Fringe benefits

A fringe benefit is generally defined as a benefit not being salary, wage or other cash remuneration, derived from employment. Such benefits usually apply more frequently to salaried employees not covered directly by awards or certified agreements and may include superannuation, low interest loans, provision of cars or car allowances, subsidised meals, etc. Fringe benefits tax (FBT) is a tax payable by employers when they provide fringe benefits to employees.

 
Definition 
 
Fringe benefits 
 
A fringe benefit is generally defined as a benefit not being salary, wage or other cash remuneration, derived from employment.
 
Such benefits are provided more frequently to high-salary employees not covered directly by awards or certified agreements and may include superannuation, low interest loans, provision of cars, subsidised meals, etc.
 
Fringe benefits tax 
 
Fringe benefits tax (FBT) is a tax payable by employers when they provide fringe benefits to employees.
 
The Australian Taxation Office publishes useful information for employers on its website.
 
Source of entitlement 
 
 
Key issues 
 
 
1. Salary packaging
 
Fringe benefits are usually substituted for cash salary and wages because the fringe benefits are either free from tax, or attract less tax that the equivalent cash salary and wages.
 
If salary is sacrificed into superannuation (see Salary sacrifice), the employer superannuation contribution is not a fringe benefit as long as it is made for the employee (and not, for example, for the employee’s spouse) and to a complying superannuation fund.
 
2. Fringe benefits — general 
 
A fringe benefit is a benefit provided to an employee (or an associate of an employee, such as a spouse) by the employee's employer, an associate of the employer (eg a related company) or by a third party under an arrangement with the employer.
 
To be a fringe benefit, the benefit:
  • must be 'provided' to the employee (or to someone related to the employee) — the employer must do something, or allow something to be done, that results in the employee receiving the benefit, and
  • must be 'in respect of employment' — a benefit provided for another reason, eg for family reasons (the employee being related to the employer), would not satisfy this.

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Tax issues 
 
 
 
1. Payment of FBT on fringe benefit 
 
The most common fringe benefits are cars, loans, payment of expenses and property. The FBT system is very complicated, with each of the different types of fringe benefit having its own valuation rules.
 
Em
ployers paid FBT at the rate of 47% in the 2014/15 FBT year (commencing 1 April 2014). This rate will rise to 49% from 1 April 2015 for the 2015/16 and 2016/17 FBT years, before returning to the rate of 47% from 1 April 2017).  FBT is calculated on the grossed-up taxable value of fringe benefits provided to employees during the FBT year (1 April to 31 March).  
 
The grossed-up taxable value means the amount that is reached after the taxable value of the benefit is increased to take into account the fact that the employer is entitled to a tax deduction for FBT it pays and also GST credits for GST it pays on benefits acquired to provide to employees. If the employer is entitled to GST credits on the acquisition, the taxable value of the fringe benefit is grossed up by 2.0647; otherwise, the taxable value is grossed up by 1.8692.  
Example:
 
An employer provides employees with fringe benefits with a taxable value of $50,000 in the 2014/15 FBT year. Assuming that the $50,000 is grossed up by 1.8692, the employer has a fringe benefits taxable amount of $93,460 (ie $50,000 x 1.8692). The employer is liable to pay $43,926 FBT (ie $93,460 x 47%) and is entitled to a $50,000 deduction for the cost of the benefits it has provided and also a deduction of $43,926 for the FBT it pays.
The taxable value will be reduced if the employee contributes to the cost of the benefit or if the employee would have been entitled to a tax deduction if they had paid for the benefit rather than having it provided by the employer
 
Tax-exempt employers (eg non-profit hospitals) that cannot claim a deduction are instead entitled to a tax rebate against their FBT liability.
 
2. Some fringe benefits are exempt from FBT 
 
Many fringe benefits are exempt from FBT. Some common exempt benefits are:
  • employment interviews
  • relocation expenses
  • newspapers and periodicals provided for business purposes
  • workers compensation
  • work site medical facilities
  • travel for medical treatment
  • occupational health counselling
  • minor benefits valued at less than $300 that are provided infrequently
  • equity benefits, such as share purchase/allocation plans
  • meals provided by the employer and consumed on work premises
  • meal components of other entertainment-related benefits
  • payments under an industrial instrument to an approved worker entitlement fund where the purpose is to cover the employer's obligation to make leave or termination payments for the employee
  • subscriptions to trade and professional journals, airline lounge memberships and corporate credit card membership fees
  • work-related items (see below) such as protective clothing, briefcases, calculators, tools of trade, notebook computers, electronic diaries, personal organisers, and portable printers, and
  • taxi travel to and from work.
 
