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02/04/2007
Fringe Benefits Tax
FRINGE BENEFITS TAX
FBT returns are due for lodgement shortly!
As companies begin to collate their records and prepare their FBT returns, many may assess the benefit of providing fringe benefits to employees, given the level of compliance and amount of FBT which needs to be paid to the ATO each year. Thankfully, there are a number of positive outcomes which stem from the provision of fringe benefits. Some of these, such as reductions in on-costs, can be quantified by the way of financial savings.
Other benefits which are less easily quantified remain just as valuable, such those relating to the recruitment and retention of quality employees.
Employers of choice are providing competitive salary packages which include fringe benefits. In addition, fringe benefits are often provided over and above employees' salary packages in an effort to recognise and reward key employees. The use of fringe benefits for this purpose can be very tax effective. In assessing the continued provision of fringe benefits, employers should consider the high value of the following options.
LOW-COST BENEFITS
There are a number of fringe benefits which can be provided to employees with concessionally calculated or no FBT consequences. When considering which benefits to include in the company's portfolio, these benefits should be offered without question, because the cost of providing them remains low. The administration costs, and in some cases, the concessionally calculated FBT associated with providing these benefits, can be passed on (with agreement) to employees in receipt of salary packaged benefits, neutralising the employer's associated costs.
The provision of these benefits can also have a positive effect on the workforce.
EXEMPT BENEFITS
In the current electronic environment, employers can remain technologically savvy by providing employees with mobile phones, laptop computers, electronic diaries and palmtop computers with no resulting FBT consequences. This allows employers to address the current popularity of digitally enhanced, photographic, polyphonic, video-based, Internet connected, mobile phones!
(note that the provision of a mobile phone will only be exempt where the phone is primarily for use, as opposed to actually used, in the employee's work).
Similarly, where employers are searching for ways to reward staff, they can employ the use of exempt "minor and infrequent" fringe benefits. These benefits are often utilised for work-related celebrations such as Christmas or end-of-year parties and can be provided to employees with no FBT implications.
FBT EXEMPTIONS
Minor gifts
Common applications of this exemption include the provision of gifts such as hampers, movie tickets,
Cricket/rugby tickets, flowers, wine/champagne, massage vouchers, gift vouchers and T -shirts. The exemption will apply provided the benefit, and any similar or associated benefit has a GST-inclusive value less than $100, and the benefit is provided on an infrequent and irregular basis. Further, if the employer provides the reward or benefit to a spouse or family member of the employee, the value of their reward must be added to the value of the employee's. If this combined total remains less than $100, the benefit will still be minor in value, otherwise FBT is applicable
Healthy rewards
Employers can provide work-related preventative health care such as flu vaccines with no FBT consequences.
This may result in a healthier workforce, reduction in sick leave and an increase in employee productivity during the winter (flu-related) months. Note: Legal issues should be considered of course before offering these benefits.
Deductible expenses
Employees may be interested in the employer providing exempt benefits that would be "otherwise deductible" to the employees in their personal tax returns, in order to obtain a cash-flow advantage.
These benefits are exempt from FBT to the extent that it would have provided a once only tax deduction for the employee, had the employee themselves incurred the expense.
A cash-flow advantage for the employee may arise here because they do not have to await the lodgement of their tax return to seek the deduction for the expense, nor in the alternative, have to await the ATO to respond to requests for the varying of their PAYG to reflect their lower taxable income. The employer reduces the gross wages by the same amount as the expense which may reduce the tax rate imposed on future wages, while the employee gets more “bang for their buck” because no tax is withheld from the payment.
CONCESSIONALLY TAXED BENEFITS
These benefits are also worth considering. Common examples include the provision of car fringe benefits and car parking fringe benefits, both of which are taxed at concessional rates. The most popular method of providing a car fringe benefit is via the use of a novated lease. The advantage of their use is that should the lease come to an end, or the employee leaves their employment, the novated lease arrangement concludes and all of the rights and obligations associated with the lease of the car revert to the employee. In other words, all the risks associated with the continued leasing of that vehicle remain with the employee. As a result, an employer can provide such benefits with little concern.
SALARY PACKAGING
Employers may still be concerned about providing some of the above benefits due to the costs associated with purchasing or leasing the benefit, and the FBT which results. These costs can be neutralised through the use of salary packaging. In this instance, an employee can request that their pre-tax salary be sacrificed in lieu of benefits and FBT. Although the liability for FBT remains with the employer, the actual cost is absorbed by the employee as part of their salary package. Note that for this to be effective, the salary packaging agreement must be entered into on a prospective basis and in advance of the derivation of the employee's salary and wages.
Salary packaging benefits will generally be advantageous for the employee where the benefits are either exempt from FBT or are concessionally taxed, and even more so, where the employee is on the highest marginal tax rate. The employee is able to reduce their taxable income by the value of the benefits plus the FBT associated with the benefit, for example, the monthly car lease payment and associated FBT. This results in after-tax savings for the employee via the purchase of benefits using pre-tax salary.
GST TAX CREDITS
Further, where an exempt benefit is subject to GST, the employee can salary package the benefit and effectively receive it free from GST where the employer can claim an input tax credit. Generally, benefits are salary packaged using the GST exclusive value of the benefits. Any related GST is captured when calculating the FBT on the benefit and clawed back by the Tax Office. However, when the benefit is exempt from FBT, there is no claw back of GST and thus the benefit is both free from FBT and GST. This means yet another saving for the employee.
Finally, employers may be able to reduce their on-costs, such as payroll tax and workers compensation premiums, which are calculated with reference to taxable salary and wages of employees, including fringe benefits. Where the benefit is either exempt or concessionally taxed for FBT purposes, a lesser amount is to be included in these on-cost calculations, creating a tax savings for the employer.
TO DO
As the FBT financial year goes from April to March each the current FBT year is coming to a close shortly. If you currently drive a car as part of your salary package, now is the time to consider that extra business trip (if you maintain a business logbook) or perhaps that extra long driving trip for those using the statutory method. Don’t forget, the statutory method is based on the total number of kilometres you travel each year and it may be beneficial to travel some extra kilometres to reduce your FBT if you are nearing one of the tax office thresholds.
This information is intended only to provide a summary of the subject matter concerned and does not purport to be
comprehensive or to render specific advice. No reader should act on the basis of any matter contained in this information without first obtaining specific professional advice.
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