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Fringe Benefits Tax

Fringe Benefits Tax

What is a fringe benefit?


A 'fringe benefit' is defined in S.136(1) of FRINGE BENEFITS TAX ASSESSMENT ACT 1986 and generally means a benefit (i.e., any right, privilege, service or facility) that is: a) provided to an employee (including a former or future employee), or to an associate of the employee; b) provided in respect of the employment of the employee; and c) provided by: i. the employer of the employee (including a former or future employer); ii. an associate of the employer (e.g., a related company); or iii. a third party under an 'arrangement' with the employer (or an associate of the employer). An 'arrangement' includes any agreement, arrangement, understanding, promise or undertaking, regardless of whether it is express or implied, legally enforceable or not. In circumstances where such an arrangement does not exist (e.g., there is no agreement of any kind between the employer and the third party), a benefit provided by a third party can still give rise to a fringe benefit generally where the employer (or their associate) facilitates, promotes or encourages the provision of the benefit. Where a fringe benefit is provided by an associate of the employer or by a third party, and the benefit is subject to FBT, it is the employer who is liable for any FBT in respect of the benefit (i.e., and not the associate or the third party).

Benefits that are excluded from FBT


Certain benefits are specifically excluded from the definition of a 'fringe benefit' and, therefore, are not subject to FBT. Examples of such benefits are as follows: a) A payment of salary or wages to an employee - these payments are subject to income tax in the hands of the employee; b) Employer superannuation contributions made on behalf of an employee to a complying superannuation fund - the contributions are generally subject to income tax in the fund; c) Employment termination payments ('ETPs') - ETPs are generally subject to income tax in the hands of the employee; d) A discount on the acquisition of shares received by an employee under an employee share scheme - the discount received is generally taxable in the hands of the employee; and e) A benefit that is an exempt benefit under a specific provision of the FBT Act - there are a range of benefits that are specifically exempt from FBI, such as the following: i. The provision of certain work-related items, such as a portable electronic device or a tool of trade primarily for use in the employee's employment - refer to S.58X; ii. The provision of a minor benefit - this is basically a benefit with a GST-inclusive cost of less than $300, where certain other conditions are satisfied. Refer to S.58P; iii. Certain taxi travel - taxi travel provided to an employee that comprises a single trip which begins or ends at the employee's place of work. Refer to S.58Z; iv. Certain property benefits - this comprises property (e.g., food and drink) that is provided to a current employee, and consumed by the employee on a working day, on the business premises of the employer where it is not provided under a salary packaging agreement.

Who is an 'employee' for FBT purposes?


The concept of an 'employee' is important for FBT purposes because a benefit provided to an employee (or to an associate in respect of an employee's employment) is generally subject to FBT. An 'employee' for FBT purposes includes not only a current employee, but also a former employee and a future employee. An employee may also include a resident individual earning foreign employment income. In contrast, where a benefit is provided to an 'independent contractor', the benefit will not be subject to FBT because no employment relationship exists. Also, FBT is not payable on benefits provided to other nonemployees, such as clients and suppliers.

Income tax consequences of providing fringe benefits


There are certain income tax consequences for employers who provide fringe benefits a) Cost of providing fringe benefits is generally tax deductible to the employer - An employer is generally entitled to claim an income tax deduction for the cost of providing a fringe benefit (excluding any GST input tax credit entitlement), as an ordinary business cost. i. FBT may still apply in respect of a benefit where an employer chooses not to claim a deduction for the costs incurred in providing a fringe benefit. This is because an employer's liability for FBT arises independently of any decision of an employer to forego the right to claim an income tax deduction for the expenditure incurred in providing the benefit. Refer to TD 94/42. b) Any FBT liability incurred is generally tax deductible to the employer - An employer can also generally claim an income tax deduction for any FBT liability incurred. In TR 95/24, the ATO sets out when an employer's FBT liability (that is payable by instalments) is deductible for income tax purposes. i. On the basis of the ruling, for the income tax year ending 30 June 2012 (for example), an employer who is liable to pay FBT in instalments can generally deduct: I. The employer's actual FBT liability for the 2012 FBT year; Less the employer's FBT instalment referable to the June 2011 quarter; Plus the employer's FBT instalment referable to the June 2012 quarter. ii. Where an employer does not pay their FBT liability by instalments, the FBT liability is basically deductible in the income year in which the FBT year ends. c) Employee contributions are generally assessable income of the employer Where an employee reimburses an employer for any part of the employer's FBT liability, the reimbursement to the employer is included in the employer's assessable income. Furthermore, the GST-exclusive value of any employee contribution in relation to a fringe benefit is also included in an employer's assessable income.

