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.
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, etc. instead 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.
Not all benefits are subject to FBT. FBT 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. Fincar can help you assess the likely FBT implications of different car financing options.
There are two methods of calculating the fringe benefits tax on a car. The most common is the ‘statutory formula’ method: the base value of the car is multiplied by a percentage determined by the number of kilometers travelled in the FBT year. The base value is based on the price paid for the vehicle including GST, and the cost of accessories fitted at the time of purchase, but excludes stamp duty and registration fees.
The percentage used is 26% for a car travelling less than 15,000km, but drops to 7% at over 40,000 km. So the more the car is used, the less FBT is payable. Interestingly, it doesn’t matter if the car is used exclusively for business use, partly private, or all private use.
When calculating FBT on running and maintenance costs, however, the formula examines the proportion of private use. You must keep a log book for at least 12 weeks, recording every journey – including private travel.
You can save FBT by having employees garage their car at their workplace while on holidays. FBT is also reduced on cars more than four years old, because the ATO reduces the base value by one-third.
The fringe benefits tax legislation imposes a significant compliance burden on businesses, so it is wise to consider its implications carefully before deciding to offer benefits to employees.