When most business owners think about tax, they think about income tax, GST and PAYG withholding. However, there is another tax that often catches employers by surprise – Fringe Benefits Tax (FBT).
Every year we see businesses receive unexpected tax bills simply because they didn’t realise that certain employee benefits could trigger FBT.
So, what exactly is it?
What Is Fringe Benefits Tax?
Fringe Benefits Tax is a tax paid by employers when they provide certain benefits to employees (or their associates) in addition to their salary or wages.
Importantly, FBT is paid by the employer, not the employee.
The purpose of FBT is simple. Without it, employers could potentially avoid income tax by paying staff with benefits instead of cash salary.
For example, instead of paying an employee an extra $10,000 salary, an employer might provide a company car, pay private school fees, or cover personal expenses. FBT helps ensure these benefits are taxed appropriately.
Common Fringe Benefits
Some of the most common benefits that can attract FBT include:
- Company cars used for private purposes.
- Payment of personal expenses.
- Low-interest or interest-free loans to employees.
- Entertainment and hospitality.
- Reimbursement of private expenses.
- Certain gym memberships and lifestyle benefits.
One of the biggest areas where businesses unintentionally trigger FBT is with motor vehicles.
Many business owners assume that if a vehicle is owned by the business, there is no tax issue. However, if the employee uses the vehicle for private purposes, an FBT liability may arise.
Why Is FBT Often So Expensive?
One reason FBT catches people off guard is the tax rate.
The current FBT rate is 47%, which aligns with the top marginal tax rate.
In addition, the value of some benefits is “grossed up” before the tax is calculated, which can make the final liability surprisingly high.
As a result, a benefit that appears relatively modest can generate a significant tax bill if not managed correctly.
Are There Any Exemptions?
Fortunately, not every employee benefit attracts FBT.
Some common exemptions include:
- Portable electronic devices used primarily for work.
- Certain work-related tools and equipment.
- Minor benefits valued at less than $300 in some circumstances.
- Certain electric vehicles that qualify under current legislation.
- Work-related training and education expenses.
The rules can be complex, and eligibility often depends on the specific facts and circumstances.
What Should Business Owners Do?
The first step is simply being aware that FBT exists.
Before paying personal expenses for staff, providing vehicles, or offering additional benefits, it is worth checking whether an FBT liability could arise.
Good record-keeping is also essential. Vehicle logbooks, employee declarations and supporting documentation can often help reduce or manage FBT exposure.
The Bottom Line
FBT is often described as one of Australia’s most misunderstood taxes.
Many employers focus on salary, wages and GST, while overlooking benefits provided to employees. Unfortunately, the Australian Taxation Office does not overlook them.
A little planning can go a long way. Understanding the basic FBT rules before providing employee benefits may save your business from an unexpected tax bill later.
As always, if you are unsure whether a benefit may attract FBT, seek professional accounting advice before implementing it.