Did you know that you may be liable for additional tax of 47% on additional benefits provided to employees? Many businesses know very little about this tax and are exposing themselves to potential audits from the ATO.
What are Fringe Benefits?
A fringe benefit is something extra an employer provides in addition to a wage or salary or in return for forgoing some of an employee’s salary under a salary sacrifice arrangement. It is not salary and wages or cash, and the benefit can be something for the employee, spouse, or children. The employer is liable for the tax (FBT) that may apply to the benefits received and not the employee.
For FBT purposes, an employee includes a:
- current, future, or past employee
- director of a company
- beneficiary of a trust who works in the business.
If you are a sole trader or a partner in a partnership, you are not an employee. Benefits that you provide to yourself are not subject to FBT.
Why do businesses offer fringe benefits?
Fringe benefits can help employers to attract, retain, and motivate employees. Employers are becoming increasingly competitive with what they offer their employees and fringe benefits are one way they can gain that competitive edge. Common ones include free food, coffee bars, discounted gym memberships and entertainment. Providing these perks can make employees feel valued and create a happier workplace. Not all of these attract FBT.
What’s considered a fringe benefit?
A wide range of perks are classed as fringe benefits. The most common ones are:
- a leased vehicle for personal use (under a ‘novated lease’ arrangement)
- personal use of a company car
- car parking
- discounted loans
- gym/health memberships
- entertainment expenses – (free/discounted food, cinema or concert tickets, accommodation)
- private health insurance
- living-away-from-home allowance (LAFHA)
- real property – land and buildings
- right to property – shares, bonds
- childcare costs and school fees
The following are
not fringe benefits:
- salary and wages
- employer contributions to complying super funds
- share or rights provided under approved employee share acquisition schemes
- employment termination payments (including the gift or sale at a discount of a company car to an employee on termination)
- payments deemed to be dividends under Division 7A
- benefits provided to volunteers and contractors
- exempt benefits, such as certain benefits provided by religious institutions to their religious practitioners
Items needed to do a job – e.g. mobile phones and occupational specific clothing – are not taxed as fringe benefits if an employer provides them. However, if an employee pays for these items, they might be able to claim a tax deduction. You can’t claim a tax deduction for a work expense if reimbursed for the expense by an employer.
Concessional contributions made to super are
exempt fringe benefits. They can therefore be a tax-effective way of boosting retirement savings.
What is a Reportable Fringe Benefits Amount (RFBA)?
If the total taxable value of the fringe benefits provided in a FBT year exceeds $3,773, employees will have a reportable fringe benefits amount in their end of financial year income statement (formerly called a payment summary). Some fringe benefits, like meals, entertainment, and employer-provided car parking, are not included in the reportable amount.
While an RFBA isn’t deemed taxable income, depending on personal circumstances, it will be used to determine whether entitlements exist to several benefits and obligations. These include Family Tax Benefits, Medicare levy surcharge, private health insurance rebate, child support payments, superannuation co-contributions, Higher Education Loan Program (HELP), tax offsets and Financial Supplement repayments.
How much FBT do employers pay?
To work out how much FBT to pay as an employer you ‘gross-up’ the taxable value of the benefits provided. This is equivalent to the gross income employees would have to earn, at the highest marginal tax rate (including the Medicare levy), to buy benefits themselves.
The FBT you pay is 47% of the ‘grossed-up’ value of the fringe benefits.
As an employer you can claim an income tax deduction and GST credits for the cost of providing fringe benefits.
What do you need to do?
As an employer, you need to:
- identify the types of fringe benefits you provide.
- check for FBT concessions and ways to reduce FBT and seek advice from your accountant or business advisor. Some benefits are exempt from FBT that are work related, reduce your FBT liability by using alternatives or providing benefits that are eligible for a concession and not-for-profit employers may be eligible for an exemption or rebate.
- work out the taxable value of fringe benefits provided
- calculate your FBT liability
- keep records, including employee declarations where needed
- lodge an FBT return and pay the FBT you owe.
- report each employee’s fringe benefits in their financial year income statement (formerly called a payment summary)
We can assist you in identifying the types of fringe benefits you may be providing, so please contact us to discuss this further.