An employer is exempt from FBT on $1000 of in-house fringe benefits provided to an employee in a year. From 22 October 2012, the $1000 exemption generally does not apply where the in-house benefit is provided under a “salary packaging arrangement” between the employer and the employee. A salary packaging arrangement is defined as an arrangement where the employee receives a benefit in return for a reduction in salary and it is reasonable to conclude that the employee’s salary would be greater if the benefit had not been provided.

The in-house benefits covered by this exemption are:
  • property and services provided to employees that are of a kind that the employer normally sells or provides in the ordinary course of business
  • the payment of expenses incurred by an employee in acquiring property of a kind that the employer provides in the ordinary course of business
  • airline transport provided to airline and travel industry employees.

Back to Tax issues

3. Employees do not pay tax on fringe benefits 
 
An employee does not have to pay tax on a fringe benefit. The way FBT and income tax fit together is that cash remuneration, including most allowances, is taxed in the employee's hands, and that non-cash benefits (and living-away-from-home allowances) are subject to FBT payable by the employer.
 
4. Employer must self-assess liability 
 
FBT is a self-assessment system, with large penalties for underpayment. Employers must lodge an annual FBT return by 21 May after the end of the FBT year showing the taxable value of fringe benefits provided during that year.
 
Certain employers may pay FBT by instalments. An employer whose previous year’s FBT liability was at least $3000 must pay FBT in quarterly instalments, rather than annually by 21 May.
 
Employers must pay four quarterly FBT instalments which are notified on the employer's quarterly Business Activity Statement. These are generally due by 28 July for the June quarter, 28 October for the September quarter, 28 February for the December quarter and 28 April for the March quarter. Any balance amount must be paid when the FBT return is lodged by 21 May.
 
5. Fringe benefits reported on employee's payment summary 
 
If an employee receives fringe benefits in an FBT year with a taxable value of at least $2000, this must be reported on the employee's payment summary given to the employee by 14 July following the end of the income year.
 
The amount that is reported — the 'reportable fringe benefits amount' — is the taxable value of the fringe benefits 'grossed up' by 1.8692. Some fringe benefits are exempted from being reported, eg car parking, meal entertainment and remote area fringe benefits.
Example: 
 
An employee is provided with fringe benefits with a taxable value of $2500. The amount that is reported on the employee's payment summary is $4673 (ie $2500 x 1.8692).
A reportable fringe benefits amount on an employee's payment summary does not make the employee liable to income tax on the amount but is taken into account when calculating the employee's liability to Medicare levy surcharge and HECS-HELP repayments. It is also included in the employee's total income for the purposes of calculating entitlement to family tax benefit, the government co-contribution for personal superannuation contributions and certain tax and superannuation rebates.
 
Pooled or shared private use by employees of their employer’s cars does not have to be reported on a payment summary. A pooled or shared car is a car that is provided by an employer for the private use of two or more employees.
 
6. Basic car rates
 
 
Each year the ‘cents per kilometre’ rates are released by the ATO. These rates are used:
  • to calculate the taxable values of a number of fringe benefits that relate to motor vehicles, eg remote area holiday travel; and
  • to calculate the tax deduction for car expenses where the taxpayer’s income-producing use of a car in the year does not exceed 5000 kilometres.
The rates for the 2013/14 FBT year ranged from 65 cents per kilometre to 77 cents per kilometre — depending on the engine capacity of the vehicle.  Current rates are noted on the ATO website. 
  
Deemed depreciation rate
 
The deemed depreciation rate on cars is 25%.
 
This rate is used to calculate the value of a car fringe benefit using the operating cost basis.
 
