Fringe Benefits Tax

The rationale behind the Fringe Benefits Tax (FBT) is that it’s not fair for some employees working for certain companies to receive fringe benefits, while others at other firms do not. As some fringe benefits, such as repayment of student costs, the use of company cars or housing for personal purposes, the reimbursement of incurred expenses, and providing low-interest loans, can be of substantial value, this can equate to a significant difference, if not in actual salary, then in living standards, for those employees, although they may perform very similar or even the same tasks. The FBT was designed to minimize those differences and restore equity between the living standards of employees, despite the fringe benefits offered, or not offered, by their employers.

The tax is paid by the employer, and is listed on the employee’s wage summary forms for income tax purposes. The FBT rate is the highest marginal income tax rate (45%) plus the Medicare levy (1.5%) for a total of 46.5%, calculated on the taxable value of the benefit according to valuation rules set out by the ATO and complicated by the GST.

There are certain fringe benefits exempt from the FBT; these are mainly benefits offered to assist employees in performing their jobs, such as remote area housing, relocation expenses, mobile phones, laptop computers, and work-related tools and other items. Other benefits, although not exempt, are treated as concessional, meaning the benefit’s value is reduced in order to lower the amount of FBT paid, in some cases to zero.

Because the FBT rate is so high, employers have devised multiple means of lowering their tax liability, including replacing fringe benefits with salary or wages, or providing only FBT-exempt benefits or those with substantial recessions attached. Another means of lowering the employer’s FBT liability is by lowering the employee’s wages to offset the amount of tax paid, a practice known as “salary sacrifice” that is often worth the employee’s while due to the large income tax savings that can be involved.

Another means of reducing the employer’s FBT liability, and indirectly that of the employee, is through employee contributions toward meeting the tax on a specific fringe benefit. Although this must be done with after-tax dollars, the effect is to lower the level of tax paid from the FBT’s rate of 46.5% to that of the income tax paid by the employee, which is generally lower. Because the weight of the tax is felt the most by the employee through salary sacrifice, such a move can be of significant tax relief assistance. The advice of a tax accountant or salary sacrifice specialist, of course, is often required to obtain the maximum benefit from such a scheme.

Article correct at its author date: May 2008. Copyright Virtual Office Space, Any unauthorised reproduction of this article will be prosecuted to the full extent of the law. Credit Cards Australia.

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