What is Fringe Benefits Tax (FBT) and how is FBT calculated?

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What is Fringe Benefits Tax (FBT) and how is FBT calculated?

Fringe benefits tax was introduced in legislation in 1986; prior to this businesses were providing things like cars, corporate boxes and lunches tax-free to employees, their families and executives with very little obligation to make the benefit related to their employment.

The whole purpose of Fringe Benefits Tax legislation is for the government (ATO) to receive the tax that would have been paid, if the employee paid for the benefit out of their own salary from take-home pay. The difference being, FBT is calculated based on the highest tax bracket regardless of what tax bracket an employee is on.

what is fringe benefits tax

In this article, we won’t be defining what is, and is not exempt from FBT, rather just how FBT is calculated. If you do want to learn more on exemptions please click here

 

Payment of Fringe Benefits Tax

FBT is the responsibility and obligation of the employer and paid by the employer. 

FBT is paid by the employer irrespective of whether the employer is a sole trader, partnership, trustee, corporation, unincorporated association, government, or government authority.

Generally, employers may claim as income tax deductions the cost of providing fringe benefits and the amount of FBT paid.

FBT year

The FBT year is the 12 months beginning 1 April and ending 31 March.

The ATO usually requests that businesses lodge their FBT returns by the 21st of May.  This can be done electronically or by post. 

FBT Rates

For the year that commenced 1 April 2020, the FBT rate is 47%.

The rate of tax may vary from year to year. Advice about the current rate of tax is provided to employers by the Australian Taxation Office (Tax Office) each year.

How is the amount of FBT calculated?

The basic calculation is as follows:

FBT Payable = Taxable value of benefit x Gross up factor x FBT rate

The taxable value of a benefit is calculated according to the valuation rules.

Gross up factor is:

Type 1

2.0802 if there is GST in the price and the employer can claim input tax credits

Type 2

1.8868 if there is no GST in the price of the benefit or the employer is unable to claim input tax credits.

FBT rate

The rate of fringe benefits tax is 47%. 

Ending 31 March 2019 to 2023 47% 2.0802 1.8868

Example calculation of Fringe Benefits Tax

1. GST Free Benefit like residential Rent

Applied Education pays rent of $5,000 for an employee Brett Smith who lives and works permanently in Perth.

The FBT payable would be:

$5,000 x 1.8868 (as there is no GST in residential rent) x 47%

= $4,433.98 in FBT would be payable.

The cost to the business would be;

$5000 in rent to landlord

$4433.98 in FBT payable to the ATO

Total Cost to business: $9433.98

2. GST in Price of Benefit - Eg Sony Camera

Applied Education gave Brett Smith a $5500 Sony Camera in recognition of his “Online Course Trainer of the Year Status”.

The FBT payable would be:

$5500 x 2.0802 (as there was GST in the purchase price) x 47%

= $5377.32

The cost to the business would be;

$5500 to Camera Shop

-$500 GST refund as the business can claim the GST paid on the benefit

$5377.32 in FBT payable to the ATO

Total Cost to business: $9488.47

How does FBT then relate to take-home pay?

So let’s say instead of providing the benefit as the employer we instead gave the employee a pay rise.

Based on a marginal Tax rate of 47%

Individual Tax rates 2020-21

0 - $18,200 Nil
$18,201 - $45,000 19c for each $1 over $18,200
$45,001 - $120,000 $5,092 plus 32.5c for each $1 over $37,000
$120,001 - $180,000 $29,467 plus 37c for each $1 over $90,000
$180,001 and over $51,667 plus 45c for each $1 over $180,000

These rates do not include the Medicare levy of 2%.

Provided by business (see FBT calc 1 and 2. above) $9433.98
FBT Paid = $4433.98
$9488.47
Net tax Paid $4488.47
Employee on Top Marginal Tax Rate $9433.96 $10377.36
Employee instead pay out of take home page
Gross wage required at top marginal rate + medicare
$5000 x (1 - 47%)
PAYG Paid = $4433.96
$5500 x (1 - 47%)
PAYG Paid = $4877.36

So in the example above, we can see that for GST free item the ATO would get the same tax in either scenario. Eg if an employee paid the rent out of their take-home pay or the employee paid the rent for them and the employer then paid the FBT.

i.e.THE TAX OFFICE ALWAYS WINS!

There are many questions that arise from this, so please get your own advice and if you want to learn more consider our FBT and Salary Packaging course. 

Income Tax Consequences of Providing Fringe Benefits

As a general rule, the cost incurred in providing a fringe benefit is an allowable income tax deduction and

An employee contribution is assessable income of the employer however, it is not an allowable deduction for the employee.

A fringe benefit is exempt income in the hands of the recipient.

For more information on FBT and Salary Packaging please view our Salary Packaging Course or Diploma of Payroll

If you are looking to re-skill or up-skill but unsure of which course best suits you, get in touch with one of our consultants today and we will endeavour to help you.

Disclaimer

We make a sincere effort to ensure the accuracy of the material described herein; however, Applied Education makes no warranty, express or implied, with respect to the quality, correctness, currentness, accuracy, or freedom from error of this document or the products it describes.

Applied Education makes no representation or warranty concerning the contents hereof and specifically disclaims any implied warranties of fitness or any particular purpose.

Applied Education disclaims any liability for any direct, indirect, incidental, consequential, special, or exemplary damages resulting from the use of the information in this document or from the use of any products described in this document.

Mention of the product does not constitute an endorsement of that product by Applied Education. Data used in examples and sample data files are intended to be fictional. Any resemblance to real persons or companies is entirely coincidental.

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