Categories of fringe benefits


A benefit that meets the definition of a 'fringe benefit' will fall into one of the following 14 different categories of fringe benefits, with each category having its own FBT valuation rules: 1. Car fringe benefits using the Statutory Formula method; 2. Car fringe benefits using the Operating Cost method; 3. Loan fringe benefits; 4. Debt waiver fringe benefits; 5. Expense payment fringe benefits; 6. Housing fringe benefits; 7. Living Away From Home Allowance ('LAFHA') fringe benefits; 8. Airline transport fringe benefits; 9. Board fringe benefits; 10. Meal entertainment fringe benefits; 11. Tax-exempt body entertainment fringe benefits; 12. Car parking fringe benefits; 13. Property fringe benefits; and 14. Residual fringe benefits

Fringe Benefits Tax

Fringe Benefits Tax

Reducing the taxable value of fringe benefits


A benefit that falls within the definition of a 'fringe benefit' will generally give rise to an FBT liability for the employer. The amount of FBT payable depends on the taxable value of the benefit which is determined in accordance with the specific valuation rules that apply to each category of fringe benefit There are a number of fringe benefits which attract concessional treatment for FBT purposes. Where a fringe benefit is subject to concessional treatment, the taxable value of a benefit may be reduced. The taxable value of a fringe benefit may be reduced by any of the following: The application of the 'otherwise deduction rule'; A contribution made by the employee (after-tax or a journal entry set-off); The $1,000 reduction for in-house fringe benefits; or Other reductions in the taxable value that are specified in the FBT Act.

How GST affects FBT


The taxable value of a fringe benefit for FBT purposes is always determined on a GST-inclusive basis.

Claiming GST input tax credits for fringe benefits


It is usually an employer's entitlement to claim any GST input tax credits in respect of fringe benefits provided that determines which gross-up rate applies for FBT purposes. Therefore, each benefit provided must be analysed to determine whether a GST input tax credit entitlement exists.

When to apply the different gross-up rates


When calculating an employer's FBT liability, fringe benefits are required to be classified according to whether there was any entitlement (i.e., full or partial) to claim a GST input tax credit in relation to the benefit provided: Identifying Type I benefits - 2.0647 gross-up rate Type I fringe benefits are those benefits for which the provider of the benefit (usually the employer) is entitled to claim any GST input tax credit. These benefits are known as GST creditable benefits. Common examples of Type I fringe benefits include the following: A car benefit provided to an employee where the car was either purchased (or hire purchased) on or after 23 May 2001, or leased under a GST-taxable lease; The provision of meal entertainment (other than GST-free food - e.g., fresh food) to employees and associates under the 'actual entertainment expenditure method'; Employee Christmas gifts costing $300 or more (excluding vouchers); or Car parking benefits (where GST applies). Identifying Type 2 benefits - 1.8692 gross-up rate Type 2 fringe benefits are those benefits which are not Type I fringe benefits. That is, these are generally benefits for which the provider (usually the employer) is not entitled to claim any GST input tax credits. In most cases, this would be because the acquisition was either GST-free or input-taxed for GST purposes. Common examples of Type 2 fringe benefits include the following: The payment of an employee's private health insurance premiums or certain medical costs; The payment of school fees for an employee's child; or The provision of a loan fringe benefit.

When is FBT payable?


Where an employer has not previously paid FBT, or the FBT paid in the previous year was under $3,000, any FBT for the current year is payable by the employer at the time of lodging their FBT return. However, where an employer's FBT liability for the previous year was $3,000 or more, the employer must pay their current year FBT liability in quarterly instalments with their Activity Statement. The instalment amounts are based either on the employer's previous year FBT liability or an estimate of the employer's liability for the current FBT year. Instalments paid during the year are credited against any FBT assessed on the employer's FBT return. The balance of FBT owing (if any) is payable on lodgment of the return. Employers must self-assess their liability for FBT and lodge an FBT return (if required) with the ATO annually, generally by 21 May each year. Where an employer is listed on a tax agent's lodgment program, the lodgment date will differ, generally 28 May 2012.

