A fringe benefits tax is the tax that an employer has to pay to provide certain benefits to his employees in addition to their salaries or wages. The benefits provided are termed fringe benefits, which can help you reduce your taxable income as an employee.
Whether you are an employer or an employee, you have to know the tax implications of both receiving and giving fringe benefits. To help you out, we have prepared a guide on what Fringe benefits tax (FBT) is, along with other factors that demand your attention.
What are fringe benefits?
A fringe benefit is a payment made by an employer to his employee but in forms other than wages or salary. The following can be a fringe benefit:
- An employer allowing his employee to use their work car for private purposes
- Cap parking
- An employer paying for the employee’s gym membership
- Providing free tickets to concerts as a form of entertainment
- Reimbursement of expenses incurred by the employee, for instance, school fees
- Giving a discounted loan to an employee
- Giving some benefits to an employee under a salary sacrifice arrangement.
What is not a fringe benefit?
The following do not fall under fringe benefits:
- Salary and wages
- Employer contribution in accordance with superfunds
- Shares or rights provided to an employee under approved employee share acquisition schemes
- Employment termination payments (such as the sale of a company car at a discount to an employee on termination)
- Benefits provided to contractors and volunteers
- Payments deemed to be dividends as per Division 7A
- Exempt benefits, for example, are specific benefits provided by a religious institution to its religious practitioners.
Can I reduce my tax through fringe benefits?
Receiving fringe benefits through salary sacrifice (under the salary sacrifice arrangement) can help you lower your tax rate. Under this arrangement, you might be pushed into a lower tax bracket, ultimately reducing the amount of tax you need to pay. For high-income earners, this can be of great help.
Fringe benefits tax
FBT or Fringe benefits tax is not included in the income tax of a person. It is calculated on the fringe benefit’s taxable value.
Fringe benefits tax is applicable to all the finger benefits received by the employees, their families, or other associates. For FBT, the following is what qualifies as an employee:
- Current, past or future employees
- Director of the company
- The beneficiary of a trust working in the business.
For those working in a partnership, fringe benefits tax is not applicable for the benefits paid to themselves. The same applies to sole traders.
Remember that the clients you are working with are not your employees. Hence, any benefits provided to them are not fringe benefits and are not subject to this tax.
Who is responsible for paying fringe benefits tax?
Your employer is the one who has to pay FBT, not you. Even if a third party provides benefits under an arrangement with the employer, the employer has to pay this tax.
How is fringe benefits tax (FBT) calculated?
To calculate how much fringe benefits tax you have to pay as an employer or your FBT liability, gross up the taxable value of all the fringe benefits you have provided to your employees. This value will reflect the gross salary your employees would need to earn to buy the benefits after paying the tax at the highest marginal tax rate, including the Medicare levy.
Two types of gross-up rates are used to calculate the FBT amounts. The first kind applies to fringe benefits if the employer is entitled to a GST or goods and services tax credit for GST paid. The other one applies when no such entitlement is there.
The tax payable is the value you get after multiplying the taxable amount by the FBT rate (this rate is currently 47%).
Did you know the financial year and FBT year are different? The FBT year runs from 1 April to 31 March.
Why do companies offer fringe benefits to employees?
Fringe benefits help an employer attract and retain employees. Nowadays, employers are becoming more competitive with what to offer their employees. To gain a competitive edge, what else can be better than fringe benefits?
Giving employees some perks, such as discounted gym memberships, free food and entertainment, can make them feel appreciated. The benefit can be provided to the employee or their children and spouse.
On top of this, the employer gets to claim the cost of providing fringe benefits to the employees and the amount of fringe benefits tax paid as income tax deductions.
Reportable fringe benefits amount or RFBA
If the taxable value of fringe benefits provided to an employee in one FBT year goes over $2000, it is termed as Reportable Fringe Benefits Amount. This amount must be reported to the Australian Taxation Office on an employee’s payment summary or financial year income statement.
Although RFBA is not taxable, it can affect what an employee is entitled to, including family tax benefits, the Medicare levy surcharge, the private health insurance rebate, child support payments and superannuation co-contributions.
It is also helpful in calculating the amount one has to repay towards government loans like the Student Financial Supplement Scheme (SFSS), the Higher Education Loan Program (HELP)and the Trade Support Loan (TSL).
Some fringe benefits like remote area housing assistance and car parking do not have to be reported on an employee’s payment summary or income statement.
What if you provide Fringe benefits to your employees?
If you have a business and provide fringe benefits to your employees, here is what you would need to do:
- Register for FBT
- Calculate the FBT amount you have to pay
- Keep a record of each benefit you provided to the employee (also keep a record of how you calculated the payable FBT
- Lodge a return and pay fringe benefits tax to the ATO.
- Make sure to add the reportable fringe benefits on the employees’ payment summary or income statement.
Navigating taxes (including FBT) on your own can be really stressful. So, it is recommended to reach out to a professional. At Clear Tax, we can help you with your tax matters to make the processes easier for you. So, if you are in search of a reliable tax agent in Melbourne, reach out to us today.
Disclaimer: This website is designed for informational and educational purposes. Although we exert diligent efforts to maintain the accuracy and reliability of the content, we must disclaim liability for any errors, omissions, or inaccuracies. The content provided is “as is” and is not accompanied by warranties, whether expressed or implied. It should not serve as the sole basis for financial or legal decisions.
Given the evolving nature of financial regulations and conditions, the accuracy and reliability of information may change over time. Users are urged to exercise due diligence and consult with a qualified financial professional for personalized advice. ‘Clear Tax Accountants’ bears no responsibility for direct or indirect consequences, encompassing financial loss or legal matters stemming from the use or misuse of the information on this website.
Please be aware that the information, by no means, is a substitute for financial advice.
