Notes on Fringe Benefits Tax (FBT)

Overview of Fringe Benefits Tax (FBT)
- FBT is related to income tax and GST, focusing on non-cash benefits given by employers to employees because of their employment.
- Aimed at non-cash benefits that affect taxation and employee compensation.
- FBT was introduced in Australia on July 1, 1986, providing significant revenue for the government, primarily levied on employers.
- Importance for employers: tax deductibility of FBT costs enhances the attractiveness of providing fringe benefits.
- For the employer:
  - the cost of providing a fringe benefit and the payment of the related FBT are normally a general deduction
- For the employee:
  - Any fringe benefits they receive are treated as non-assessable non-exempt (NANE) income or exempt income and are not included in their assessable income
- It is a non-salary/wages benefit provided by the employer or an associate of the employer to the employee or an associated of the employee during an FBT year
  - FBT year: 1 April - 31 March
  - Examples - company owned car, payments of an employee’s expenses
- What is not a fringe benefit
  - not sufficiently linked with the employment of the employee or expressely exempted by the FBT Act
  - A gift given by an employer to an employee for personal reasons
  - Salary or wages, most superannuation contributions, employment termination payments
Learning Objectives
- Describe the operation of FBT in Australia.
- Calculate FBT liability by applying relevant rules.
- Understand the impact of employee contributions and the otherwise deductible rule.
- Identify common types of fringe benefits, focusing on those relevant for examination.
FBT Calculation Process
- Three Key Steps:
1. Assess Taxable Value of Benefit: Initially establishing the monetary value of the fringe benefit received by the employee.
  - GST-inclusive taxable value
2. Gross-Up Value: Adjusting taxable value using specific gross-up rates depending on whether GST is included (Type 1: 2.0802; Type 2: 1.8868) to arrive at the grossed-up amount.
  - Things that are GST free
    - Basic food
    - education
    - health service providers
    - Exports
    - And more
  - Type 1 - benefits where the employer IS entitled to claim an input tax credit for the GST paid on the benefit
  - Type 2 - Benefits where the employer IS NOT entitled to claim an input tax credit for the GST paid on the benefit
3. Apply FBT Rate: Multiply the grossed-up value by the FBT rate of 47% (45% marginal tax + 2% Medicare levy).

Otherwise Deductible Rule

- Reduce the taxable value of certain benefits, sometimes to 0
- The rule applies where employees would otherwise be able to claim a deduction if they incurred the relevant expenditure in acquiring the benefits by themselve

Employee Contributions

- Employee reimburses the employer in respect of a payment of a private expense, the fringe benefit taxable value is reduced, amount is assessable income
- Employee cannot claim a deduction for the reimbursement

Types of Fringe Benefits
- Categories of fringe benefits generally discussed include:
- Car Benefits: Significant contributor to FBT liability.
  - An employer or associate provides a car to an employee for private use
  - Calculated using statutory formula or operating cost methods:
    - Statutory Formula: 20% of base value of the car x (days available ÷ 365) - employee contributions.
      - Base value does not include stamp duty, registration, insurance
    - Operating Cost Method: Total costs x business use - employee contributions.
    - Depreciation at 25% diminishing return
    - Deemed interest at 4.52%, that’s old use 8.77%
      - interest and depreciation included in cost
- Loan Benefits: A fringe benefit arises when an employee receives a loan at an interest rate lower than the statutory rate (currently 8.77%). Taxable value calculated based on the difference between statutory and actual interest rates.
  - Loan principle x (statutory interest rate - interest rate offered by employer)
  - Don’t forget gross up and discount, loan will have no GST, so type 1 fringe benefit
- Expense Payment Benefits: When the employer pays for or reimburses an expense on behalf of the employee, like school fees or memberships. The otherwise deductible rule applies to reduce taxable value.
  - Paying the employee’s home phone or internet bills
  - Mist differentiate between an expense payment fringe benefit and an allowance
    - Allowance is assessable income, will pay income tax on, it i cash, fringe benefit is non-cash
  - On-house benefits can be categorised into in-house property benefits and inphouse residual benefits
    - property benefit example - provision of goods
  - In-house property benefit arises if this provision of goods is part of the benefit provider’s ordinary business
  - All others are external benefits
- Property Fringe Benefits: Involves providing property to employees; taxable values are defined based on various categories (cost price, lowest selling price, etc.).
  - Includes any goods (e.g. a television or clothing), real property and financial assets (shares)
  - Benefits provided on a working data and on the employer’s business premises, this benefit will be exempt in some particular cases
    - Internal
      - Property acquired/purchased by employer who is a retailer
        Cost price less employee contribution
      - Property is manufactured and sold to other manufacturers in the same type of business
        Lowest selling price less employee contribution
      - Property is manufactured and sold to the direct public
        75% of the selling pirce less employee contribution
    - External
      - Property was acquired by the employer
        Cost price less employee contribution
- Residual Fringe Benefits: Used when a benefit does not fit into other categories; assessed similarly to property fringe benefits.
Exempt Fringe Benefits
- Certain benefits are automatically exempt from FBT, including work-related items (like computers and phones) predominantly for business purposes (over 50% usage).
- Other exemptions include minor benefits, contributions to specific employee memberships, and various other benefits laid out in legislation (sections 58Y, 58X).
Reporting Requirements
- Employers are required to report fringe benefits exceeding $2,000 in value on income statements.
- Employers must lodge an FBT return by May following the year-end on March 31 and make quarterly payments where FBT exceeds $3,000.
Salary Packaging
- This refers to structuring an employee's pay to include a mix of salary and benefits (like cars or other packages) to minimise tax liability. Salary sacrifice
- Arrangement may be subject to reporting
- It can save on taxes since benefits like vehicles can have lower tax implications compared to regular salary payments.
  - Benefit: Salary
    - FBT to employer: N
    - Assessable income to employee: Y
  - Benefit: Superannuation contribution
    - FBT to employer: N
    - Assessable income to employee: N (but fund assessed 15%)
  - Benefit: Exempt benefits
    - FBT to employer: N
    - Assessable income to employee: N
  - Benefit: Fringe benefits
    - FBT to employer: Y
    - Assessable income to employee: N
FBT Administration
- Employers must lodge an FBT return by May following the year-end on March 31 and make quarterly payments where FBT exceeds $3,000 for the past year.
- Employers who have provided fringe benefits to their employee and had a fringe benefit taxable amount for FBT years are required to lodge annual FBT returns to the Commissioner
- The annual FBT returns must be lodged no later than 21 May in the next FBT year
Conclusion
- The importance of understanding FBT lies in its implications for both employers and employees regarding tax liabilities and planning.
- Key areas of focus for the exam include the calculation methods, types of benefits, exemptions, and reporting responsibilities.