Many retail businesses look to get the best out of their staff by providing benefits and perks over and above their normal salary and wages. Whilst that can be a great way to incentivise staff, there are potential tax consequences that need to be borne in mind.
If you provide benefits to your employees, you could find that your business is liable to pay Fringe Benefits Tax (FBT). This is a tax paid by the employer – not the employee – on the taxable value of certain benefits paid to employees. When we refer to employees, this also covers benefits provided to the family of employees or to associates (such as friends) of employees.
Examples of Fringe Benefits
Among the most provided benefits that can give rise to FBT are:
- Providing a car for your employee that can be used for private purposes
- Providing free or subsidised car parking for your employees
- Providing your staff with “entertainment”, such as meals, drinks, sporting or leisure pursuits (such as a round of golf or tickets to a sporting event), theatre tickets and holidays
- Either reimbursing an employee for private expenses or paying for such expenses directly to a third party (for instance, paying your employee’s domestic utility bills)
- Giving your employee a loan and charging no interest or a reduced rate of interest
- Providing accommodation to an employee rent-free or at a reduced rent
How is FBT calculated?
FBT is payable based on the grossed up ‘taxable value’ of the benefit provided. This grossing up process is intended to reflect the gross salary employees would have to earn to buy the benefits you’re providing after paying tax. Fringe Benefits are split into Type 1 and Type 2 benefits. The actual calculation can be complex and is best done by your accountant, but the process can be summarised as follows:
- Identify the total taxable value of Fringe Benefits you provide for which you can claim a GST credit (Type 1 benefits).
- Work out the grossed-up taxable value of these Type 1 benefits by multiplying the total taxable value by the type 1 gross up rate (currently 2.0802).
- Identify the total taxable value of benefits for which you cannot claim a GST credit, for example, supplies you made that were GST-free (Type 2 benefits).
- Work out the grossed-up taxable value of these Type 2 benefits by multiplying the total taxable by the type 2 gross up rate (currently 1.8868).
- Add the grossed-up amounts from steps 2 and 4. This is your total Fringe Benefits Taxable amount.
- Multiply the total Fringe Benefits Taxable amount (from step 5) by the FBT rate (currently 47 percent). This is the total FBT amount you are liable to pay.
Let’s assume you provide a car to a member of staff which they can use privately. The taxable value of the benefit is $10,000 during the 2023/24 FBT year. FBT payable by the employer is worked out as follows:
|Multiplied by Gross-up rate x
|Grossed-up taxable value
|FBT Payable (rounded)
Can my business reduce its FBT liability?
It’s possible to reduce your FBT liability, or even eliminate it altogether, by getting your employee to make a cash contribution towards the cost of the benefit provided to them. Each dollar that they pay towards the provision of the benefit reduces the taxable value of the benefit by the same amount.
Are any benefits FBT free?
Some benefits are free from FBT, such as the provision by a small business of tools or electronic devices (such as laptops) that are mainly used for work purposes. So-called ‘minor benefits’ are also FBT free. A minor benefit is one with a notional taxable value of less than $300 and could include things like the annual staff Christmas party, provided the cost per head is less than $300.
There are a number of generous FBT concessions and exemptions available to certain not-for-profit organisations like charities, hospitals and religious institutions.
What are Reportable Fringe Benefits?
I pointed out earlier that FBT is payable only by employers. However, if the amount of fringe benefits provided to an employee exceeds $2,000, the figure must be reported in the year end income statement provided to employees and is then included on the individual’s tax return.
This isn’t taxable income so there are no direct income tax consequences for the employee. However, these Reportable Fringe Benefits can be considered in working out a number of other benefits and obligations, including Family Tax Benefits, Medicare levy surcharge, private health insurance rebate, child support payments, superannuation co-contributions, Higher Education Loan Program (HELP) repayments, and various tax offsets.
How does my business report and pay FBT?
The FBT year runs from 1 April to 31 March so now is the time to determine if your business needs to register for and pay FBT.
If you provide benefits to your employees and think you might have an FBT liability, the first step you need to take is to register for FBT with the ATO. Your tax agent can help you with that process.
If you have provided fringe benefits for your employees, you must then lodge an FBT return. The latest date for lodging an FBT return is 21 May 2024, though if you use a tax agent you may qualify for an extended deadline.
If you haven’t paid FBT before, or if the amount of FBT you had to pay for the previous year was less than $3,000, you only make one payment for the year when you lodge your FBT return. Otherwise, FBT is payable quarterly through your activity statements for the next FBT year.
Mark Chapman is director of tax communications at H&R Block.