FRINGE BENEFITS TAX FBTAA Fringe Benefits Assessment Act 1986 FBTAA ratings Act sets rates at 49% FBT year April 1st to 31st March No lodgement required if employer has less than $3,000 FBT in the previous year Basic Features Taxes Employer (not employee)/ (1 employer) Values Benefits (at a flat rate of 49%) FBT year 1 April – 31 March

FBT rate for the year ending 31 March 2016 to 31 March 2018 FBT year FBT rate Ending 31 March 2018 47% Ending 31 March 2016 and 31 March 2017 49%

Reasons For Separate Legislative Provisions FRINGE BENEFITS TAX Reasons For Separate Legislative Provisions Supplements narrow concept of ordinary income Recall Tennant v Smith (1892) This case considered the issue of ordinary income and whether or not rent free accommodation provided to an employee was income according to ordinary concepts and decided it was not since it could not be converted to cash.

Statutory Income Original Fringe Benefits Tax Section 26(e) [now 15-2]- used to tax employees Problems associated with this section Tracking benefits – too many people to track Valuing benefits – different valuations for different types of benefit

Types of fringe benefit Car Debt waiver Loan Expense payment Housing Living-away-from-home allowance Airline transport Board Meal entertainment Tax exempt body entertainment Car parking Property Residual Foundations of Taxation Law © CCH Australia Limited

Foundations of Taxation Law FRINGE BENEFIT “Fringe benefit” defined in s 136(1) FBTAA. Arises where: A benefit is provided during a year of tax By an employer, an associate of the employer, or a third party under an arrangement with the employer or associate of the employer To an employee or an associate of the employee In respect of the employment of the employee Foundations of Taxation Law © CCH Australia Limited

Provision of Fringe Benefit Employer Employee Or Or Associate Provides benefit Associate to Arranger Third Party

Benefits exempt from FBT Remote area housing Living away from home allowances (partly exempt) Employee relocation expenses Superannuation (retirement/private pension contributions) Minor benefits (less than $300 in value) incurred infrequently and irregularly Work-related items: protective clothing tools of trade briefcases mobile phones / walkie talkie laptops and similar portable digital assistants, including software, portable printers, calculators, electronic diaries.

VALUATION OF BENEFITS MOTOR VEHICLE / CAR BENEFIT (S.136(1)) -arises where a car is provided or is made available for the employees private use. The provider must be the employer, an associate of the employer or a 3rd party who has a relevant arrangement with the Employer (s.7) Private use means it is not exclusively used in the course of gaining or producing assessable income. Valuation Methods Statutory Formula Cost Basis

Car means : The following types of vehicles, including four-wheel drive vehicles, are cars: motor cars, station wagons, panel vans and utilities, but not panel vans and utilities designed to carry a load of one tonne or more any other goods-carrying vehicle with a carrying capacity of less than one tonne any other passenger-carrying vehicle designed to carry fewer than nine passengers.

Private use means : A car has generally been made available for private use when any of the following apply: employee actually uses it for private purposes (travel to and from work is private use) Employee is allowed to use it for private purposes and it is not at the employer's premises it is garaged at or near employee’s home, even if he doesn't have permission to use it privately.

Statutory formula Taxable value = (A x B x C) - E D Where: A = the base value of the car (i.e cost price of car) B = the statutory percentage (derived from the annualised kilometres)(0.2) C = the number of days in the FBT year when the car was used or available for private use of employees D = the number of days in the FBT year (365 / 366) E = the employee contribution (if any)

Car Benefit - Statutory formula CALCULATION Statutory allowance Base Value = $20,000 Private Use = 365 days FBT Year Employee Contribution nil .2 x 20,000 x 365 - 0 365 Fringe Benefit value = $4,000

$4,000 x 2.1463 = $8,585.20 x 49% = $4,206.75 is the tax on the car 2.1463 is the gross up amount for 2016/17 $8,585.20 the grossed up amount 49% the FBT tax rate for 2016/17 $4,206.75 the tax to be paid by the employer 2.0802 is the gross up amount for 2017/18 47% is the FBT rate for 2017/18

Statutory Formula 2016/17 Car $40,000 Km 18,000 Business use 20% Costs $5,000 Driver paid $2,000 herself ABC - E = .2 x $40,000 x 365 - $2,000 D 365 = $8,000 - $2,000 = $6,000 x 2.1463 = $12,877.80 x 49% = $6,310.12 FBT

Car Benefit – Cost Basis Operating Costs Petrol, Repairs, maintenance, tyres Registration and Insurance Depreciation (where vehicle owned by provider) Lease Charges (where vehicle leased by provider) Business Percentage Estimated by keeping a log book for 12 weeks showing business travel. Odometer reading is required for commencement and end of period.

