Fringe Benefit Tax Explained: A Guide For Employers

As an employer, you may come across fringe benefit tax (FBT), a special area of Australian tax.

Your FBT obligation is separate to any income tax you may be liable to pay. It is an additional tax obligation that requires a different assessment. Understanding FBT is important to ensure your business is adequately meeting its tax obligations.

In this guide, we help explain what those obligations may look like and how you can stay on top of them.

What are fringe benefits?

Fringe benefits refers to any non-cash benefit provided to employees by the company. This can include company cars, housing allowances, car parking, gym memberships and entertainment perks.

The taxable value of your fringe benefit is known as FBT.

How to calculate fringe benefit tax

When it comes to calculating your fringe benefit tax, there are a few things that you need to remember. It is unfortunately, not a straightforward calculation.

There are a few steps that need to be taken to get to the final calculation. If you are a business with many different types of fringe benefits, take the time to look through each benefit to understand the way it should be treated. Not all fringe benefits are the same.

GST vs non-GST fringe benefits

Before you embark on any calculation, the first thing to be aware of is there are two fringe benefit gross-up rates. The one you use will depend on whether there’s any eligibility for a GST credit. They are called gross-up rates as you’re required to add up the total fringe benefits provided, that is, the gross amount.

The two rates are:

• Higher (type 1) gross-up rate
• Lower (type 2) gross-up rate

The higher gross-up rate is used when you are entitled to a GST credit as GST was part of the benefit. Where there is no GST, you will use the lower gross-up rate.

To give you an example, let’s take accommodation for a business trip. An employee stays for a few nights interstate on business and makes payment at the hotel. Upon their return, the employer reimburses the cost of the accommodation. As the accommodation also involves GST, the employer will now be entitled to a credit for that GST paid on that fringe benefit.

Many times, fringe benefits provided to employees will have a GST component. However, you may also come across some benefits that are GST free. For instance, some education and healthcare costs may not include GST.

The gross-up rates can change year on year and there are different considerations based on the type of fringe benefit. The ATO regularly publishes the rates and thresholds so it’s a good idea to keep their table as a reference.

Calculating fringe benefit tax

To give you an idea of how it works, we’ve provided a step by step approach to calculate your fringe benefit tax. Remember, there are different treatments and thresholds depending on the fringe benefit. For instance, when it comes to entertainment expenses with a client, sometimes a 50/50 approach is preferred so only 50% of the expense is attributed to the employee and the other 50% goes to the client.

Here, we provide a generic step by step approach to calculating your FBT:

Step 1: GST or non-GST benefit

First, classify the benefit according to whether there is GST or not. This classification will determine which fringe benefit tax rate you need to apply.

Step 2: Multiply your total

Add up the fringe benefits in their separate classifications and multiply the total by the applicable rate. At the time of writing, the rate for GST benefits (type 1) is 2.0802 and 1.8868 for non-GST benefits (type 2)

Step 3: Apply the FBT percentage

Finally, multiply your grossed-up total by the FBT rate of 47% to arrive at your tax liability for the year.

Reportable fringe benefits

FBT only applies if your total reportable fringe benefit amount exceeds $2000. There are also a number of benefits you may not need to report, depending on certain considerations. It’s always worth checking the details of the benefits you provide to ensure you’re reporting correctly.

By reporting fringe benefits, you can then claim an income deduction and GST credit for the fringe benefit. You can also claim an income tax deduction on the FBT that you pay. The key is accurate reporting so you don’t get caught out.

What are the obligations of an employer with FBT

Fringe benefits are self-assessed. So, every year, you’ll need to assess your FBT liability by applying the gross-up rate. Any FBT liability must then be lodged and paid.

To assess your FBT accurately, it all starts with identifying the type of fringe benefit. This way, you’ll apply the correct rates and in turn calculate the relevant tax. Ensure you keep adequate records including any required employee declarations.

Details of fringe benefits will also need to be declared on your employee’s payroll including end of year payment information.

Get on top of your FBT obligations

Staying on top of your FBT obligations is crucial for the smooth running of your business. Incorrectly declaring income deductions can create headaches not only your bookkeeping but also the relationship with the ATO.

Since 1997, The Practice has been helping Australian businesses understand their changing tax obligations and plan accordingly. If you’re concerned about where you stand with your FBT or simply want to chat to an expert about your obligations, we’re here to help.

This article provides general information only and does not constitute personal financial advice. It does not consider your individual objectives, financial situation, or needs. You should seek professional advice before making any financial decisions.