Fringe Benefits Tax

Fringe Benefits Tax

Car fringe benefits


The most common type of fringe benefit provided by employers to their employees is a car fringe benefit. When does a car fringe benefit arise? Broadly, a car fringe benefit arises on a particular day where a car that is 'held' by an employer (or their associate) is made available for the private use of an employee (or their associate) at any time during the day where all of the following conditions are met: a) There is a car; b) The car is held (i.e., owned, leased, or otherwise made available) by a provider (normally the employer, although it may be an associate of the employer); and c) The car is either: i. applied to a private use by an employee (or their associate); or ii. deemed to be available for the private use of an employee (or their associate). That is, the car is either: I. garaged or kept at or near a place of residence of the employee (or their associate); or II. not on the employer's business premises, and the employee (or their associate) has the use, custody and control of the car. What is a car? For FBT purposes, a 'car' is defined in S.995-1 of the ITAA 1997 as a 'motor vehicle' (except a motor cycle or similar vehicle): (a) designed to carry a load of less than one tonne; and (b) fewer than nine passengers. A 'motor vehicle' is, in turn, defined to mean any motor-powered road vehicle (including a four-wheel drive vehicle), such as a motor car, station wagon, panel van, utility truck or similar vehicle. Circumstances where a car fringe benefit does not arise There are a several circumstances in which a car fringe benefit does not arise and, therefore, the concessional valuation rules that apply to car fringe benefits do not apply. 1. Vehicles that are not cars Where a vehicle provided to an employee does not satisfy the definition of a 'car' in S.136(1), the benefit provided is not a car fringe benefit. Basically, this will be the case for: motor cycles/similar vehicles; and a motor car, station wagon, panel van, utility truck or similar vehicle, designed to carry a load of one tonne or more. An employer provided vehicle other than a car can still be subject to FBT as a residual fringe benefit. 2. Certain hire cars Basically, where a car hired by an employer for a period of less than 12 weeks is provided to an employee, the car is not considered to be held by the employer therefore, a car fringe benefit does not arise. However, a hire car in these circumstances could still be subject to FBT as a residual fringe benefit. 3. Exempt car benefits A car benefit is exempt from FBT under S.8(2) where both of the following conditions are met: (I) The car is a taxi, panel van or utility truck or any other road vehicle designed to carry a load of less than one tonn; and (ii) The private use of the vehicle (if any) is limited to: travel between home and work; and other private travel which is minor, infrequent and irregular. 4. Reimbursement of employee car expenses If a car is held (e.g., owned) by an employee and the employee's car expenses are reimbursed by their employer, the reimbursement is not a car fringe benefit but an expense payment fringe benefit. The taxable value of this benefit is generally the amount of the reimbursement. Furthermore, the taxable value can be reduced under the 'otherwise deductible rule'.

Taxable value of a car fringe benefit


The taxable value of a car fringe benefit is determined by using either the Statutory Formula method or the Operating Cost method. An employer may use a different method for each car benefit, and may alternate the method used for any particular car from one FBT year to the next. Statutory Formula method (a) This method assumes that the business use of a car increases as the distance it travels increases. This has the effect of reducing the taxable value of the benefit, regardless of whether the car was actually used for business or private purposes; and (b) Significant record keeping concessions apply under this method. Under this method, the taxable value of a car benefit is calculated by applying the statutory fraction to the base value of the car, as shown in the following formula. Calculating the taxable value under the Statutory Formula method Taxable value = A x B x(C/D) E where: A = the base value of the car B = the statutory fraction (discussed below) C = number of days during the FBT year the car fringe benefit was provided D = number of days in the FBT year E = the amount of the recipient's payment (i.e., employee contributions) Operating Cost method An employer must elect to use the Operating Cost method for a car fringe benefit, otherwise the Statutory Formula method applies. An election must be made regardless of the method used in a previous FBT year. Importantly, there is no formal election required. However, an employer must have kept adequate FBT records (e.g., a log book, odometer readings, etc.) in order to use this method and to explain the calculation of the taxable value of the benefit. Basically, the taxable value of a car fringe benefit under the Operating Cost method is determined by applying a percentage (which varies with the actual private use of the car) to the total costs of operating the car during the relevant FBT year, as shown in the formula below. Calculating the taxable value under the Operating Cost method Taxable value = (C x (100% - BP)) - R where: C = the total operating costs of the car during the FBT year BP = the business use percentage of the car during the holding period, as determined by the log book R = the amount of the recipient's payment (i.e., employee contributions)

Client: Client Code: FBT Year End:

Fresh Star Pty Ltd FRES0002 31 March 2011


Prep by: Rev by:

W/P Initials
DI Enter initials here

FBT 10 (2) Date


10/11/2011 Enter date here

Car Benefits Employees 7-12

Calculate car benefits using both the Statutory Formula and Operating Cost methods to evaluate the method that produces the best result for the client. The results will prefill to the FBT Summary worksheet and to the appropriate employee summary sheet to assist in the preparation of PAYG Summaries.
Vehicle Vehicle Description Registration number Date that motor vehicle was first held Latest date of: or Earliest date of: or (1) date of the beginning of the FBT year (2) date when vehicle was purchased (1) date of the end of the FBT year (2) date when vehicle was sold
Enter employee name here Enter employee name here

