While income tax and company tax seem to be front of mind for most businesses, Fringe Benefits Tax (FBT) is also applicable when employers provide certain benefits to their employees or associates of employees (usually family members connected to their employment). Let’s look at the basics of Fringe Benefits Tax.
What is a fringe benefit?
The term ‘benefit’ in fringe benefit can be broadly defined to include any rights, privileges or services. A few examples of an employer providing fringe benefits include:
- giving an employee the use of a work car for private purposes.
- providing entertainment with food, drink or recreation.
- giving an employee a discounted loan.
- reimbursing a non-business expense incurred by the employee (for example, private health insurance or school fees).
Determining whether you are providing fringe benefits
The first step is to determine whether you are providing fringe benefits to your employees and their associates (usually family members). By definition, employees can be current, former and future employees, or directors who conduct their business through a company or trust.
In addition, a fringe benefit can be provided by a third party or associate by agreement with the employer. For instance, a business might work with a supplier who, in turn, provides free products or services to employees.
By definition, associates include people or entities that are associated with employers and employees. This can include relatives or companies or trusts that are closely connected.
How to calculate FBT
The Australian Tax Office will not usually notify employers of how much FBT they need to pay. Businesses need to self-assess (or use the services of a professional adviser) and report fringe benefits tax liability for the given FBT year. The FBT year is from 01 April to 31 March, so it's different to the normal financial year period.
Here are some useful steps for calculating how much FBT you will need to pay:
Determine if you have provided fringe benefits and identify the type of benefit/s.
Calculate the taxable value of each fringe benefit provided to each employee. There are various rules for calculating the taxable value of a fringe benefit, depending on the type of benefit.
Calculate the total taxable value of all the fringe benefits that your business provides that you can claim a GST credit for.
Determine the total taxable value of all the fringe benefits that you cannot claim a GST credit on, such as supplying goods or services that are GST-free.
Calculate the grossed-up taxable value of the fringe benefits by multiplying the total taxable value of all the benefits you can claim a GST credit for (the amount from Step 3) by the type 1(higher) gross-up rate. This can be found on the ATO website.
The term ‘grossing-up’ for FBT purposes refers to an increase to the taxable value of fringe benefits provided to reflect the gross salary an employee would need to earn at the highest marginal tax rate (including the Medicare Levy) to purchase the benefits after paying tax.
Multiply the total taxable value of all fringe benefits not claimable for a GST credit (from Step 4) by the type 2 (lower) gross-up rate.
Registering for, reporting and paying FBT
Once you have determined you need to pay fringe benefits tax, you will need to register for FBT with the ATO, then report and pay what you owe. The reporting period for FBT runs from 01 April to 31 March annually.
Types of fringe benefits subject to FBT
There is a range of fringe benefits that require fringe benefits tax to be paid. These include:
- car fringe benefits.
- car parking fringe benefits.
- entertainment and fringe benefits.
- expense payment fringe benefits.
- loan fringe benefits.
- debt waiver fringe benefits.
- housing fringe benefits.
- board fringe benefits.
- living away from home allowance fringe benefits.
- residual fringe benefits.
Each type of fringe benefit has specific criteria. For example, for fringe benefits tax purposes a car is defined as:
- a station wagon, sedan, four-wheel drive, utility or panel van (except for panel vans and utilities that can carry one tonne or more).
- any vehicle for carrying goods with a carrying capacity of under one tonne.
- any other passenger vehicle that is designed to carry fewer than nine passengers.
For a complete explanation for criteria under which FBT applies to the categories listed above and valuation rules, visit the Types of Fringe Benefits page on the ATO website.
The definitions and valuations of FBT categories can be complex so it’s best to get advice from a registered tax agent – like The Peak Partnership – we're across all the intricate details of FBT and can help you with your FBT assessment.
You can also head across to our Financial Fact Sheets section for more helpful information about FBT around entertainment expenses, meals and Christmas spending on staff. Just look under the BUSINESS tab.