Many 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 potentially 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 you – the employer – 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.
Amongst the most commonly 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
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:
1. Identify the total taxable value of Fringe Benefits you provide for which you can claim a GST credit (Type 1 benefits).
2. 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).
3. 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).
4. 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).
5. Add the grossed-up amounts from steps 2 and 4. This is your total Fringe Benefits Taxable amount.
6. 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 2018/19 FBT year. FBT payable by the employer is worked out as follows:
|Multiplied by Gross-up rate x||2.0802|
|Grossed-up taxable value||$20,802|
|FBT Payable (rounded)||$9,777|
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.
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.
There are a number of generous FBT concessions and exemptions available to certain not-for-profit organisations like charities, hospitals and religious institutions.
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. The latest date for lodging an FBT return is 21 May, though if you use a tax agent you may qualify for an extended deadline.
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.
Mark Chapman is the tax communications director at H & R Block