Number of days vehicle was held during the FBT year Statutory Formula Method Original cost price of vehicle or leased car value (GST inclusive amount) Base value of car ("A") Number of days vehicle was privately used or available for private use ("C") Number of days in the FBT year ("D") Odometer reading at beginning of year or date of purchase Odometer reading at end of year or when sold Kilometres travelled (or annualised kilometres travelled) Statutory Fraction ("B") Gross Taxable Value = (ABC)/D Operating Cost Method Is the vehicle leased (Yes/No)? Number of days in the holding period - i.e. number of days that the vehicle was held for the purpose of providing a fringe benefit (s162 - typically the period owned during the year) WDV of motor vehicle at start of year or purchase cost (not for leased vehicles) WDV of motor vehicle at end of FBT year ATO Benchmark interest rate for 2011 Operating expenses incurred during the holding period: Deemed depreciation Imputed interest Lease payments Petrol and oil - paid by employer Petrol and oil - paid by employee Repairs and maintenance - paid by employer Repairs and maintenance - paid by employee Registration Insurance Other Expenses Total Operating Expenses Log book business use percentage Log book FBT year Gross Taxable Value Summary Method which provides the lesser fringe benefit Gross taxable value under this method Less: Employee contribution - expenses paid Employee contribution - cash Employee contribution - loan account reimbursement Taxable value of benefits Gross-up rate Grossed-up fringe benefit Was GST claimed on the original car purchase? $ $ $ $ Total Expense (Excl. GST) GST Claimed by the Employer?

$ 6.65%
Apportioned Expenses

Total Expense (Excl. GST)

$ 6.65%
GST Claimed by the Employer? Apportioned Expenses

$ $

$ $ $ $ $ $ $ $ $ $ $

$ $

$ $ $ $ $ $ $ $ $ $ $

Type 1 Benefits

Statutory Formula Method

Operating Cost Method

Value of Benefits Employees 7-12 Less Employee Contributions Taxable Value of Benefits Employees 7-12 $

- Gross Taxable Value - Employee Contributions - Value of Reductions Taxable Value of Benefits
Type 2 Benefits

$ $ N/A $

$ $ N/A

Value of Benefits Employees 7-12 Less Employee Contributions Taxable Value of Benefits Employees 7-12 Statutory Formula Method $

Gross Taxable Value Employees Contribution Value of Reductions Taxable Value of Benefits Gross Taxable Value Employees Contribution Value of Reductions Taxable Value of Benefits $ $ N/A $ $ $ N/A $ - Gross Taxable Value - Employees Contribution Value of Reductions - Taxable Value of Benefits - Gross Taxable Value - Employees Contribution Value of Reductions - Taxable Value of Benefits $ $ N/A $ $ $ N/A $ -

Operating Cost Method

FBT - Electronic Workpapers 2011 - Compatibility Version_r257436.xls Copyright 2006-2009 Business Fitness Pty Ltd

FBT 10 Car Benefits (2) 1

Fringe Benefits Tax

Entertainment related fringe benefits


Employers often incur expenditure on food, drink, amusement and/or other leisure activities. This expenditure (particularly food and drink) may be incurred in various different circumstances (e.g., in connection with a business trip, a conference, a social function or a promotional event), and in relation to different people (e.g., employees, associates, clients and independent contractors). The biggest challenge facing employers incurring this expenditure is to correctly identify what is 'entertainment', so that the correct FBT consequences can be applied. The distinction between what is, and what is not, entertainment is also important because meal entertainment provided to an employee is not reported on their payment summary, and different income tax (deduction) and GST (input tax credit) consequences could apply for employers. What is entertainment? For FBT purposes, 'entertainment' is basically defined by reference to the income tax definition in S.32-1O of the ITAA 1997, as follows: (a) entertainment by way of food, drink or recreation; or (b) accommodation or travel to do with providing entertainment by way of food, drink or recreation. You are taken to provide entertainment even if business discussions or transactions occur. These are some examples of what is entertainment: business lunches social functions. These are some examples of what is not entertainment: meals on business travel overnight theatre attendance by a critic a restaurant meal of a food writer. Meal entertainment expenditure Basically, food and drink provided to an individual will have the character of 'meal entertainment' where it results in that person being entertained. In effect, an element of entertainment is basically required before the provision of food or drink becomes meal entertainment. Therefore, food and drink will have the character of meal entertainment if it confers entertainment on the recipient (e.g., it provides 'pleasure' or 'amusement'). It should also be noted that the definition of 'entertainment' basically provides that meal entertainment can still occur where food and drink is consumed in connection with business discussions or business transactions (e.g., a business lunch at a restaurant, or food and drink provided at a business conference). Furthermore, in the court decision of FC of T v Amway 2004 ATC 4893 ('Amway's case'), all meals that were provided at an overseas conference by Amway for its direct distributors were considered entertainment even though 'business' was the principal purpose of the conference. Meal entertainment valuation methods Once an employer (other than a tax-exempt employer) has determined that expenditure on food and drink has the character of meal entertainment, the taxable value of meal entertainment expenditure is determined using one of the following valuation methods: Actual entertainment expenditure method; 50/50 split method under Division 9A of the FBI Act; or 12 week register method under Division 9A.