Employers making non-cash payments to employees may find themselves liable to pay ‘fringe benefits tax’ (‘FBT’) on those payments.
For tax purposes, you might be considered an employee of your own business, so you incur FBT on benefits your business provides for you, or for other employees. FBT also applies to benefits provided indirectly to an employee by a third party, if the benefit is seen to be a benefit associated with a person’s employment.
What is the Purpose of Fringe Benefits Tax?
The logic behind the fringe benefits tax is that it restores fairness in the system, removing the tax advantage enjoyed by employees who receive employer-funded access to computers, cars, housing, travel, restaurant meals in place of a higher salary.
To discourage excessive use of the practice of offering non-cash benefits to reduce employee taxation, the Australian Taxation Office levies tax on the employer. Employers often recover this by reducing the employee’s wages or salary by the equivalent amount. However, the cost of providing benefits includes the cost of paperwork required to report benefits correctly. Also, states impose payroll tax on fringe benefits.
To further complicate the paperwork FBT creates, the ATO defines the tax year for FBT purposes as the period from 1 April to 31 March.
Which Benefits Involve Fringe Benefits Tax?
Not all benefits are subject to FBT. For example, it does not apply to superannuation contributions, or to minor benefits valued at less than $300 and incurred infrequently. Remote area housing and employee relocation expenses are exempt. Living away from home allowances are partly exempt. Laptops, mobile phones, calculators, software, PDA’s, and other work-related items are exempt.
There are many other exemptions, and concessions may be allowed on some taxed items. Varying methods of calculation for some items effectively reduce the amount of tax that applies, depending on how the benefit is used.
Special fringe benefit tax rules apply to motor vehicles provided by employers. Rates reduce as annual mileage increases. The calculations are complex, and employers should take care to get their sums right so that tax is minimised.
Relevant Changes
For the years ending 31 March 2022, 2023, 2024 and 2025, the fringe benefits rate of tax is 47%. However, there are a number of thresholds and rebate rates to be aware of, which you can find in detail on the ATO website here.
Please note, from 1 July 2022, employers won’t pay FBT on benefits provided for eligible electric cars and associated car expenses. Benefits provided for electric cars are exempt from FBT if relevant criteria are met.
However, as a recent change, effective 1 April 2024, for certain benefits, employers will have a choice to use existing records in place of statutory evidentiary documents, such as travel diaries or employee declarations. This will only apply if the Commissioner has made a determination by legislative instrument that applies to the employer which specifies the kind of alternative documents or records.
The ATO also sets out the methods for calculating the fringe benefits tax on a car. In short, employers can elect between different options, albeit the ‘statutory formula’ method is the most common, which involves the base value of the car being multiplied by a percentage determined by the number of kilometers travelled in the FBT year. In short, the more the car is used, the less FBT is payable.
As always, it’s best to speak to a professional, whether that be a licensed tax professional, or a finance specialist like Fincar.
The Fincar team is here to help you with all your financing needs. Contact us today to help arrange your next car or equipment loan.