Running a company and providing high-quality fringe benefits is an ultimate approach to hire quality staff. On the other hand, fringe benefits allow you to enjoy the job perks. Whether you are an employer or an employee, you need to consider the aspects of fringe benefits tax and at what rate it will be paid.
That’s why we are here today to guide you in detail about fringe benefits tax, its types, examples and what you need to do in various circumstances.
For those who are new here, let’s start with the basics. But Before Also Read About Comprehensive Guide On Tax Deductions Australia.
What is fringe benefits and fringe benefits tax?
Fringe Benefits
Ever heard some extra perks an employee is given other than its original salary? Those perks are called fringe benefits. Some fringe benefits are provided to the employees worldwide while some of the privileges are given only to those who are executive levels.
The most common fringe benefit which is provided by numerous companies worldwide is the gym membership.
Fringe Benefits tax
Now if we talk about the fringe benefits tax, it is the amount paid by the employers on the benefits they provide to employees. FBT or Fringe benefits tax is separate from income tax and can be paid to employees’ family members or their associates.
Some of these benefits are only given to the employees for their cost effective work and some are given just for satisfactory measures.
Examples of fringe benefits
Here are some examples of fringe benefits which are provided by the employers to their employees;
- Car provided by the company for private use as well.
- Gym membership.
- Car parking.
- Free tickets to concerts provided by the employers for entertainment.
- Discounted loans.
- Providing accommodation to the employees either for free or at reduced rates.
- Food and drinks.
- Reimbursing any expense which is incurred by the employee such as school fees.
Here are some benefits which are NOT fringe benefits;
- Salary and wages.
- Employers’ contributions in funds.
- Payments which are subjected to dividends under division 7A.
- Benefits provided to volunteers and contractors.
- The benefits which are provided by the religious institutions to their religious practitioners.
- Employment termination payments.
Now that you have an idea about fringe benefits and the tax on it, let’s have a look at the types of fringe benefits for better understanding.
Types Of Fringe benefits
There are two types of fringe benefits employers provide to their employees. One which is compulsory and is required by the law and the other ones are not compulsory but are provided for satisfaction.
Let’s have a look at them.
Fringe benefits which are required by the law
There are some mandatory benefits which are given by the employers to their employees to help them in economic hardships.
Health insurance
Any business which requires more than 50 workers is obliged to provide healthcare privileges. Health care insurance or programs include free visits to primary doctors, emergency and specialist doctors.
Medical Leave
Another mandatory privilege provided to employees by the law is medical leave. Those workers who have been working in a company for more than a year are provided medical leave which can last up to 12 weeks.
Those businesses or companies who have minimum 50 employees are provided medical leave by the law.
Unemployment insurance
According to the Federal unemployment tax act (FUTA) allows the employers to pay unemployment tax to the department of labor. Which further provides salaries and wages to the deserving employees who become unemployed without being at fault.
Woker’s/Employee’s compensation
Usually workers get injured at their workplaces during their work time and in order to compensate for such situations, employers provide federal workers with medical care, financial assistance, rehabilitation and other benefits.
However, these compensation vary from state to state and one should consult the state worker’s compensation board before providing benefits to employees.
Also Check Out Drawbacks Of Hecs Indexation Rates.
Entertainment-related fringe benefits
Entertainment related fringe benefits are not required by law. Such benefits depend upon the employers or companies whether they want to provide or not.
Fringe benefits such as health care, paid vacation, and sick days provide additional benefits to employees.
Loan fringe benefits
These benefits hold importance for employees because very few companies offer such privileges. Employees can lend money from employers at a lower interest rate than the market. Usually companies offer only 3% interest on the loan as compared to the market rate which is around 9%.
Property Fringe benefits
These benefits include;
- Clothing items and television.
- Real property like land and buildings.
- Any kind of shares, financial assets, crypto assets etc.
Residual Fringe benefits
This benefit is quite different from the prior one, which includes;
- Use of your (employer’s) items such as television.
- Group policy for health insurance.
- Use of vehicles for private use which are not for fringe benefits tax.
Who pays and receives fringe benefits tax?
As it would be crystal clear now about who pays the fringe benefits tax and who gets privilege from it, let us tell you clearly once again. Only employers or third parties (those who have an agreement with the employer) pay FBT.
Employees or workers are not eligible to pay such tax. In fact, these benefits are specifically for employees and workers.
What is the Fringe benefits tax rate?
Well, this question is quite tricky yet easy. A lot of customers have asked us about the tax rate of fringe benefits and how to calculate it.
Don’t worry, we have heard you ask.
In order to calculate the fringe benefits tax rate, Divide total fringe benefits of the employees to the Annual wages and then multiply the answer with 100. The answer will be the fringe benefit rate.
