost to the company and the amount of tax is the same as if it was salary. The current rate of FBT is 47%. Page 1
There were a couple of changes to the legislation but it ended with today s system, (and now we add the GST impact). When the company pays the expense, the company will now get a tax deduction for that expense but only when they pay FBT. The company will also get the GST back. So the amount of the FBT equates to the same amount of tax as though the employee had been paid salary and no GST credit was allowed. In the above example, the $100 expense gets grossed up to $189 and taxed at 47% therefore the government gets $89 tax and the employee gets reward by having the expense of $100 paid. (Please note today s marginal tax rate is lower therefore the FBT rate is lower but do remember that Medicare levy is added to make up the total of the FBT rate). It is not a legal option for the company to pay the expense and NOT claim the tax deduction as a way of not paying FBT. The Result The taxable value of a benefit provided needs to be grossed up to reflect the gross salary that an employee would have to earn at the highest marginal tax rate including the Medicare levy, as per example above, to purchase the benefit using after tax dollars. FBT Rates from 1 July 2017 The 2% Budget Repair Levy that was introduced on 1 July 2014 has now finished, therefore the FBT rate reduces to 47% from 1 July 2017. The higher gross-up rate is used where the benefit provided attracts GST: 2.0802 The lower gross-up rate is used where the benefit provided does NOT attract GST: 1.8868 Example FBT Calculation Benefit Value Gross Up Factor Taxable Value Benefit value includes GST $5,000 2.0802 $10,401 Benefit value excludes GST $3,000 1.8868 $5,660 FBT Exemptions Some benefits provided to employees are exempt from FBT Certain work-related items Minor benefits Relocation expenses Page 2
Items not subject to FBT Salary and wages Acquisition of shares under employee approved scheme Superannuation employer contributions Termination payments that includes a company car given or sold Certain benefits provided by religious institutions to their religious practitioners Items exempt from FBT Minor benefits <$300 Portable electronic device Computer software Protective clothing Briefcase Tool of trade Eligible not for profit organisations Organisations need to be endorsed by the ATO in order to be eligible for FBT exemptions. Public benevolent institutions and health promotion charities: the reportable amount is over $30,000 (grossed up amount) per employee Public and not for profit hospitals and public ambulance services: the reportable amount is $17,000 (grossed up amount) per employee Types of Benefits Common fringe benefits are vehicles, travel, parking, entertainment, financial (i.e., paying expenses on behalf of the employee or providing a loan), accommodation, meals and property. There are a number of benefits that are not considered for FBT, for example, work related items such as computer, tools of trade or mobile phones. Other exemptions include some taxi travel to or from the workplace, some car parking, and some minor benefits that have a value of less than $300. Cars The most common Fringe Benefit has been the car. The employer picks up all the costs of the car and provides it to the employee who has that car available for private use. We now have a variety of different arrangements including company owned vehicle, leased, novated lease etc., where it is still considered that the company is providing a fringe benefit. It is the fact that the car is available for private use that is the issue; then it immediately becomes subject to Fringe Benefits Tax. Car Fringe Benefits - What you need to do When Action At purchase of a car, sale of a car, change of Get odometer declaration signed by employee driving a car and every 31 March the employee driving the car 31 March Provide summary of each vehicle s Page 3
expenses for the year 1 April to 31 March. This will require accessing records from two financial years At least every 5 years if no change in employee Keep log book for 13 consecutive driving the vehicle weeks for each vehicle Whenever the purpose or driver of vehicle Keep new log book for 13 changes consecutive weeks for each vehicle Advise tax agent in case instalment At purchase of vehicle rate needs varying Cents per km basis for calculating FBT from 1 April 2017 Engine Capacity 0-2500cc Over 2500cc Motorcycles Rate per Kilometre 53 cents 63 cents 16 cents Entertainment Entertainment expenses are probably the most ugly of the fringe benefits considerations. FBT applies to some and not to others. There are two categories of FBT exemption. 1. Entertainment which is exempt from FBT and IS deductible for company tax purposes 2. Entertainment which is exempt from FBT and IS NOT deductible for company tax purposes. The ATO provides the following table to explain how FBT applies to different entertainment scenarios. The table is not intended for use by income tax-exempt employers. All other forms of entertainment are subject to FBT and deductible for company tax purposes. Situation Employee takes two clients to lunch at a restaurant cost $150 Income Tax FBT Employees portion $50 tax deductible Clients portion $100 non-deductible Employees portion $50 fringe benefit Clients portion - No FBT Employee has meal in restaurant while travelling on business trip No FBT ("otherwise deductible" rule) Employee has meal in an "in-house canteen" Exempt from FBT Page 4
Employer provides sandwiches and juice for working lunch in office (not entertainment) Exempt from FBT Employer provides substantial lunch with wine for employees in office but not in "canteen" Non-deductible Exempt from FBT Employer provides social function for employees in office Non-deductible Exempt from FBT Cost per employee Non-deductible Cost per associate Cost per employee Exempt benefit Cost per associate Taxable fringe benefit Amount reimbursed is tax deductible Taxable fringe benefit Taxable fringe benefit Employer provides social function for employees and associates in office Employer reimburses employee for cost of private party Employer provides employee and associates with theatre tickets Financial Benefits Financial benefits may include low interest loans to employees, debt waivers or expense payments. The ATO sets a statutory interest rate for loans provided to employees, based on figures from the Reserve Bank published most recently before the FBT year begins. For the FBT year ending 31 March 2018 the rate remains at 5.65%. Property Employers may provide employees with property, for example goods, clothing, land, buildings or shares. Record Keeping Requirements Obtain advice from the tax agent on which method the tax agent wishes to be used to record and therefore value the entertainment fringe benefit. Page 5
