Fringe Benefits Tax
What are fringe benefits?
Fringe benefits are benefits, but not salary and wages, provided to employees
or their associates in respect of their employment.
Advantages of fringe benefits
Can provide flexibility to an employee’s remuneration and provide a taxeffective way of providing part of an employee’s renumeration package where
that employee receives less salary and more benefits.
The advantage of this is that the employees assessable income is reduced
resulting in an overall increase in remuneration with cash flow and budgeting
becoming easier.
How does Fringe Benefits Tax (FBT) work?
Different fringe benefits can vary in the amount of FBT they attract. Some
items incur full FBT, some attract concessional rates, others are fully exempt.
Where FBT is payable on an item, it becomes the employers liability to pay it.
However in such situations the employer will normally stipulate that as part of
an employee’s salary packaging arrangement, the cost of the FBT will be
passed onto the employee.
In order to calculate FBT we apply gross-up rules to the value of the benefit.
These rules are desgined to provide a similar tax outcome between the fringe
benefits provided and the salary or wages of an employee on the top
marginal tax rate.
The rate of fringe benefits tax is 48.5% (for non-concessional and non-exempt
benefit).
To calculate the tax we use the following formula:
Taxable value x 2.1292 x 48.5% = Type 1 rate (GST creditable items)
- mobile phone bills
- credit cards
Taxable value x 1.9417 x 48.5% = Type 2 rate (GST free or input taxed items)
- medical services
- education courses
- financial supplies (home loans)
The difference between the two gross-up rates is the GST burden.
In calculating the actual cost of FBT however, the amount that is charged to
an employee’s renumeration package should generally be grossed up by
1.9417 regardless of the type of benefit.
This is because where the Type 1 gross-up rate is used, the employer claims
back the GST input tax credit attached to the benefit. Meaning the actual net
FBT cost remains the same whichever method is used.
The FBT rate is the highest marginal tax rate – consequently someone who
salary packages a non-concessional non-excempt item and is below the
highest marginal tax rate would be worse off if they also had to bear the FBT
liability. If they had bought it with post tax dollars they would have only
needed to to earn an extra 30c in the dollar to pay for the benefit. By
packaging and incurring the liability they are charged an extra 48c in the
dollar.
Why else do we gross-up?
Grossing up the value of fringe benefits is also important for calculating the
employee’s assessable income with regards to:
- the Medicare Levy surcharge
- Superannuation contributions surcharge
- Calculating child support obligations
- HECS repayments.
Salary packaging does not reduce the assessable income for these charges.
The value of the fringe benefit less the gross-up value is used in the
assessment of entitlement for these income tested government benefits.
- parental means test for youth allowance
- family tax benefit
- child care benefit
Types of Fringe Benefits useful to our clients
Superannuation
Superannuation contributions are not subject to FBT; however super that is
salary sacrificed by an employee is counted as an employer contribution and
thus goes towards the employee’s age based contribution limits.
Employer Provided Cars
Concessional FBT rates applying to cars can make them an attractive option
for salary packaging, especially for clients who wish to package a car through
their own company.
Car Packaging
There is a concessionaly FBT rule for motor vehicles make them an attractive