Generally, 35% tax rate is deducted from the grossed up monetary value of the benefits. The maximum rate is 47% including medicare levy and other benefits.
Example of fringe benefit tax on gym membership
Let us explain to you in detail about how fringe benefit tax is calculated.
Suppose Jimmy owns a law firm and he offers gym membership to his employee john of about $1100 which includes GST of about $100. The taxable value of this fringe benefit is $1100, the gross up rate would be around 2.08 (for GST inclusive rate).
FBT rate would be 47%. Multiply the taxable value with the gross up rate and then calculate the 47% of it.
The FBT would be around $107.5.
Now Jimmy must lodge a fringe benefit tax return to pay his FBT liabilities. After that, jimmy can claim;
- Income tax deduction for the FBT you paid.
- GST credit for the gym membership.
If you don’t know, an employer can claim;
- An employer can claim GST exclusive as an income tax deduction.
- And if you can’t claim GST credits, you can claim the full amount as income tax deduction.
- Income tax deduction for the FBT an employer has to pay.
How Fringe Benefits Tax work?
The fringe benefits which are given to the employees are decided by the employers other than mandatory ones in a specified period of time. However, some companies offer their employees to choose the fringe benefits they want at the time of recruitment.
The goal of providing fringe benefits to employees is for employee satisfaction and comfort. It is helpful to build a strong company which makes it stand out from the competitors for employers.
Why do companies offer fringe benefits?
There are some reasons why employers offer fringe benefits to their employees which are as follows;
Employee satisfaction and comfort
First of all, when an employee works hard in a company, he/she expects appreciation in return which pays off the hard work. These benefits along with the appreciation works as the cherry on the top.
Offering paid holidays once in a while provides employees comfort.
Public perception
No doubt, companies which offer such additional benefits to their employees other than salary and wages stand out from their competitors. It attracts more employees and overall credibility enhances.
Other than that, customers get attracted as well and they buy your product or services when they get to know about your reputation.
Employee wellness
Another important reason why employers provide fringe benefits to their employees is their well being. Sometimes, workers get injured on the site and are unable to do work, providing health insurance and a safe environment can save you from this loss.
Such benefits can save the employers from finding new employees on short notice.
Image
The overall image of the company and employer enhances and people look forward to working in your company. The more fringe benefits you provide, the higher will be your company’s credibility.
Can you trust us?
Some of you might be wondering why trust us? Right? Well, I have been paying tax for years and own a small law firm. That’s why I wanted to provide as much information about fringe benefits tax to employers and businesses about what challenges one can face in this whole scenario.
Only an experienced person can guide the users more precisely.
Important Considerations of Fringe benefits tax
There are some fringe benefits which are exempt from income tax as per the IRS (Internal Revenue Service) publications. Here is the list of fringe benefits which are exempted from income tax;
- Accident and health benefits.
- Community benefits.
- Athletic benefits.
- Educational benefits.
- Employee discounts.
- Cell phones provided by the employers.
- Meals.
- Achievement awards
- Tuition reduction.
- Working conditions benefit.
- Group-term life insurance coverage.
- Retirement planning services.
These exemptions are applied only in specific conditions. For example, achievement awards are only exempted from income tax if only they value above $1600. Some of the exemptions like employee discounts are not available for highly compensated employees.
To make it easier for you, any fringe benefit which is not confirmed by the IRS publication is taxable.
IMPORTANT NOTE: The companies which are highly competitive and look for outstanding talent, offer extraordinary fringe benefits. Similarly, small firms or companies offer less fringe benefits.
Options to fill FBT return
The employers who want to lodge FBT return must know the options available;
- Quarterly.
- Annually for tax year.
- Annually for your income year.
This choice depends upon the type of company you own.
What are the common mistakes employers make?
- FBT tax is heavenly and if you can’t afford it then offer high salaries and bonuses instead of making your company go through a financial crisis.
- A lot of employers don’t know that they have to pay FBT tax when eligible and after knowing, the bill can be heavenly as a result.
FAQs
Final Verdict
No doubt providing fringe benefits to the employees attracts customers and trust of the workers, but it comes with a heavy FBT. it is important to know how fringe benefits are taxed and at what rate (47% max).
Being a tax practitioner for years I know what challenges an employer can face when lodging FBT return and applying it. Hope this piece of information has helped you ease all your confusions and queries.
Calculate the FBT before listing the fringe benefits to the employees so you can have an idea about how much you will be paying.
Still, if you are confused about anything related to fringe benefits tax, feel free to ask.
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Information and statistics for This Post provided by My Tax Daily.
