So, have you been a little creative this year with your employee salary packaging?  Given them a car, paid for relocation costs, thrown a Christmas party, gym membership. This is great for boosting morale and showing appreciation but when you discover it costs you a lot more in the form of Fringe Benefits Tax it can be a real knock.  Today I’m going to explain what Fringe Benefits Tax is and how fringe benefits tax works. And if you stay until the end of the article I have a couple of bonus tips which I will share with you.

Let’s get into it

What is Fringe benefits tax.  Simply put, fringe benefits tax is a tax paid by employers that is applied to certain non-cash benefits paid to employees.  It is paid on items provided over and above their cash salary. 

FBT was first introduced on 1 July 1986 by the then Labor government led by Bob Hawke.  It completely redefined how non-cash benefits were treated for tax purposes especially around areas such as entertainment.  At the time it was introduced it was intended it address a perceived failing in the tax law which basically meant that non-cash benefits provided to employees went un-taxed and therefore, according to the Labor government of the day, caused a tax leakage which really means, they thought they were losing money.

In fact, the then Government were so upset about the thought of losing tax revenue, that they made the tax applicable to employees and their associates.  So the next question has to be: what is an employee for fringe benefits tax purposes?  Well, you have employees as we all understand them:  people who work for you, but the definition goes on to include people who used to work for you and people who will be working for you, so think the person who has signed the contract of employment but not started work yet.  It also includes; directors, beneficiaries of a trust who also work in the business, office holders such as company secretaries, and people receiving compensation payments.  Plus their associates…so people they know such as spouses and children.  It’s a pretty broad definition and the reason for this is because fringe benefits tax is levied on “items provided in respect of employment” which in itself is a pretty broad definition and explains why both past and future employees are caught in the net.

This can be a pretty bitter pill to swallow so the good news for employees here is that you don’t actually pay the tax, your employer does.  As an employee you will be given the total dollar value of all fringe benefits items provided via your income statement each year, assuming you have received $2,000 or more in fringe benefit items.  This amount does need to be disclosed on your tax return and for most, it ends there.  Whilst the amount of fringe benefits provided to employees is not taxed at an employee level, it is used to calculate several other things such as the negative gearing on investment properties, and will act to reduce the loss.

It is not so simple if you are an employer.  Firstly, you can’t just take the dollar value of the fringe benefits provided and put that on the income statement.  The total dollar value needs to be grossed up to represent the value of the benefit as if it were a pre-tax cash salary that was being paid. The tax itself is then calculated as 47% of the total grossed up value, that is, they assume the highest marginal tax rate is to be applied including Medicare levy.  The Fringe Benefits Tax year runs from 1 April to 31 March each year and the due date for lodgement of returns is generally speaking around 15 May.

So there’s the bare bones of fringe benefits tax, and I know I said I would give you a couple of bonus tips if you stayed until the end of the video but before I do, if you have learned 1 useful thing in this video, perhaps you would consider heading over and giving it a thumbs up, if you learned 2 useful things, perhaps you would consider hitting the subscribe button and supporting small channels like this one to continue to make useful content for you all.

Right, now that’s out of the way, bonus tip number 1, what type of items are considered to be benefits provided and captured by fringe benefits tax. Broadly speaking fringe benefits can divided into nine different categories and these are car, loan and debt waivers, expense payments, housing, living-away-from-home allowances, airline transport, board, entertainment, car parking, property and residual fringe benefits.  Items that are excluded from the fringe benefits tax net include: salary and wages, remote area housing, superannuation, minor benefits, work-related items such as tools, briefcases, mobile phones and laptops and other portable digital items.

My second bonus tip speaks to how to reduce FBT.  If you are an employee, you have three main options which you can consider.  Number 1, cash out your benefits.  This means you receive cash instead of the benefit being offered.  Number 2, make contributions towards the cost of the fringe benefit being provided from your after-tax salary.  So for example, if you are being provided with a car, making after tax contributions towards the running costs of the car will help to reduce the overall fringe benefits tax on the vehicle.  And number 3 change things up a bit.  Swap out your fringe benefits for items that are on the exempt list.

If you are an employer, you can use the same three options plus consider using other methods such as employee share schemes or additional payments into superannuation.

So there we go, fringe benefits in a nutshell.  Thankyou for reading and I’ll catch you in the next one.

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