7. Rates for motor vehicle other than a car
 
The rates to be applied on a cents per kilometre basis for calculating the tax from the private use of a motor vehicle other than a car for the fringe benefits tax year commencing on 1 April 2015, are as follows:
 
Engine capacity Rate per kilometre
0-2500cc 51 cents
Over 2500cc 61 cents
Motor cycles 15 cents
 
A ‘motor vehicle other than a car’ is defined as a motor vehicle (including a four wheel drive vehicle), which is: a motor car, station wagon, panel van, utility truck or similar vehicle, designed to carry a load of less than 1 tonne; or any other road vehicle designed to carry a load of less than 1 tonne or fewer than 9 passengers; but does not include a motor cycle or similar vehicle.
 
 
8. Record-keeping exemption
 
The record keeping exemption threshold for the 2015/2016 year is $8164 (up from $7965 in the previous year). An employer that provides fringe benefits in a year with a value below this amount may be exempt from keeping FBT records. The ATO website provides current information.
 
9. Benchmark interest rate
 
The benchmark interest rate to be used for the fringe benefits tax year commencing on 1 April 2015 is 5.65% per annum (replacing the previous rate of 5.95%). ATO provides history of rates and current rates. The rate is used to calculate the taxable value of:
  • a loan provided by an employer (see Loan fringe benefit); and
  • a car fringe benefit where an employer chooses to value the benefit using the operating cost method.

Back to Tax issues 

10. Non-remote housing index factors 
 
The indexation factors for valuing non-remote housing for the fringe benefit year commencing 1 April 2015 are:
 
New South Wales 1.032
Victoria 1.020
Queensland 1.022
South Australia 1.020
Western Australia  1.028
Tasmania 1.011
Australian Capital Territory 0.989
Northern Territory 1.043
 
 
The ATO provides a history of rates and current rates. These factors are based on movements in the rent sub-group of the Consumer Price Index.
 
11. Reasonable food component — Australian employees 
 
“Reasonable” amounts for food and drink expenses are for those incurred by employees receiving a living-away-from-home allowance fringe benefit for the 2015–16 year.
 
The amount for a single employee within Australia has increased to $241, from $236 in 2014-15, and for two adults to $362, from $354 the previous year.
 
Employees who incur total food and drink expenses for themselves and eligible family members that are less than these amounts do not have to substantiate these expenses. The amounts relate to total food or drink expenses and include any amounts that may have been allowed for home consumption.
 
Adults are defined as persons aged 12 years or over before the beginning of the FBT year
 
Taxation Determination TD 2015/7 (pdf) sets out reasonable amounts for locations within Australia and specified overseas locations (selected countries), and are based on salary levels.
 
12. Overpayments to employees 
 
Allowing the employee time to repay 
 
Allowing an employee time to repay overpaid wages means the overpayment becomes a loan and is therefore liable to FBT (TD 2008/10).
 
If overpayment debt is waived 
 
Waiving an employee’s obligation to repay an amount to which he/she is not legally entitled means it becomes a ‘debt waiver benefit’ and is also liable to FBT (TD 2008/11).
 
The Ruling only applies to those cases where the recipient of the overpayment must repay the amount. So, for example, the employee may be able to establish that he/she should retain the money and in this situation a ‘debt waiver benefit’ does not arise.
 
Bad debt: The employer may be able to establish that the waiver has occurred because it considers the amount to be a bad debt — this would have to be supported by the employer’s debt collections policy or by showing that reasonable efforts had been made to recover the amount. In this circumstance, FBT would not apply.
 
Uneconomic to recover debt: The employer may also be able to establish that the debt was waived because it was considered uneconomic to recover it, for example, because the employer’s policy was not to pursue debts below a certain threshold. If the employer can establish that the waiver occurred under such a policy and not because of the employment relationship then again it would not be considered to be a debt waiver benefit.
 
Bonus offset: If the employer agrees to off-set the debt amount against an employee bonus payment, then this is not considered to be a debt waiver and therefore FBT will not apply. The bonus will instead be included in the assessable income of the employee.
 
Exemption 
 
In some circumstances the overpayment could be considered an ‘exempt benefit’ and therefore excluded from being a loan fringe benefit or a debt waiver benefit, for example if it meets the conditions of being a minor benefit (less than $300).
 
Do employees have to pay tax on overpaid wages? 
 
