Understanding Australia’s Fringe Benefits Tax

The Australian tax system has various components — including the Fringe Benefits Tax (FBT) — which often requires employers' attention. This article aims to provide a straightforward explanation of FBT, ensuring clarity while addressing its nuances.

What is FBT, and who is affected by it?

FBT arises when employers provide their employees with additional perks beyond their regular salary. These can include benefits like a company car for personal use or gym memberships. While these benefits effectively enhance employee satisfaction, they are subject to the Fringe Benefits Tax. This tax – distinct from income tax — is levied on employers based on the value of certain benefits they provide to their employees.

FBT is relevant to all employers who provide fringe benefits, regardless of the size or type of the organisation. This includes large corporations, small businesses, non-profit entities and government entities. It's also important to understand that FBT isn't confined to high-value benefits like company cars or loans; it can also apply to smaller benefits.

Calculating FBT: A detailed overview

The calculation of FBT requires employers to adjust the taxable value of the provided benefits. This process, known as 'grossing-up', essentially estimates the amount an employee would need to earn at the highest tax rate to afford these benefits out of their pocket. This calculation aims to equate the benefit's value to a pre-tax income equivalent.

To calculate the FBT, the taxable value of the fringe benefits is multiplied by the gross-up rate, which accounts for the Goods and Services Tax (GST) status of the benefits. There are two types of gross-up rates: one for benefits, where the employer is entitled to a GST credit and a lower rate for those with no GST credit.

A practical example

As of the current tax year, the FBT rate is 47%. This rate is applied to the grossed-up value to determine the total FBT payable. For example, if the taxable value of a fringe benefit is $1,000 and the applicable gross-up rate is 2.0802 (for GST-credit entitlements), the grossed-up value is $2,080.20. The FBT payable would be 47% of this amount, equating to $978.49.

BST for employers

Here's some good news: you can claim income tax deductions and GST credits for the cost of providing these fringe benefits. Plus, you can also claim a deduction for the FBT you pay. On the other hand, make sure to remember to identify the types of fringe benefits you provide, calculate their taxable value and work out your FBT liability. Keep your records tidy and lodge an FBT return. Some benefits might be exempt, so it pays to do your research.

Final thoughts

Grasping the essentials of FBT is vital for every Australian employer, ensuring responsible business practices and compliance with tax obligations. However, given the unique nature of each business, tailored advice can be invaluable.

For expert guidance specific to your business needs, consider reaching out to WMC Accounting.