It pays to understand what FBT is, how it works and when it’s triggered

Last blog we wrote about the perils of taking poor advice, especially towards the end of the financial year when everyone’s keen to make their sales numbers or dispose of a little bit of cash in advance of a tax bill. There was a little story close to the end about providing staff massages, which as nice as it sounds, could deliver the paying company a nasty sting in the tail care of FBT.

My guess is that a lot of businesses (and their owners) could get caught out providing FBT-able perks for their staff without realising it.

That monthly or quarterly dinner at the pub you give your staff for their efforts? FTB-able. That gym membership or child-care you pay for a member of your team? FBT-able. That company car you’re driving to do the shopping, pick up kids, go on holidays in? FBT-able. Even your staff Christmas party held off-site to thank your staff for all their efforts? The Scrouges at the ATO would say it’s very likely FBT-able!

This blog isn’t to say, you as a business owner shouldn’t provide extra benefits for yourself (if you’re an employee) or your staff members. Rather, if you do, you need to be across the realities of what it’s really going to cost you. And it can be a big hit.

As a rough back of the envelope example, if something given to an employee costs the company $1000, it’s assumed the employee would have had to have earned almost double that in order to purchase (after GST and paying the top marginal tax rate) – so the grossed up value becomes $2000. Then you pay 46.5-47% (top marginal tax rate inc medicare levy) on $2000 – ouch! So not only have you paid the $1000, you’re then paying almost another $1000 on top of the original cost.

So to ensure you don’t end up with an FBT bill (and possibly fine) that you weren’t expecting, let’s look at FBT in closer detail.

What is FBT?

Fringe Benefits Tax, also known as FBT, is a tax paid by employers on certain benefits provided to their employees* (and other associates, such as directors of the company or family members of employees).

FBT is paid separately to income tax and on a different timetable to income tax. The FBT year runs 1 April to 31 March.

What are fringe benefits?

A fringe benefit is a non-cash payment, for private/personal use, usually the provision of something in kind (that the employer has paid for), that is perceived to have a cash value to an organisation’s staff member. Think tickets to a sporting event or concert, entertainment/meals, private use of a company car, car parking (if you’ve a paid carpark within 1km of your car park), private health insurance payments, discounted loans, etc. The list is almost endless.

It’s important to note that client/customer benefits are not subject to FBT as they’re not employees.

What’s not a fringe benefit?

  • Employee salary and wages
  • Employer contributions to complying super funds
  • Shares under an approved employee share scheme
  • Termination payments (which might also include the sale or gift of a company car to an employee on termination)
  • 7A dividend payments
  • Benefits to volunteers and contractors
  • Exempt benefits (see below)

Which benefits are FBT exempt?

In order for a benefit to be FBT exempt, it needs to fall into the minor and infrequent category. Of course there are lots of interpretations on what’s minor and what’s infrequent, but it’s safe to say if it’s something you do regularly (weekly, monthly, quarterly), it’s not infrequent. And minor, the general interpretation of that is the benefit being less than $300 dollars.

If the benefit is costs more than $300 OR is not infrequent, FBT is likely to apply.

So if you’re sending flowers as a get well for a staff member, chances are you’re not sending more than $300 of flowers and they’re not unwell every other week. Hence that would be exempt. The same goes for sending a $200 basket of baby items to a staff member to congratulate them on a new baby.

Other exemptions include;

  • On premises function to recognise a staff member (again, not of the every Friday evening variety. And not if the event involves alcohol of any kind).
  • Portable devices used mainly for work – think laptops, tablets, phones, GPS, etc (only one per year per employee unless you’re a small business <$50M/yr in revenue)
  • Work-related items such as protective clothing, briefcases and tools of trade.
  • If you’re a not-for-profit, charity, healthcare or government institutions (separate FBT concessions exist for these organisations – that’s something for another blog post).

Who pays FBT?

The employer (organisation) pays the FBT, even if the benefit is provided by a third party, say for example the employer has arranged for a weekend away for an employee which is supplied by a client of the employer. (can you give me an example?).

How do you work out how much FBT to pay?

This is where the rubber really hits the road so to speak. You have to ‘gross up’ the taxable value of the benefit provided to the maximum marginal tax rate your employees would have to earn including the medicare surcharge. So that would be 47% 46.5% (in 2023). Yes, you read that correctly. Even if your employees are only taxed at 32 or 37% + 2% 1.5% medicare levy surcharge.

Why is FBT so high?

In essence, it’s to stop companies effectively paying employees in kind which of course would see the ATO lose out on tax revenue required to pay for all the costs of running the country.

Can you claim FBT as a tax deduction? And what about GST credits?

As an employer, the company can claim an income tax deduction and the GST credits for the cost of providing fringe benefits.

EOFY employee reporting

If you’re an employee and you’ve received reportable fringe benefits, they may also be listed on your PAYG payment summary. However, if your fringe benefit is less than $3,773 (double check with your employer that it’s correct), it doesn’t need to be included in your tax return.

If you’re an employee of an exempt organisation under Section 57A of the FBTAA 1986, you’ll have to report that. However, you’ll be able to tick the Yes box on the question of Is the employer exempt from FBT?

FBT wrap up – it pays to have an a trusted accountant

It’s incredibly easy to get tripped up by FBT expenditure – especially if you’ve got more than 30 employees and you’re competing to win talented people. However, having a trusted accountant in place means having a second set of eyes to catch any issues along the way. Particularly say for businesses with vehicles which are subject to FBT. What your accountant will likely do is get to the end of the year and do one of two things – either look at your log-book and work out the business proportion of use. Or do a calculation called a statutory calculation that allows for the private use of said vehicles. The same goes for home electricity, internet, etc. Your accountant will circumnavigate (aka adjust for) any FBT issues by allowing for private use. That way, you’ll likely pay a little more personal income tax at the end of the year and the business doesn’t end up with a hefty FBT liability.

In summary: unless the perks you’re giving employees are small in nature and infrequent, you’re probably heading into FBT territory. And given the ATO is on a revenue raising trajectory, they’re likely to be looking at this in greater detail in the coming years. You have been warned. As with all things business related, talk to your accountant.

Of course, if you need good, qualified advice for your end of financial year planning, potential FBT liabilities or we can help you transition your business to cloud accounting with Xero (especially whilst there are still govt tax incentives – but only until June 30, 2023) so you have a clearer handle on your tax affairs, we’d love to help. You can call us on 6023 1700 or connect with us via Facebook or LinkedIn.

* Sole traders and partners in a partnership are not classified as employees. Hence the benefits you provide to yourself/selves are not subject to FBT.

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If you've got financial or business questions, or you just want to run something by us, we'd be delighted to really talk to you – in person, over the phone - call us on 02 6023 1700 - or you can use the form below and we'll get back to you.

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About us:

Lloyd Accounting is a boutique accounting firm based in North Albury that operates with the sole purpose of making your tax and business affairs as easy as possible. For us, it's about really understanding what it is you're wanting to achieve and then using our experience and expertise to help facilitate that.

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