Cost Basis Taxable value = (C x (100%-BP)) – R C = operating cost (i.e expenses such as petrol, maintenance, regn, insurance etc) BP = business percentage (percentage of biz use during holding period based on km travelled) R = recipient’s payment (any unreimbursed expenses incurred by recipient)

Operating Cost Cost base = (C x (100% - BP)) - R taxable value $5,000 costs of fuel etc $10,000 deemed depreciation of the car (25% of cost) $2,580 deemed interest 5.65% ABC = $40,000x.5.65x365 = $2,260 D 365 = ($5,000) + $10,000 + $2,260 x (100% -80%) - $2,000 = $17,260 x 80% - $2,000 = $11,808 x 2.1463 = $12,418.32 FBT

Loan Fringe Benefit (S.136(1)) Arises when one person makes a “loan” to another person s.16(1) Loan = advance of money, provision of credit or any form of financial accommodation which in substance effects a loan of money A loan is deemed to arise when an amount a person is obliged to pay on a particular date is not paid on that date (s.16(2))

The taxable value of a loan fringe benefit is the loan amount multiplied by the difference between the rate of interest charged by the employer and the statutory rate of interest. (Loan x Statutory rate) – (Loan x Employer’s Interest rate)

Loan Statutory Rate 2014/15 5.95% 2015/16 5.65% 2016/17 5.65%

Example Loan Amount = $60,000 Date 1 April 2016 Interest Rate charged 3% Statutory Rate 5.65% (2016/17 year) [$60,000 x 5.65%] – [$60,000 x 3%] $3,390 - $1,800 Fringe Benefit value = $1,590 x 1.9608 = $3,117.67 x 49% = $1,527.65 FBT

Other Benefits Expense Payment An expense payment fringe benefit may arise in either of two ways: where the employer reimburses an employee for expenses they incur where the employer pays a third party for expenses incurred by his employee. Roads Traffic Authority of New South Wales v FCT (1993) Reimbursement means payment of actual (exact) cost Distinguish from allowance An allowance is not reimbursement as it is a payment of a predetermined amount to cover estimated cost. Falls within the def of “salary / wages”

The taxable value of an expense payment FB depends on whether it is “in house” or “external” In House Expense payment FB In house property expense :expense relates to acquisition of property (goods) of a kind provided by E’yer or his associate in his ordinary course of biz In house residual expense : expense relates to acquisition of other benefits (eg. Services) of a kind provided by E’yer or his associate in his ordinary course of biz

In house expense payment An in-house expense payment fringe benefit arises where the expenditure reimbursed or paid for by the Employer was incurred by the employee (or family member) in purchasing goods or services that the Employer (or an associate) sell to customers or clients in the ordinary course of his business.

EXAMPLE An employer, who is a manufacturer, markets her products through independent retailers. The employees of that employer purchase those products from the retailers at full retail price, but subsequently receive a reimbursement from the employer for part of the purchase price. The reimbursement is an in-house expense payment fringe benefit

External expense payment FB Taxable value is the amount of expenditure that is paid or reimbursed by the Employer minus employee (recipient’s) contribution : section 23

The ‘Otherwise Deductible’ Rule A benefit is ‘Otherwise Deductible’ if the employee would have been entitled to claim an income tax deduction if the employer had not paid for the expense. To determine if the employee would have been entitled to claim an income tax deduction, the expense must be incurred in the course of producing assessable income.

Otherwise Deductible Rule Reduces the taxable value of a benefit by “notional deduction” Notional deduction = GD - RD GD = the amount of the once-only deduction employee would have been entitled to if he (instead of his employer) incurred the expense RD = the amount of the once-only deduction which the employee is now actually entitled to in respect of his actual expenditure Pls see example in Chapter 23.10 of Barcokzy

CALCULATING FBT Fringe Benefits are split into Type 1 and Type 2 benefits. Type 1 – (GST Expense) fringe benefits are benefits an employer provides an employee whereby the employer is entitled to a GST credit for the provision of the benefit. Type 2 – (GST Free Expense) fringe benefits are benefits an employer provides an employee whereby the employer is not entitled to a GST credit for the provision of the benefit.

Example of Type 1 Example Brian is employed by a Public Benevolent Institution. Brian enters into salary sacrifice arrangement with his employer in which $2,200 is paid to his phone and internet account and $3,300 is paid towards his electricity and gas account per FBT year. This is a total salary sacrifice amount of $5,500 per FBT year. Since both expenses provided have GST in the price Brian’s employer is entitled to claim a input tax credit (presuming the valid tax invoices and paid receipts have been kept)

Example of Type 2 Example Luke is employed by a Public Ambulance Service. Luke enters into salary sacrifice arrangement with his employer in which $9,000 is paid to his Home mortgage account per FBT year. Since the mortgage payments are GST Free Luke’s employer is not entitled to claim an input tax credit on the expense.

Calculating FBT Determine Type of Aggregate Fringe Benefit Amount Gross Up - When working out FBT liability the Employer must gross-up the taxable value of benefits provided to reflect the gross salary employees would have earned. Calculate tax

GROSS UP The current type 1 gross up rate is 2.1463 Please see example in Chapter 23.25 of Barkoczy. Please be mindful of changed rates.

GROSS UP Assume 50% tax rate Assume $10,000 fringe benefit If $10,000 taken as value, salary sacrifice = $15,000 ($10,000 + $5,000 tax) How much would employee need to earn (if they paid tax on amount) to be left with $10,000 cash? Answer is $20,000 (i.e. 20,000 less 50% = 10,000) Gross up rules ensure salary sacrifice is $20,000 NOT $15,000. Thus no tax advantage in taking a fringe benefit

Gross up rates Year Type 1 (GST) Type 2 (no GST) 2014/15 47% 2.0802 2014/15 47% 2.0802 1.8868 2015/16 2016/17 49% 2.1463 1.9608 2017/18 47%

Benefit on Motor Vehicle FBT PAYABLE Benefit on Motor Vehicle Value = $4,000. No GST $4,000 x 1.9608 = $7,843 x 49% Tax = $3,843 GST on Vehicle $4,000 x 2.1463 = $8,585 x 49% Tax = $4,207

CONSEQUENCES Consequences of Providing Fringe benefits For Employer Cost of benefit and FBT tax deductible Special rules for non profit organizations Section 65J rebate For Employee Salary Sacrifice