“It’s not what you look at that matters, it’s what you see.” – Henry David Thoreau
When it comes to taxes, many business owners focus solely on the numbers they see in front of them.
In the case of Fringe Benefits Tax (FBT), understanding the nuances can help ensure you are aware of all of your tax obligations.
This guide is designed to help you Understand your responsibilities as an employer when providing benefits to your employees.
What Is Fringe Benefits Tax?
Essentially, Fringe Benefits Tax (FBT) is a tax employers pay on certain benefits they provide to employees (or their families) in addition to their salary or wages.
It covers benefits like company cars, entertainment expenses, and accommodation. However, some benefits are classified as exempt fringe benefits and are not subject to FBT under certain conditions.
But here’s the key: Not every benefit is treated equally.
Understanding how fringe benefits are taxed can open up opportunities for smarter planning.
Fringe Benefits Tax: A Guide for Employers
The surface-level understanding of FBT is simple – you pay taxes on the perks you provide to your employees.
But, as Henry David Thoreau said, it’s not about what you look at, it’s about what you see.
To truly understand FBT and see its potential for your business, you need to look deeper.
Here are some actionable steps and examples to help you make sense of FBT:
1. The Basics: What Is Considered a Fringe Benefit?
You might look at a company car or meal expenses and think they’re just perks, but the tax office sees them as taxable fringe benefits. These can include:
- Cars or car parking provided to employees
- Entertainment expenses like meals, tickets to events
- Loans to employees at reduced interest rates
- Housing and accommodation
Think of fringe benefits as hidden costs in a meal deal. You pay for the sandwich upfront (salary), but you also need to account for the chips and drink (benefits) on the side.
While they may seem small, they still add up.
2. Not All Benefits Are Taxable
Not every benefit provided to employees is taxable. Some are exempt or subject to a reduced taxable value. For example, work-related items like laptops, mobile phones, or notebooks can be exempt from FBT if they are primarily used for work purposes.
This means you can provide these essential tools to your employees without incurring additional tax, making it a tax-efficient way to reward staff while managing your FBT liability.
Similarly, minor and infrequent benefits, such as occasional meals or movie tickets valued at less than $300 per employee per year, are also exempt from FBT. These small gestures can boost employee morale without adding to your tax burden.
The key to managing FBT effectively is understanding the difference between taxable and exempt benefits and structuring your employee benefits packages accordingly. By leveraging these exemptions and concessions, you can significantly reduce your FBT liability and offer meaningful perks to your team.
3. Calculating FBT on Cars
When providing company cars to employees, the taxable value of the benefit can be calculated using either the statutory formula method or the operating cost method.
Both methods factor in how the car is used for work versus personal purposes.
- Statutory Formula Method: This is the default method for calculating FBT. It applies a set statutory rate to the car’s base value and adjusts for personal use.
- Operating Cost Method: This method calculates FBT based on the actual operating costs of the car, including fuel, maintenance, and registration, adjusted for personal versus work-related use. To use this method, employees must maintain a valid logbook recording their car usage for at least 12 consecutive weeks to determine the proportion of work use.
Example: Suppose your business provides an employee with a $50,000 company car. If the car is used for personal trips (e.g. outside work hours), part of the benefit becomes taxable. Using the statutory formula or operating cost method, you’ll calculate the taxable value of the benefit and include it in your FBT obligations.
Important Note: Not all car benefits are reportable fringe benefits. Specific exclusions or concessions may apply based on the usage and type of vehicle.
By choosing the most suitable method for your business and maintaining accurate records, such as logbooks, you can ensure compliance and potentially minimise your FBT liability.
4. Employee Contributions: A Smart Way to Reduce FBT
It’s like sharing a bill at dinner – when everyone chips in, your portion is smaller. If an employee contributes towards their company car’s running costs, it reduces the taxable portion of that benefit.
