PKF "Break it down" - Fringe Benefits Tax

What is Fringe Benefits Tax (FBT)?

FBT is a tax that ‘catches’ benefits provided to employees that don’t have tax withheld from them the way wages normally would.

Why was FBT imposed by the ATO?

Employees got ‘cute’ about saying to their employer: “Rather than pay me wages, which you must withhold tax on, why don’t you pay my mortgage instead? Or my kids’ school fees? Or give me a car? Or…”. This meant that the employee would receive a benefit that they would otherwise have had to pay for out of their after tax dollars.

How does FBT work?

Let’s say you pay an average marginal rate of 30% tax. Normally your employer would pay you $100 for you to take home $70 in after tax cash (i.e. your employer withheld $30 in tax and paid it direct to the ATO as PAYG withholding). If your employer gives a benefit worth $100 instead, the ATO miss out on $30 tax.

They don’t like that.

Rather than coming after you as an employee (because there are thousands and thousands of you), the ATO go after the employers (because there’s slightly less of them) for the missing cash.

For administrative ease (and for maximum tax revenue!) the ATO impose FBT at top marginal rate (47% - including medicare levy). The theory also is that the employer is not disadvantaged if their employees are on top marginal rate – e.g.:

Gross wages: $100 – paid as PAYGW to the ATO $47 and cash to employee $53

Benefit: $100 – paid to the provider (effectively cash to the employee $100)

GST complicates things and introduces two different ‘gross up rates’ – an employee not registered for GST can’t claim back the GST paid; whereas most employers do (and often pass this on to their employees).

What are some tricks and traps?

The FBT year ends 31 March (not 30 June) to smooth lodgement deadlines throughout the year.

Some benefits may be exempt from FBT or concessionally taxed.

Reportable fringe benefits must be included on employee PAYG payment summaries and are factored into various individual means tests.

Fringe benefits provided are ‘wages’ for the purposes of payroll tax and workers compensations; we generally calculate and provide the amounts to employers as part of preparation of the FBT return.

Ensure you read up on the various exemptions and reductions to FBT (including the ‘otherwise deductible’ rule, not for profit and government organisations and work-related items / travel). Some benefits may also be concessionally taxed.

What are the ‘warning signs’?

Where there are any benefits provided to employees other than wages, these need to be reviewed to assess whether subject to FBT.

How does it relate to the work we do for our clients?
Let’s be clear. Clients hate FBT. Generally they cop it on things they didn’t mean to be providing to employees to avoid PAYGW – so it’s just another cost of business for them.

Each year we run a project to offer all clients our assistance in reviewing their accounts, preparing their return if necessary and where possible looking to reduce their liability.
If an event throughout the year impacts on their FBT position, it is important to note this (e.g. as a file note saved in the following year’s FBT folder).

For more information

https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/ttp://www.ato.gov.au/businesses/content.aspx?doc=/content/950.htm