Designing salary packages requires a close look at what FBT affects, not all of which is obvious at first glance. FBT is a separate tax, but income tax and social security services eligibility are inter-related.
FBT affects the cost of an employee’s salary package, and has an impact on net pay. In addition, fringe benefits above a certain level are counted as income when applying for government benefits. Employees can be disadvantaged by receiving a fringe benefit unless the outcome is carefully calculated.
It depends on the salary level, the nature of the benefit, and the amount. There’s a closer look at salary sacrifice here.
Employers must pay any FBT owing on the benefits provided, lodge returns and keep records.
How Does FBT Affect Your Tax Return? (Employee)
An employee does not pay tax on fringe benefits, FBT is paid by employers. Taxable income does not include fringe benefits, and the medicare levy (but not medicare levy surcharge) is calculated without the value of fringe benefits being taken into account.
However an individual employee’s tax return is affected in other ways.
Employers are required to keep records of fringe benefits paid for each employee. At the end of the FBT year, if the total fringe benefits are above a specified level (currently set at $2,000) then they need to be reported in the payment summary (group certificate). These are called “reportable fringe benefits“.
Some fringe benefits are excluded from being reportable. They are listed here.
The FBT year runs from 1 April to 31 March of the following year. The reportable fringe benefits will be shown on the payment summary issued for the year which ends on the following 30 June.
3 Reasons why the payment summary fringe benefits total doesn’t match your records
The amounts of reportable fringe benefits shown in your payment summary may not be what you expect. There are a number of possible reasons for this:
1. Financial year mis-match
As mentioned above, the FBT year measures a period from 1 April to the following 31 March, whereas the normal financial year of a payment summary covers the period from 1 July to the following 30 June.
The periods overlap, but the fringe benefits measured within each period will not necessarily (and usually don’t) add up to the same amount.
2. Some benefits can only be estimated in advance
Ideally, fringe benefits are clearly specified and agreed with the employer at the beginning of the employment contract, and specified in writing so there are no surprises at the end of the year.
However calculating FBT can be very complex, and even the outcome of simple calculations can’t always be known in advance.
3. Reportable fringe benefits are “grossed up”
Because reportable fringe benefits are taken into account when calculating certain government benefits, the law requires that they be calculated on fringe benefits at their pre-tax value.
This requires a calculation of the amount of salary required to pay for both the tax and the actual value of the fringe benefit. Hence reportable fringe benefits are declared at their “grossed-up” value; i.e more that the actual value of the benefit.
The grossing-up factor used to calculate reportable fringe benefits also depends on whether GST is taken into account, but is based on an assumed tax rate at the highest marginal rate, currently 45%, plus 2% to allow for medicare. This rate (47%) is also the FBT tax rate. For more on reportable fringe benefits go here.
The effect of FBT reportable fringe benefits in your tax return
You don’t pay income tax on reportable fringe benefits. However the amount of reportable fringe benefits identified on your payment summary, and therefore included in your tax return are added to your taxable income when being assessed for the following (not exhaustive):
- medicare levy surcharge
- Senior Australians Tax Offset
- Employee share schemes tax concessions
- HECS-HELP Repayment income
- Personal super and government co-contributions
- Higher income earners increased super contributions tax
- Most Centrelink entitlements where there is an income test
- see more here
How Does FBT Affect Your Tax Return? (Employer)
As mentioned above, fringe benefits tax and income tax are quite separate. For employers there is an FBT return, with FBT payable on the taxable value of fringe benefits, as well an an income tax return, on which income tax, if any, is payable.
Although separate, there are a number of ways in which income tax and the fringe benefits tax rules interact.
Fringe Benefits Tax and Taxable Fringe Benefits are Tax Deductible
In general terms, a taxable fringe benefit (and the FBT payable) are tax deductible. Exempt fringe benefits benefits are not tax deductible.
FBT Example Calculations
Most fringe benefits for employees are tax deductible, although entertainment expenses have their own complex set of rules.
It is often assumed that FBT can be avoided by simply refraining from claiming it as a tax deduction. This is not correct.
The following may help to clarify how FBT is applied.
ATO Step-by-Step Calculation for Determining FBT
- Determine the taxable value of each fringe benefit
- Determine taxable value of fringe benefits on which GST is claimable
- Calculate grossed-up value of benefits in step 2. using the Type 1 gross-up rate
- Determine taxable value of fringe benefits on which GST is NOT claimable
- Calculate grossed-up value of benefits in step 4. using the Type 2 gross-up rate
- Add the result from Steps 3 and 5 – this is the total fringe benefits taxable amount
- Multiply the result from step 6 by the FBT tax rate to determine FBT payable
Checklists can be used to see whether there is a fringe benefit and if so, what the taxable values is (steps 1 and 2 above).
Example of FBT on Vehicles Using the Statutory Formula Method
The statutory formula method determines a fringe benefit value by applying a fixed percentage to the vehicle’s price.
The purchase price of a vehicle is the cost price, excluding stamp duty, registration and fleet discount
but including dealer delivery and GST.
Example Source: Remunerator.com.au (Note: The example uses data from the 2016-17 year)
Example Calculations Showing the Interaction Between GST, FBT and Income Tax
Worked examples of 3 kinds expense payment fringe benefit:
- Reimbursement of phone expenses (30% business use, partly otherwise deductible)
- Reimbursement of child care expenses (non-deductible expense)
- Reimbursement of rental property expenses (otherwise deductible)
Examples source: www.taxinstitute.com.au (Aug 2013)
Example type 2 gross-up – GST-Free fringe benefit – Non-Profit Organisation
This example shows the treatment of a non-deductible expense (employee mortgage payments) paid by a non-profit employer.
As the employer is not entitled to a GST credit, the Type 2 gross-up calculation is used to calculate the taxable value of the benefit.
Since the employer is a Public Ambulance Service, a grossed up value of fringe benefits of up to $17,000 can be paid tax free.
For calculation details see salarypackagingcards.com.au
Also from this same source is a handy list of the common types of expense payment benefit.
Examples of fringe benefits
Classifying benefits is a crucial step in determining whether an FBT liability arises and how it is calculated.
This quick reference guide for FBT provides useful examples of the types of transaction, and how they may be classified for FBT purposes:
See: What Type Of Benefit is This? (anu.edu.au)
How Does FBT Affect Child Support?
Child Support assessments by Human Services (Services Australia) require income to be identified.
Reportable fringe benefits are included in the income total.
How Does FBT Affect Family Tax Benefit?
Family Tax Benefit entitlement assessments by Human Services (Services Australia) require income to be identified.
Reportable fringe benefits are included in the income total.
How Does FBT Affect HECS?
HELP Student Loan Scheme repayment obligations are based on income level. Repayment income includes total reportable fringe benefits amounts,
See further HECS and HELP Student Loan Scheme Repayments
This page was last modified 2020-03-21