5. FBT Lodgement and Payment
Timely lodgement and payment of your FBT return are crucial to avoid penalties and interest. For employers who prepare their own return, the due date is 21 May, while those using a tax agent have until 25 June. Missing these deadlines can lead to unnecessary financial strain, so it’s essential to stay on top of your obligations.
Accurate record-keeping is the backbone of FBT compliance. You need to maintain detailed records of all fringe benefits provided, including the type, value, and the method used to calculate the taxable value.
These records should be kept for at least five years from the date of lodgement of the FBT return. Think of it as building a solid foundation for your tax reporting.
Lodging your FBT return can be done electronically or on paper, and you have multiple options for payment, including cheque, credit card, or electronic funds transfer. If you find yourself unable to pay the FBT liability by the due date, don’t panic. The ATO may offer payment plans to help manage your financial commitments.
By ensuring timely lodgement and payment, and maintaining meticulous records, you can navigate the FBT landscape with confidence and avoid unnecessary penalties.
6. Income Tax Deductions: What Can You Claim?
The FBT you pay can be claimed as a deduction on your business’s income tax return. This can soften the blow of FBT, making it more manageable.
Example: If you’ve paid FBT on employee benefits like car parking or entertainment expenses, these amounts may be deductible on your next tax return in addition to the FBT paid to the ATO.
Common Mistakes in Fringe Benefits Tax
Understanding FBT is one thing; managing it effectively is another. Here are some common mistakes employers make: Failing to accurately report reportable fringe benefits can lead to compliance issues and potential penalties.
- Overlooking exempt benefits: Many businesses pay FBT on benefits that could be exempt if structured correctly, such as work-related items.
- Poor record-keeping: Without detailed records of how fringe benefits are used, you could overpay or underpay FBT, leading to penalties.
- Not considering employee contributions: As mentioned earlier, employee contributions can reduce your FBT liability, but many employers fail to implement this strategy effectively.
- Not keeping a log book: If you are wanting to calculate the FBT on car fringe benefits using the operating cost method, employees must keep a log book for a continuous period of 12 representative weeks, recording the odometer readings of both business and personal travel during that period.
Correcting FBT Errors
Mistakes happen, but the key is knowing how to correct them efficiently. If you’ve made an error in your FBT return, you can rectify it by lodging an amended return. This process allows you to correct any understated or overstated FBT liability.
For understated liabilities, lodging an amended return and paying the additional FBT is necessary. On the other hand, if you’ve overpaid, you can request a refund from the ATO. However, be aware that errors can attract penalties and interest, so it’s crucial to address them promptly.
If you’re unsure about how to correct an error, seeking advice from a tax agent or accountant can provide clarity. The ATO is also a valuable resource for assistance with correcting FBT errors.
By proactively addressing errors and seeking professional guidance when needed, you can ensure your FBT compliance remains intact and avoid potential financial repercussions.
Case Study: Reducing FBT through Smart Employee Contributions
Meet Mark, an owner of a medium-sized business who was struggling with rising FBT costs.
Mark provided several fringe benefits to his employees, including company cars and entertainment perks.
After reviewing his FBT liabilities, he realised he was paying more tax than necessary.
Mark consulted a tax advisor at Bishop Collins who suggested introducing employee contributions for the company cars.
By having his employees contribute towards the cost of fuel and maintenance, Mark was able to significantly reduce the taxable value of the car benefits. This reduction in taxable value also impacted the reportable fringe benefits amount, making it easier to manage FBT obligations.
In the end, his business saved thousands in FBT, and his employees appreciated the transparency and shared responsibility.
Fringe Benefits Tax A Guide for Employers
Understanding FBT isn’t just about compliance – it’s about seeing the full picture.
From structuring employee benefits efficiently to minimising your tax liability, the key is to look beyond the surface-level numbers and make strategic decisions.
Fringe benefits tax might seem like a burden, but with the right skills, you can make it work for both you and your employees.
By mastering the rules, you can provide valuable perks to your employees while keeping your business’s tax obligations in check.
