As we dive deeper into the complexities of running a successful business, one aspect that stands out in the realm of employee compensation is the strategic use of non-wage benefits. These benefits, ranging from company cars to gym memberships, not only enhance the attractiveness of your employment packages but also introduce a layer of complexity in taxation known as Fringe Benefits Tax (FBT).
At Nationwide Financial, we understand the importance of balancing competitive employee compensation with prudent tax management.
In this blog post, we’ll unpack the essentials of FBT and how you can navigate its implications for your business.
Understanding Fringe Benefits Tax
FBT is a tax levied on the value of certain non-wage benefits provided to employees or their associates. It operates independently of income tax and requires businesses to assess the value of benefits provided and report them accordingly. The scope of FBT is broad, encompassing not only current employees but also past and future employees, company directors, and trust beneficiaries involved in the business.
It’s critical to note that the FBT year runs from April 1 to March 31, which may differ from your business’s financial year, adding a layer of planning complexity.
Identifying Reportable Benefits
A wide array of benefits falls under the FBT umbrella, including but not limited to company cars used for personal purposes, free parking, paid memberships, educational assistance, and more. However, not all benefits incur FBT. Certain exemptions apply, especially for work-related items such as laptops, tools of trade, and protective clothing, which are designed to alleviate some of the tax burdens associated with employee benefits.
For benefits to be reportable, they must surpass a cumulative taxable value of $2,000 within the FBT year. This threshold necessitates meticulous record-keeping and valuation of all benefits provided.
Calculating Your Obligations
The calculation of FBT involves determining the ‘reportable fringe benefits amount’ (RFBA) for each employee. This process includes applying the appropriate ‘gross-up rate’ to the total taxable value of benefits, which adjusts for the gross salary an employee would need to earn to purchase these benefits after tax.
The ATO specifies two gross-up rates:
Type 1, for benefits where GST credits are claimable, and Type 2, for those without GST credit entitlements.
Strategies for Managing FBT
As an employer, there are several strategies you can employ to manage your FBT liability effectively. These include providing benefits that fall under the ‘otherwise deductible’ rule, encouraging employee contributions towards their benefits, opting for cash bonuses over physical benefits, and taking advantage of exemptions and concessions available for certain types of benefits.
The Impact on Salary Sacrificing Arrangements
It’s essential to consider the implications of FBT on salary sacrificing arrangements, where employees forgo a portion of their salary for non-cash benefits.
These arrangements can offer tax advantages for employees while potentially increasing the employer’s FBT liability. However, certain contributions, like additional superannuation payments, are exempt from FBT and treated as employer contributions.
Claiming Deductions and Reducing Liability
Employers can claim income tax deductions for the FBT paid and for the costs associated with providing fringe benefits. Moreover, by carefully planning the types of benefits offered and leveraging the various exemptions and concessions, businesses can significantly reduce their FBT liability.
Case Study: Navigating FBT on Employee Benefits
Consider a scenario where your business offers an employee a benefits package including a company car and a gym membership. Assessing the taxable value of these benefits and applying the relevant gross-up rate will determine the RFBA, which must be reported through Single Touch Payroll.
This exercise not only ensures compliance but also enables strategic decision-making regarding the composition of employee benefits packages.
In conclusion, while fringe benefits can be a powerful tool in attracting and retaining talent, they come with a set of tax obligations that require careful consideration.
At Nationwide Financial, led by myself, Dino Di Giulio, we are committed to helping you understand these obligations and optimise your approach to employee compensation. Whether you’re evaluating your current benefits offering or planning for the future, we’re here to guide you through the intricacies of FBT and ensure your business remains both competitive and compliant.