However, overpaid salary, wages or workers compensation amounts are not considered to be ordinary pay for an employee and therefore assessable income (TD 2008/9).
 
 
13. Work-related items
 
From 13 May 2008, the FBT exemption that previously applied to certain work-related items has been tightened. The work-related items covered by the exemption are:
  • briefcases
  • calculators
  • certain portable printers
  • computer software
  • electronic diaries
  • laptops or similar portable computers
  • mobile phones
  • personal digital assistants or similar items
  • protective clothing
  • tools of trade.

Before 13 May 2008, these items were, except in two cases, always FBT-exempt when provided to employees. The two cases where a condition had to be satisfied were:

  • a mobile phone, computer software or protective clothing was only exempt from FBT if it was primarily for use in the employee’s employment; and
  • only the first notebook computer, laptop computer or similar portable computer provided to an employee in the year was exempt.
Where a portable electronic device, computer software, protective clothing, a briefcase or a tool of trade is acquired after 13 May 2008, the item is only exempt if it is primarily for use in the employee’s employment. The exemption is restricted to one item per year for items that have a substantially identical function, although a second item is allowed if it replaces an item acquired earlier in the FBT year.

Employees are not allowed depreciation deductions for exempt work-related items if they were purchased after 13 May 2008.

 
14. Meals on an employer’s premises 
 
Business property provided to an employee for consumption on the employer’s premises, eg use of a telephone or refreshments, is FBT exempt.
 
According to the Treasurer, this exemption is being exploited by some employers who pay for employees’ meals, provided by a third party such as a catering service, delivered to and consumed on the employer’s premises.
 
Meal card arrangements allow employees to salary sacrifice for the provision of the meals out of pre-tax income. The integration of meal facilities into business premises, such as food court outlets in large office blocks, has encouraged the spread of these arrangements.
 
Meals provided as part of a salary sacrifice arrangement ceased to be FBT-exempt from 7.30 pm on 13 May 2008 — ensuring equity with employees who have to purchase meals out of their post-tax income.
 
Existing balances on meal cards remain eligible for the FBT exemption if used by 31 March 2009, but any supplements to existing balances will be subject to FBT.
 
Subsidised canteens provided to all staff that are not part of a salary sacrifice arrangement continue to be FBT-exempt.
 
15. Loan fringe benefits
 
 
An employer provides a loan fringe benefit if it makes a loan to an employee, to an associate of an employee, or to some other person at the request of the employee or the associate. The loan may be made by the employer, by an associate of the employer or by a third party under an arrangement with the employer. 
 
A loan includes an advance of money, the provision of credit, the payment of an amount for someone where that person is obliged to repay the amount and allowing a debt owed by an employee to run past the due date for payment (sec 16 and 17, Fringe Benefits Tax Assessment Act 1986).
 
The key fringe benefits tax issues relating to a loan fringe benefit are:
 
 
1. Taxable value of loan fringe benefit
 
The taxable value of a loan fringe benefit is the difference between the interest calculated at the statutory interest rate for the year (5.95% for the 2014/15 FBT year and 6.45% for the 2013/14 FBT year) and the actual interest charged by the employer on the loan.

Under the otherwise deductible rule, the taxable value of a loan fringe benefit may be reduced where the employee uses all or part of the loan for income-producing purposes. If, therefore, the employee uses the loan to build a swimming pool in his backyard, the taxable value would not be reduced because this is a private purpose. But if the employee uses the loan to purchase an investment property, the taxable value may be reduced.
 
The employee must provide evidence to the employer that the employee would have been entitled to a tax deduction on the interest if the employee had taken out the loan personally. The employee must generally complete a loan benefit declaration showing the uses made of the loan and the extent to which the employee would have been entitled to a deduction for the interest. 
 
Example: 
 
 
 From 1 April 2014 to 31 March 2015, an employee receives an interest-free loan of $10,000 from her employer. The statutory interest rate is 5.95%. The employee uses the loan for two purposes: $2000 to purchase furniture for her home and $8000 for buying shares. The taxable value, before any reduction, is:

$10,000 x 5.95% = $595. As 80% of the loan is used for income-producing purposes, the taxable value is reduced by: 80% x $595 = $476. The taxable value of the loan fringe benefit is therefore $595 - $476 = $119.

