Tightening Your Fringe Benefits Tax
Fringe Benefits Tax (“FBT”) is a tax that many business owners try to forget until the deadline is upon them.
What benefits are subject to Fringe Benefits Tax?
FBT covers multiple categories of benefits that are provided to or on behalf of an employee and/or an associate of an employee. Common FBT benefits can range from the private use of a business car to the payment of an employee’s child’s school fees.
1 April 2016 started the new FBT year, and with it came some updates and changes to FBT law. If your business is:
- in the hospital or non-profit sector and uses salary packaging for team members,
- a small business, or
- provides team members with fitness packages
there are a few things you need to know about the recent FBT changes before lodging an FBT return.
The following are the top 5 things you need to know about the fringe benefits tax changes:
Your business may pay more FBT
The rate of Fringe Benefits Tax increased from 47% to 49% on 1 April 2015 in conjunction with the 2% debt tax levied on high income earners (referred to as the Temporary Budget Repair Levy). The FBT year that just ended is the first year at the higher tax rate, which means if your business has an FBT liability it will pay more tax than in previous years.
|FBT year||FBT rate||Type 1 gross up rate||Type 2 gross up rate|
|1 April 2015 to 31 March 2017||49%||2.1463||1.9608|
|1 April 2017 onwards||47%||2.0802||1.8868|
The FBT rate will stay at 49% until 31 March 2017 when the debt tax is scheduled to be removed.
Tightening fringe benefits tax on non-for-profit organisations
In the 2015-2016 Budget, the government announced a limit of $5,000 per employee per year for the value of fringe benefits that are exempt from FBT purposes for:
- Salary sacrificed meal entertainment expenses and;
- Salary sacrificed entertainment facility leasing expenses.
This measure applies to employees of the following non-for-profit organisations:
- public benevolent institutions,
- health promotion charities,
- public ambulance services and
- public, non-for-profit hospitals.
This is quite a significant change for some employees who previously had uncapped FBT exempt meal and entertainment expenses.
Why are these rules in place?
The Fringe Benefits Tax Assessment Act 1986 has been amended, introducing the new FBT capping measure proposed in the 2015-2016 Budget. This is aimed at stopping the overuse and abuse of the FBT exemption for public benevolent institutions and non-for-profit, non-government organisations.
What do you do as an employer?
Review the existing salary packages of employees affected by the changes as you may be paying the extra FBT as a result of the new cap being introduced. If your arrangements don’t enable your business to recover the additional FBT liability from the employee then your business may be stuck with the additional cost.
Salary sacrificing may not be worth it
It is essential that you review all salary sacrificing agreements. In some cases, salary sacrifice agreements may no longer achieve the intended goals and simply create an administrative burden for little or no benefit. This is because providing benefits is more expensive and potentially less attractive now and over the next few years unless that cost is passed through to employees.
For high income earners (above $180k), the difference in timing between the FBT year and the income year means pre-tax, FBT taxable, earnings may be used more effectively to purchase private items or spend on private expenditure between 1 April 2017 when the FBT rate reduces back to 47% and 30 June 2017 when the 2% debt tax is removed from income tax.
As with any salary sacrifice agreement, the employee should agree in writing to forgo an amount of salary and wages before that entitlement has been earned. If an agreement is entered after the fact, it is not valid and the employee will simply be taxed on the value of the benefit provided. The business would also be liable for obligations such as PAYG withholding and superannuation guarantee amounts on the value of the benefit provided.
If you are unsure of the rules that must be followed for the agreement to be effective, contact Butlers Business and Law and we can assist you in this process.
Two laptops are better than one for small business
An FBT exemption was introduced on 1 April 2016 for small businesses with an aggregated turnover less than $2 million per annum that provide employees with more than one work-related portable electronic device, even if those devices have substantially similar functions. Portable electronic devices include laptops, tablets, mobiles, PDAs, electronic diaries, notebook computers and GPS navigators.
Devices are exempt from FBT if they are provided primarily for use in the employee’s employment. Removing the restriction that a tax exemption is only provided for one work-related electronic device of each type remove’s confusion where there is an overlap between different products (such as between a tablet and a laptop).
Gym classes at the office?
Do you have some extra office space that you’re not sure what to do with? Why not put in an in-house gym facility for the team? A recent ATO decision confirmed that recreation facilities can be exempt from FBT. There is one condition, though. The recreational facility must be exactly that: a facility for recreation. This includes amusement, sport and similar leisure pursuits (for example, ping pong or pool). This means the provision of personal trainers, where paid for by an employer, would not be exempt from FBT under this ruling.
How do you know if your business needs to pay FBT?
If you answer yes to any of the following questions you may be providing fringe benefits and the FBT law may apply in your circumstances:
- Does your business own or lease vehicles that employees or their associates use for non work-related travel?
- Does your business provide loans at lower than market interest rates to employees or their associates?
- Has your business forgiven or released any debts owed by employees or their associates?
- Has your business paid for, or reimbursed, any private expenses incurred by employees or their associates?
- Does your business provide a house or unit of accommodation to employees or their associates?
- Does your business provide employees or their associates with living-away-from-home allowances?
- Does your business provide entertainment by way of food, drink or recreation to employees or their associates?
- Do any employees have a salary package or a salary sacrifice arrangement in place?
- Has your business provided employees or their associates with goods at a lower price than they are normally sold to the public?
Want to know more about fringe benefit tax? Please don’t hesitate to contact our experienced Newcastle commercial lawyers at Butlers Business and Law on (02) 4929 7002 or fill out an enquiry form on our website.