You need to keep any and all records that allow the FBT liability to be assessed, for 5 years from the end of the FBT year. Records you need: The taxable value of each fringe benefit provided to each employee, e.g., invoices, travel diaries, log books, odometer readings. The method of allocating the taxable value of a fringe benefit provided to two or more employees, e.g., a written agreement regarding the apportionment of fringe benefits. To show that 100% of the taxable value has been allocated to employees. (Excluded benefits not needed). If total benefits to an employee have a taxable value of more than $2,000 (in the FBT year), then this must be shown on the employee s payment summary. Note that the grossed up amount is shown. Bookkeeper Recording and Reporting Recommendation You will need to track expenses and benefits that incur FBT. This may be via jobs or tags/identifiers or by using separate accounts. Cars: dissect or tag the expenses for each vehicle. Entertainment (meal benefit), use the 50 / 50 method so ensure all meal entertainment expenses are tagged or allocated to one chart of account line and this is advised to the accountant (this type of FB doesn t have to be reported on each employee s PAYG Summary). All other benefits, tag them. Because these expenses are typically part of an employee s package then many employers would/should allocate such expenses to one account called Salary package expenses. If they are expenses outside of the package then maybe it s an account simply called Fringe Benefits. At least the amounts are then caught and obvious for each FBT year reporting. Who pays FBT on the BAS? Businesses that have cars as a salary package Businesses with high entertainment expenses Not for Profit organisations salary sacrifice packages Living Away Allowance for employees Businesses that have an FBT instalment FBT Instalment If the FBT liability was $3,000 or more in the previous year, the ATO will provide a quarterly instalment amount based on the most recent FBT assessment. Bookkeeper Role If a business purchases a car or some other expense that is subject to FBT within the period of the BAS then it s important to advise the tax agent of the acquisitions as the instalment rate may need varying. Page 6
If the business is registered for FBT but during the FBT year the taxable amount is zero, then you must lodge a Notice of non-lodgement FBT Fields on the BAS F1 ATO provided instalment amount Write the F1 amount at 6A in the summary section F2, F3, F4 are used for varying instalment amount NOTE: A penalty is incurred if the varied amount is under 90% of the actual FBT liability; therefore seek tax agent s advice before varying. F2 Estimated FBT for the year F2 Estimated grossed up FBT Liability for the year ended 31 March F3 Varied amount for the quarter and place same amount in 6A. If negative write zero and place negative value in 6B. F3 Formula F2 x Relevant Percentage (see table for %) LESS previous instalment liabilities and credits claimed Quarter Ending 30 June 30 September 31 December 31 March Relevant Percentage 25% 50% 75% 100% F4 Reason Code for Variation of Instalment Reason Current business structure not continuing Change in fringe benefits for employees Change in employees with fringe benefits Fringe benefits rebate now claimed Code 22 30 31 32 GST and FBT Calculation of FBT return may also incur an adjustment to GST in the next BAS lodged. The accountant will provide a GST adjustment amount to be added to the BAS. This amount will either increase or decrease G1 and 1A or G11 and 1B respectively. FBT is paid as part of the usual BAS lodgement. FBT on the Payment Summary Page 7
If an employee s total fringe benefit amount in the FBT year (1 April to 31 March) exceeds $2,000.00, the amount must be grossed-up by the relevant rate and reported in the reportable fringe benefit amount field of the payment summary; this is entered manually, the software will not calculate this. The reportable amount is higher for some eligible not for profit organisations see below for details. Verify the Reportable Amount with the Tax Agent If your employees have fringe benefits please contact the tax agent of the client to discuss which of these needs to be included on the payment summaries. A bookkeeper/bas agent may assist the accountant and provide information, but they may not ascertain the amount of liability or advise the client. New FBT Reporting Requirement for 2017 Payment summaries must now show whether or not employers have an FBT exemption under Section 57A of the Fringe Benefits Tax Assessment Act 1986. If you report an FBT value on a payment summary you are required tick the following box Answer Yes if you have exemption under section 57A. (See Eligible Exemption Entitles) Answer No for employees of entities that are not eligible for an exemption. Eligible Exemption Entities Registered public benevolent institution endorsed by the Commissioner of Taxation. Public hospitals. Hospital carried on by society/organisation that is a rebatable employer. Registered health promotion charity endorsed by Commissioner of Taxation. Provision of a public ambulance service. Summary Although this information refers only to fringe benefits provided to employees, fringe benefits can also be provided to an employee s friends or associates (such as a family member). Remember that to ascertain and advise on FBT liability is a tax agent matter, however, a bookkeeper or BAS agent can assist in compiling the material and providing information to the tax agent. The BAS agent can also submit the FBT as part of the BAS assuming the figures have been verified by a tax agent. References ATO FBT Rates ATO - FBT Car Calculator ATO - Fringe Benefits Tax ATO - Entertainment ATO FBT Exemptions ICB - Payment Summary Guide Page 8