FBT at the rate of 47% is payable on the grossed-up taxable value, ie on $119 x 1.8692 = $222.   
 
2. Loan fringe benefit provided jointly to employee and spouse
 
 
The otherwise deductible rule applies differently where an employer provides a loan jointly to an employee and the employee’s spouse and the loan amount is used for income-producing purposes, eg to purchase shares to earn dividend income.
 
In 1993 the Federal Court decided in National Australia Bank Ltd v Federal Commissioner of Taxation 93 ATC 4919 that if a fringe benefit was provided jointly to an employee and their spouse it was to be treated as if it was provided solely to the employee, and the employer’s FBT liability could be reduced.  
 
This decision resulted in an anomaly in the FBT law that, according to the Tax Office, led to taxpayers entering into inappropriate arrangements such as salary sacrificing of expenses related to a jointly held investment property. Under such an arrangement, the spouse with the higher income was able to effectively claim 100% of all the expenses related to a jointly held investment property. 
 
The law has been changed to overturn the effect of the National Australia Bank decision and to ensure that the FBT liability will only be reduced to reflect the employee’s, and not the spouse’s, share of the expenses. This applies to arrangements entered into after 13 May 2008. 
 
Arrangements already in place at 13 May 2008 were allowed to continue until 31 March 2009.
 
16. Expense payment fringe benefits 
 
An expense payment fringe benefit is provided by an employer when the employer:
  1. makes a payment in discharge of an employee's obligation to pay an amount to a third person, or
  2. reimburses an employee for expenses incurred by the employee.
The taxable value is the amount of the payment or of the reimbursement. The employer can, however, avoid FBT liability by making a no-private-use declaration to the Tax Office that covers all the employer's expense payment fringe benefits for the FBT year.
 
Some expense payment benefits are exempt from FBT, including:
  • various types of expenditure where an employee is required to live away from a usual place of residence to perform the duties of employment;
  • reimbursement of an employee for car expenses, where the reimbursement is calculated on a cents per kilometre basis;
  • the provision of fuel associated with a car fringe benefit;
  • short-term car parking fees;
  • newspapers and periodicals used for business purposes;
  • compassionate travel and medical treatment;
  • minor benefits that are worth less than $300 and are infrequent; and
  • certain work-related items such as notebook computers, briefcases and tools of trade.
Even if not exempt, an expense payment fringe benefit may have a reduced taxable value if the employee contributes to the cost of the benefit or if the employee would have been entitled to a tax deduction for the cost of the benefit if the employee had provided it rather than it being provided by the employer. The taxable value of expense payment fringe benefits provided in remote areas may be reduced by 50%.
 
GST
 
If an employer reimburses employees for expenses directly related to the performance of their duties as employees (ie the reimbursement is a fringe benefit, or an exempt fringe benefit), the employer may be able to claim GST credits as if the employer had incurred the expense itself. The GST credit would be one eleventh of the amount of the reimbursement. 
Example:
 
An employee spends $220 on petrol that she uses entirely in work-related travel. If the employer fully reimburses the employee, the employer can claim a GST credit of $20. 
If an employee makes a contribution to the cost of a fringe benefit, the employer must pay the Tax Office one-eleventh of the contribution as GST paid on the supply by the employer of the benefit. 
Example:
 
An employer reimburses an employee's telephone expenses. The expense payment fringe benefit has a taxable value of $1000. The employee contributes $440 to the cost, the employer must send $40 (ie 1/11th of $440) to the Tax Office as GST paid on the supply of the benefit.
Sample documentation
 
For an extensive library of policies, agreements, forms, correspondence and checklists, designed to make human resources (HR) management easy for your business see our HR Advance website.

Unfair dismissal - high income threshold

Unfair dismissal remedies under the Fair Work Act do not apply to an employee whose annual rate of earnings exceedds the 'high income threshold' (currently $133,000 pa FY2014/15). The Fair Work Commission has determined that FBT should be included when assessing an employee's overall income when determining whether an employee's annual salary exceeds the high income threshold. It is considered a 'non-monetary benefit' fot the purposes of unfair dismissal law.
 

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