Over recent months it has become increasingly apparent the ATO is intent on focusing on a strict adherence to the tax law in an effort to lessen the Government’s cash shortfall created by the various COVID-19 payments. An area overlooked by many small businesses (and Tax Agents) alike, is Fringe Benefits Tax (‘FBT’). This is a tax paid by employers on some of the benefits they give to their employees or their employees’ family (so it’s really quite broad in it’s application). If you are thinking of offering benefits or perks, or perhaps you already are, you need to consider whether they are subject to FBT.
This guide will cover:
- What are fringe benefits
- When to report fringe benefits
- Do you need to register for fringe benefit tax
- Giving gifts to employees and customers
What are fringe benefits?
A fringe benefit is something offered to an employee by their employer on top of their salary. It can be used to incentivise and reward employees without increasing wages.
Fringe benefits must be non-cash incentives paid on top of salary. Even if the benefit is provided by a third party the employer must pay FBT. Employees can exclude fringe benefits from their taxable income.
Types of fringe benefits:
- The private use of a company car
- Car parking and maintenance expenses
- Lifestyle benefits (e.g. gym memberships)
- Payment of personal expenses (e.g. school fees)
- Certain types of entertainment (e.g. tickets to events)
- Low interest loans used for personal purposes
The following are not fringe benefits:
- Salary and wages
- Benefits given to volunteers and contractors
- Shares purchased in approved employee share acquisitions
- Employer contributions to super funds
- Employment termination payments or gifts (e.g. a company car gifted to an ex-employee)
- Work-related personal items (e.g. mobile phones and laptops)
When to report fringe benefits
You need to report the fringe benefits you provide to employees if the total taxable value in an FBT year (1 April to 31 March) exceeds $2,000. The due dates for lodgement of FBT returns for tax agents are:
- 21 May if the return is lodged by paper
- 25 June if the return is lodged electronically
Be aware of changes to fringe benefits
Like with most taxes, there are regular changes to fringe benefits and how they’re reported, so it’s important to stay updated.
Do you need to register for fringe benefit tax?
In short: yes. This is regardless of whether you are currently providing benefits to your employees. The reason for this is fairly simple. If a $nil return is lodged with the ATO, the period of review for FBT (this is the timeframe which the ATO is allowed to review your business for adherence to FBT) is limited to 4 years. If you are not registered for FBT or you have lodged a notice of non-lodgement, their ability to review your books (that is, the time period which they are allowed to look at) is significantly longer.
How do you register? Probably the easiest and quickest way is to contact your tax agent and ask them to manage the process for you. Alternatively, you can use one of the methods outlined below:
You can register:
How to calculate fringe benefit tax
For those who prefer to “go it alone”, here is a guide to calculating FBT fringe benefits. They are split into two types of benefits.
- Type 1 benefits can give the benefit provider GST credits
- Type 2 benefits do not give the benefit provider GST credits
Here’s a step-by-step guide to calculating your FBT.
- Work out the taxable value of each benefit you gave to employees during an FBT year.
- Work out your Type 1 benefits by identifying how much of the total taxable value of the benefits you gave to employees that you can claim GST credits for.
- Work out the grossed-up taxable value of these Type 1 benefits by multiplying the total taxable value by the Type 1 gross up rate (currently 2.0802).
- Work out your Type 2 benefits by identifying how much of the total taxable value of the benefits you gave to employees that you cannot claim GST credits for.
- Work out the grossed-up taxable value of these Type 2 benefits by multiplying the total taxable by the type 2 gross up rate (currently 1.8868).
- Add the grossed-up amounts from steps 3 and 5. This is your total Fringe Benefits Taxable amount.
- Multiply the total Fringe Benefits Taxable amount (from step 6) by the FBT rate (currently 47 percent). This is the total FBT amount you are need to pay.
Here’s an example:
If you provide an employee with a car benefit with a taxable value of $7,000 during the 2019/20 FBT year. The $7,000 car benefit tax is calculated like this:
|Multiplied by Gross-up rate x||2.0802|
|Grossed-up taxable value||$14,561|
|FBT Payable (rounded)||$6,843|
Before you start your sums make sure you’re up to date with the fringe benefits rates.
Giving gifts to employees and customers
Non-entertainment gifts under $300 are fully tax deductible with no FBT to pay. Non-entertainment gifts can include skincare and beauty products, flowers, wine, gift vouchers and hampers.
If the gift costs over $300, a tax deduction and GST credit can still be claimed, but FBT is payable at the rate of 47 percent on the grossed-up value.
Entertainment gifts, such as tickets to a musical, movie, sporting event or holidays, are more expensive for businesses than non-entertainment alternatives.
If the cost for each employee is less than $300 each (including GST), you won’t have to pay FBT, but you won’t be able to get a tax deduction or GST credit .
However, if the cost for each employee is over $300 GST inclusive each, a tax deduction and GST credit can be claimed – but FBT is payable at the rate of 47 percent on the grossed-up value.
Office parties also fall under entertainment-related gifts, so keep in mind that you won’t be able to claim your next Christmas party on tax unless it’s over $300 a person – and then, you’ll be paying FBT.
Giving gifts to customers and clients
Non-entertainment gifts given to clients and suppliers do not fall within the FBT rules as they are not considered your staff. In these instances, a tax deduction and GST credit can be claimed provided the claim is not excessive.
If you plan on giving an entertainment gift to a client, the gifts provided are not subject to FBT, and no tax deduction or GST credit can be claimed.
Can I gift myself?
Sadly not. Favourable tax rules don’t apply to gifts for sole traders and partners in a partnership, as you can’t be an employee of yourself. It’s a shame, we know.