Fringe benefits tax (FBT) is a tax employers pay on certain benefits they provide to their employees – including their employees’ family or other associates.
The benefit may be in addition to, or part of, their salary or wages package.
If you are a director of a company or trust, benefits you receive may be subject to FBT.
FBT is separate to income tax and is calculated on the taxable value of the fringe benefits provided.
What types of benefits may be subject to Fringe Benefits Tax?
The main types of benefits captured under the fringe benefits tax legislation include:
- Car fringe benefits
- Car parking fringe benefits
- Expense payment fringe benefits
- Loan fringe benefits
- Housing fringe benefits
- Living away from home fringe benefits
- Property fringe benefits
The legislation is very broad, and even if a benefit is not listed above or covered by a specific section of the legislation, it may be captured as a residual fringe benefit. Examples of residual fringe benefits may include:
- Paying an employee’s gym fees, private health insurance or life insurance
- Allowing an employee to use a vehicle that is not a car for private purposes (i.e. a truck, motor bike or excavator)
- Paying for legal advice for an employee
- Providing employees with long service awards (such as gold watches, Gucci handbags, or gift vouchers etc)
- Paying for an employee’s flights to the US for a family holiday
Car Fringe Benefits
By far the most common example of a fringe benefit is to provide a car to an employee that is available for private use. It is important to remember that the ATO generally considers that travel between home and work is private use.
If the vehicle is not a ‘car’ and instead is a utility vehicle (not designed to principally carry passengers), van, truck etc, then the vehicle may be exempt from FBT. This type of benefit is not considered a car fringe benefit.
Car fringe benefits are calculated in one of two ways:
- Statutory Formula Method – this method values the private use of a car at 20% of the cost price of the vehicle. This could be a very expensive method, especially if the vehicle has a high purchase price.
This used to be a much better method prior to the ATO changes in 2009. Under the old method, the more kilometres you travelled in the FBT year, the lower the fringe benefits taxable value.
- Operating Cost Method – this method values the private use of a car, based on the total operating expenses for the period, multiplied by the logbook percentage. A logbook needs to be maintained for a 3 month period and lasts up to 5 years (unless there any significant changes to the use of the vehicle).
If you are providing car fringe benefits to employees, you need to factor the tax cost into your agreement with your employee. Fringe benefits tax is a tax paid by employers, so if it is your intention that the employee will reimburse you for any fringe benefits tax incurred, this needs to be included in the agreement.
It may be advantageous for the employee to make an FBT employee contribution. This type of contribution reduces the fringe benefits tax (at 47% for the 2018 year), and is instead taxed at the employees marginal tax rate. Where an employee is on less than $180,000 per annum, this can result in a reduction to the overall tax cost.
Non-Car Fringe Benefits
Vehicles such as panel vans, utility (ute) or other commercial vehicle that are not designed principally to carry passengers may be considered exempt for FBT if private use is limited to:
- Travel between home and work
- Travel that is incidental to travel in the course of duties of employment
- Non-work related use that is ‘minor, infrequent and irregular’
The ATO has recently released additional information regarding what can be considered ‘minor, infrequent and irregular’ for the purposes of the FBT exemption. Where the private use is limited to;
- No more than 2kms diversion on private home to work travel (e.g. picking up or dropping of children at school on the way to or from work),
- No more than 750kms travelled wholly for private purposes within the FBT year,
- No single private purpose trip exceeding 200kms return,
the ATO considers it will meet the definition of ‘minor, infrequent and irregular’.
If you fail to meet the above criteria, you will be subject to fringe benefits tax in relation to any private use of the vehicle.
Did you provide your employees with a Christmas party? Or an end of financial year party? Take your staff to a local pub for lunch on Fridays? Buy them tickets to a concert or show? Or visit the local café with clients on a regular basis? If so you may be providing entertainment fringe benefits.
Entertainment is a very complex area of FBT. Entertainment may comprise of more than just one benefit, and may fall into a number of benefit categories, each with their own valuation methodologies and exemptions. We have developed an entertainment matrix to guide employers through the maze of what is and is not exempt from FBT when it comes to entertainment. Please contact our office if you would like a copy of the matrix and further information about entertainment.
The extra cost associated with paying fringe benefits tax is generally not planned when a small business decides to reward its employees with a night out. If you talk to your accountant prior to providing the benefit, often there is a better way to structure the benefit, and reduce any unwanted tax liabilities.
Travel vs Living Away From Home – FBT and tax deductibility
Travel is another common issue for employers. Determining whether travel is tax deductible or subject to FBT is also very complex.
Travel between home and work
As a general rule of thumb, if travel is between home and the workplace there is no tax deduction, and FBT may apply if any of these costs are paid by the employer. However, there are a number of circumstances where this travel may be tax deductible, including:
- Transporting heavy or bulky goods
- Where the employee’s work is itinerant in nature
- Where an employee is ‘on call’ and their work commences before leaving home (i.e. a doctor who is on call and travels to the hospital or clinic after giving instructions on treatment at home). An employee merely being on call will not meet this exception.
- Where an employee is required to work concurrently between two or more different workplaces (i.e. Melbourne office two days a week and Sydney office 3 days a week).
- An employee is required to move continuously between changing work places
- An employee is posted to another work location for an extended period
What other conditions need to be met for transport costs to be tax deductible?
- The work activities must require the travel to be undertaken
- The employee is paid, directly or indirectly to undertake the travel
- The employee must be subject to the direction and control of their employer for the period of the travel.
What other conditions need to be met for accommodation costs to be tax deductible?
- The work activities must require the travel to be undertaken
- The work must require the employee to sleep away from home overnight
- The employee must have a permanent home near their regular place of employment.
- The employee must not be considered to be ‘living away from home’ (separate FBT rules apply to LAFH arrangements) or have relocated to the alternative location.
When would an employee be living away from home as opposed to travelling?
Whether an employee is living away from home depends on the facts of each case. Relevant factors include:
- the time spent working away from home
- whether the employee has a usual place of residence at a previous location
- the nature of the accommodation, and
- whether the employee is, or can be, accompanied by family or visited by family or friends.
Where an employee is living away from home, the costs of accommodation, food and incidentals are not tax deductible, however, an employer can provide their employee with an allowance, which is exempt from income tax to the employee and exempt from FBT to the employer. The allowance is tax deductible to the employer. Substantiation requirements may need to be maintained by the employee, if the allowance exceeds the ATO’s reasonable food and drink component.
Access to the tax concessions for living-away-from-home allowances and benefits are limited to a period of 12 months for an employee (other than employees working on a fly-in fly-out or drive-in drive-out basis) at a particular work location, and to cases where the employee:
- maintains a home in Australia at which they usually reside and is available for their immediate use and enjoyment during that period that their duties of employment require them to live away from home and
- can substantiate all expenses incurred on accommodation and
- can substantiate all expenses incurred on food or drink (if the food or drink expenses incurred are more than the Commissioner of Taxation’s reasonable amounts) and;
- provides you with a declaration about living away from home and, where required, a declaration on substantiation.
If you would like further information regarding FBT, please contact our office.