What Is Fringe Benefits Tax (FBT)?

Fringe Benefits Tax (FBT) is a tax employers pay on certain benefits they provide to their employees (or their employees’ associates). These benefits are normally provided in place of, or in addition to, salary and wages.

FBT is separate from income tax and is calculated on the taxable value of the fringe benefits provided. In otherwords, the business needs to pay tax on the value of the benefit that is provided to the employee.

Employers are responsible for calculating and paying FBT. FBT is designed to ensure that someone is paying tax on the non-cash benefits that employees receive from their employer.

Fringe Benefits Tax is also reported separately to normal Income Tax. Fringe Benefits Tax is reported to the ATO through a Fringe Benefits Tax Return.

To make things more confusing, the Fringe Benefits Tax Year is also different to a normal Financial Year. The FBT year goes from 1 April to 31 March – this means you report the total Fringe Benefits provided to employees between 1 April to 31 March each year.

Example: Using a Company Car as a Fringe Benefit

To better understand what FBT is, let’s look at a common example: a motor vehicle owned by the company and provided for the personal use of an employee.

Scenario:

• Your business owns a car, and you allow your employee, Sarah, to use it for both business and personal purposes.
• Whenever Sarah drives the car for personal errands or on weekends, this use is considered a fringe benefit.
• Even if Sarah occasionally uses the car for work, any personal use attracts FBT, and you (the Company), as the employer, are required to pay FBT on the value of this benefit.
• The value of the benefit can include things such as:
  • Petrol
  • Repairs & Maintenance
  • Registration
  • Interest payments if the car is leased
  • Depreciation
• A calculation is made based on the total value above, adjusted for the private use of the car by Sarah.

This example highlights how FBT applies when a benefit, like a company vehicle, is provided to employees for non-work-related activities.

Types of Fringe Benefits Tax

FBT covers a wide range of benefits provided to employees. Here are some of the main categories:

1. Car Fringe Benefits
   • This occurs when a company car is made available for an employee’s private use. Private use includes taking the car home and using it for personal trips.
2. Loan Fringe Benefits
   • If you provide a loan to an employee at a reduced interest rate (or no interest at all), the difference between the market rate and what the employee actually pays is subject to FBT.
3. Housing Fringe Benefits
   • This applies when you provide an employee with accommodation, either for free or at a reduced rent. Housing benefits are common for employees who work in remote locations. Please note, this is different to employees travelling for work.
4. Expense Payment Fringe Benefits
   • If you pay or reimburse an employee’s expenses, such as their personal phone bill or private health insurance, this is considered a fringe benefit.
5. Meal and Entertainment Fringe Benefits
   • This category covers the cost of food, drink, and entertainment (like tickets to a concert or sports event) provided to employees.
6. Living-Away-From-Home Allowance (LAFHA)
   • This is an allowance paid to an employee to compensate for additional expenses incurred because they are required to live away from their usual home for work purposes.

For a more exhaustive list, please visit the ATO website, here.

How Is Fringe Benefits Tax Calculated?

Calculating FBT can be complex, but it essentially involves determining the taxable value of the benefits provided. Here’s an overview of the key components involved in FBT calculation:

1. Calculating the Taxable Value
   • The taxable value varies depending on the type of benefit. For example, for a company car, the taxable value is based on either the statutory formula method or the operating cost method.
   • The statutory formula method is the most common way to calculate FBT for cars. It uses a fixed percentage (20%) of the car’s base value plus benefits to determine the taxable value, regardless of how much the car is used for private purposes.
   • The operating cost method requires detailed records of business and private use, and the taxable value is calculated based on the cost of operating the vehicle. In this case, a log book needs to be kept.
2. Grossing Up the Taxable Value
   • The taxable value is then grossed up to account for the income tax that the employee would have paid if they had received the benefit as cash income.
   • There are two gross-up rates: the Type 1 gross-up rate for benefits where the employer can claim a GST credit and the Type 2 gross-up rate for benefits where no GST credit can be claimed.
3. Applying the FBT Rate
   • The grossed-up taxable value is then multiplied by the FBT rate (currently 47%) to determine the amount of FBT payable.

Example Calculation – following on from Sarah and the Motor Vehicle:

• Let’s say that between fuel, servicing, depreciation etc – the total value provided to Sarah is $20,000.
  Assume there is a logbook showing 50% business use – this means we can use the operating cost method.
• The taxable value of Sarah’s car benefit is $10,000 ($20,000 x 50%).
• If the car benefit attracts GST, you would use the Type 1 gross-up rate (currently 2.0802), resulting in a grossed-up taxable value of $20,802.
• The FBT payable would then be $20,802 x 47% = $9,777.54.
• The above calculations need to reported to the ATO on a FBT Return and the tax paid to the ATO.

What Is Excluded from Fringe Benefits or Exceptions?

Not all benefits provided to employees are subject to Fringe Benefits Tax (FBT). Here are some common exceptions and exclusions:

1. Superannuation Contributions
   • Employer contributions to a complying superannuation fund are exempt from FBT.
2. Minor Benefits
   • Benefits valued at less than $300 and provided infrequently (such as small gifts or occasional meals) are generally exempt from FBT. That being said, these would mostly be not tax deductible either.
3. Work-Related Items
   • Certain items that are primarily used for work, like laptops, mobile phones, or protective clothing, may also be excluded from FBT.
4. “Otherwise Deductible” Rule
   • If the employee could have claimed a tax deduction for the expense if they had paid it themselves, the benefit may be exempt from FBT under this rule.
5. Certain Travel Expenses and Meals
   • Travel expenses related to work and meals provided on-site in a staff cafeteria may also be exempt from FBT in some circumstances.

Managing FBT in Your Business

Understanding and managing FBT is crucial for employers who provide non-cash benefits to employees. It’s not only the extra tax that needs to be taken into account, but also the extra administration time and cost involved.

Whenever we provide benefits to our employees, it’s important to understand if they trigger Fringe Benefits, this could result in unexpected costs and complications.