Fringe benefits tax (FBT) concessions are meaningful resources to attract and retain staff by organisations that qualify for them including Education Institutions. However there is often misinformation and misinterpretation of the FBT concessions available which can limit the application of benefits levied to qualifying staff. The changes that have come into effect over the last 2 years have also been cause for confusion and issues will result if the changes are not accounted for correctly.
By way of background, FBT is a tax employers pay on certain benefits they provide to their employees, including their employees’ family or other associates. The benefit may be in addition to, or part of, their salary or wages package.
Fringe benefits tax is separate to income tax and is calculated on the taxable value of the fringe benefits provided. The FBT year runs from 1 April to 31 March and the FBT return is required to be lodged by 21 May.
The FBT law includes various categories of fringe benefits and there are specific valuation rules for each category. These categories are:
• Car fringe benefits
• Car parking fringe benefits
• Entertainment and fringe benefits
• Expense payment fringe benefits
• Loan fringe benefits
• Debt waiver fringe benefits
• Housing fringe benefits
• Board fringe benefits
• Living away from home allowance fringe benefits
• Property fringe benefits (including property, goods or shares)
• Residual fringe benefits (benefits not covered by the above categories)
To cover all of the above categories in detail would require many pages of information. Therefore based on our experience we have identified the key categories of benefits that are commonly encountered by Educational Institutions and have prepared an overview of each and how it can be applied.
Car fringe benefits arise when you make a car owned or leased by the employer available for the private use of an employee. There are two methods to value the car benefit, the operating cost method and the statutory formula method.
This will typically occur when either the school has a vehicle or fleet of vehicles that are provided to employee(s) or where an employee salary sacrifices a vehicle under a novated lease arrangement.
Entertainment fringe benefits arise when the employer provides entertainment by way of food, drink or recreation including any accommodation or travel in connection with such entertainment.
Some examples of this include the following activities where the employer pays or subsidies the cost of:
• Christmas parties
• Dinners or functions at restaurants, bars etc
• Movie nights
• Sporting events
Expense payment benefits are where an employee incurs an expense and the employer either reimburses the employee for the payment of that expense or pays a third party directly. The expenses can be business, private or a combination of both but must be incurred by the employee.
Expenses that are tax deductible to the employee their personal tax return (otherwise deductible) are exempt from FBT. Further, benefits provided in the form of work related items can also be exempt from FBT. Some examples of these items include:
• Portable electronic devices such as mobile phones, laptops, tablets, GPS etc
• Computer software
• Protective clothing
• Tools of trade
It is important to note that the items must be primarily for the employee’s use in employment and there is a limit of one item per FBT year for items that have a substantially identical function.
Residual fringe benefits cover any circumstances where the employee is provided with a benefit that is not a specific type as listed above.
An example of this would be the discount on school fees for the children of employees which are classified as in-house residual fringe benefits. For these types of benefits there are concessions with regards to the calculation of the taxable value but only where the discount is not part of a salary sacrifice arrangement.
Calculation of FBT
Once the taxable value of each Fringe Benefit is worked out, the value is grossed up using one of two rates. The gross up value for type 1 benefits is 2.0802 and it applies where the employer is entitled to a GST credit for the GST paid on the benefits provided. The gross up value for type 2 benefits is 1.8868 and it applies where the employer is not entitled to a GST credit for the GST paid on the benefits provided.
Then the FBT rate of 49% is applied to the total of the grossed up taxable value of all benefits provided. Note that 49% (and the current gross up values) are a temporary rate that applies up to 31 March 2017, from 1 April 2017 the rate will revert back to 47% (and the values will reduce).
Further concessions on the FBT payable as above are available via the FBT Rebate to certain non-profit organisations that includes certain educational institutions. To be a Rebatable Employer the organisation must be endorsed to access the tax concession.
These Rebatable Employers are entitled to have their FBT liability reduced by a rebate equal to 48% or 49% of the gross FBT payable depending on the year the benefit is provided. It is important to note that the rebate is subject to a $30,000-31,777 capping threshold on the grossed up taxable value of the benefits per employee depending on the year that the benefit is provided.
Depending on existing levels of Fringe Benefits provided to employees, opportunities exist for employees of Rebatable Employers who have a taxable income in excess of $80,000 per year to salary sacrifice Fringe Benefits and increase their after tax take home salary package. This will be highly dependent on individual circumstances and advice should be sought by both employees and employers before embarking on a salary sacrifice arrangement.
It is important to not only be fully aware of all FBT concessions available for staff of Educational Institutions to structure employment terms attractively, but to be accounting for them correctly. Hanrick Curran has over 30 years of experience in supporting Education Institutions across business advisory, audit, tax and accounting. Please contact Robert Pitt on 07 3218 3900 to arrange a complimentary FBT consultation for your organisation.
Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.