If you own a business that employs staff, and provide remuneration to your employees in a form other than straight salary, you may be liable for fringe benefits tax (FBT). The upside for your workers is that they do not then have to pay income tax on the value of the benefits that attract FBT.
FBT is separate to income tax, is based on a 'taxable value' of the benefits provided, and is payable at the current FBT rate of 46.5%. The Tax Office has even given FBT its own tax year, from April 1 to March 31 (with the FBT return lodgement deadline May 21, but possibly later if you use the services of your tax agent).
Under the tax law, a fringe benefit is deemed to arise when one of the categories of benefits (see below) is provided by an employer, an associate of the employer, or a third party under an arrangement with either of the former. The benefit might be provided to the employee or an associate (widely defined).
Fringe benefit categories
The law contains several different categories of fringe benefits, which include:
· car fringe benefit
· debt waiver
· loan fringe benefit
· expense payment
· housing fringe benefit
· living away from home allowance
· airline transport
· board (accommodation)
· tax-exempt body entertainment
· car parking
· property fringe benefit
· residual benefits (that is, any that are not covered by the preceding).
The rules for calculating the taxable value of a fringe benefit are subject to two separate 'gross-up' rates – a higher and a lower gross-up rate. Grossing-up means increasing the taxable value of benefits you provide to reflect the gross salary employees would have to earn at the highest marginal tax rate (including Medicare levy) to buy the benefits after paying tax.
The higher gross-up rate is used where the employer is entitled to a GST credit for GST paid on benefits provided to an employee, known as GST-creditable benefits. The lower gross-up rate is used where there is no entitlement to a GST credit.
Exemptions from FBT
Minor benefits (that is benefits that have a GST-inclusive value of $300 or less) are generally exempt from FBT. However a condition to maintain this exemption is that such minor benefits must be offered with ‘infrequency and irregularity’. There can also be other conditions (check with us). Examples of minor benefits can include the occasional lunch, birthday gifts, flowers on special occasions, the Christmas party, or a one-off interest free loan. Note also that there can be multiple minor benefits (that is, each can have a value of less than $300) – for example Christmas lunch on one hand plus a Christmas gift on the other.
Providing certain work-related items to staff will not make you liable for FBT. These include protective clothing, a briefcase, a mobile phone, calculator or tools of trade, portable computer (limited to one per year for each employee) and other items. There are other benefits that escape the FBT net, however a condition of exemption is that the benefit or item is primarily used to enable your employee to do their job.
Salary of course is not a fringe benefit, and a super contribution is exempt. Entitlements under employee share acquisition schemes are not deemed to be a fringe benefit, nor are termination payments.
You are providing a fringe benefit if, for example, you allow a staff member (or their associates) to use a work vehicle for private purposes, provide a loan or reimburse a worker for a private expense, such as school fees.
Also a car provided to an employee by the popular 'novated lease' arrangement is considered a fringe benefit, and typically gives rise to an FBT liability for the employer (see more on novated leases for cars in our last newsletter, or ask us for a copy).
The FBT rules pertaining to cars changed recently for situations where a vehicle is available for private use and the ‘statutory formula’ method is used to determine the taxable value. The value of the car benefit (on which the amount of FBT is based) is taken on the actual purchase price of the car. Under the statutory formula method the number of kilometres travelled determines the statutory fraction applied to determine the taxable value.
The position up to 7.30pm on 10 May 2011 was:
For example, an employee using a car valued at $34,000 would get a tax liability of $6,528 if they drove 24,000km, but that liability would drop to only $3,591 if they drove more than 25,000km.
But starting on 10 May 2011, the government introduced a flat 20% to be applied across all bands, but to be introduced over four years, as per the following table.
New contracts entered into after that date will operate under the new rates, but contracts existing before then will still run out under the old rules, unless a significant change occurs to the arrangement after 10 May 2011 (such as extending the term of a car lease).
The impact of the changes will generally be dependent on the number of kilometres travelled annually by the employee. For example: an employee travelling less than 15,000km annually would benefit from a reduction in the fraction from 26% to 20% once the new rules become applicable.
Record keeping and registration
The FBT record keeping regime for small businesses contains a threshold under which full records need not be kept (although you will still need to show the value of benefits on employee payment summaries). The threshold for 2011-12 is $7,391, but it increases each year. As long as benefits paid do not exceed 20% more than the previous year, the exemption can still apply.
For businesses, it makes no difference whether you are a sole trader, partnership, trustee, corporation, unincorporated association or government body, or whether you pay other taxes such as income tax – as an employer providing taxable benefits in connection with employment, you will be liable to the FBT provisions. All that is required is that the employee receives the benefit in their capacity as an employee of the business. Also an employee is deemed to have received a fringe benefit if that benefit is directly received by the employee's 'associates' – in the main, these would be family members and relatives. So this catches the school fees paid for an employee’s children or the interest-free loan made out in the wife's name.
While an item’s ‘primary use’ is important to determine if a taxable benefit has been provided, the Tax Office bases its decisions on the employee's 'intended use' at the time the benefit is provided.
Other documentation and declaration requirements can seem very particular. For travel, for example, a diary of the trip will need to be kept only if the employee is away for six continuous nights or more, but documentary evidence of travel expenses need to be kept no matter the duration of travel. If the trip is within Australia and not entirely for business purposes, receipts must be kept for food, drink, accommodation and incidentals. But if the trip is deemed to be entirely for business, these are not needed. And if overseas and solely for business, only accommodation receipts are required.
Once a business registers for FBT with the Tax Office it will be allocated an FBT number (which is actually the same as the tax file number)
Can you pay less FBT?
There may be strategies available to reduce the amount of FBT you are required to pay. The most obvious of course is to replace fringe benefits with straight salary, or simply focus on providing only those fringe benefits that are deemed exempt under the FBT law. Or share some of the cost and use employee contributions to reduce the taxable value of the benefit. With a car, for example, an employee could agree to contribute to some of the operating costs, such as fuel, that you do not then reimburse. This then reduces the taxable value of the fringe benefit provided.
You can also provide a benefit that your employee would normally be able to claim as an income tax deduction, had they paid for it themselves. Operating under the 'otherwise deductible' rule, you can reduce the taxable value of the fringe benefit by the amount your employee would have been able to claim. Assume a staff member incurs a work expense that would have been a one-off wholly deductible amount for the employee in their own tax return, such as a subscription to a professional accounting body for an employee of an accounting practice. If you reimburse the employee for this expense (as a fringe benefit for them) the taxable value would be zero (but the employee won't get the deduction).
Please contact Alan Beck at BASMAN RETURNS if you require any assistance.
DISCLAIMER: All information provided in this publication is of a general nature only and is not personal financial or investment advice. It does not take into account your particular objectives and circumstances. No person should act on the basis of this information without first obtaining and following the advice of a suitably qualified professional adviser. To the fullest extent permitted by law, no person involved in producing, distributing or providing the information in this publication (including Taxpayers Australia Incorporated, each of its directors, councillors, employees and contractors and the editors or authors of the information) will be liable in any way for any loss or damage suffered by any person through the use of or access to this information. The copyright is owned exclusively by Taxpayers Australia Inc (ABN 96 075 950 284). This content has been researched, authored, reviewed and produced by Taxpayers Australia staff. This paper takes into account the law and related matters of which the author is aware at 1 March 2012.