So you’ve come into a sudden increase in business and you want to share the love around with your staff.
In addition to offering pay rises, you’ve also decided it would be a good gesture to start adding extras to their contracts as a small thank-you for all of their hard work.
While all these extras might be doing wonders for morale, they certainly don’t make your small business accounting any easier. In fact, they may even incur an added tax liability, thanks to Fringe Benefits Tax (FBT).
Are you an employer that’s offering fringe benefits for the first time? If so, you’ll want to listen to what our business tax accountants in Melbourne have to say first!
A small business accountant explains fringe benefits
Do you allow employees to use the company car on their own time? Maybe you offer complimentary gym memberships? Perhaps you have an allowance for expenses?
All of these perks and extras are just some examples of fringe benefits.
Benefits such as these have their own tax: the creatively-named Fringe Benefits Tax.
FBT is a tax that’s paid by employers – if you’re an employee, you can safely check out here (if you’re lost, personal accounting services section of our website can be found here).
Still here? Good.
Examples of fringe benefits
Think of fringe benefits as all the extras that come with taking on a job.
If your salary and superannuation contributions are the meat and potatoes, then fringe benefits are the gravy.
Some other examples of fringe benefits include:
- Shares and bonds
- Movie tickets
- Taxis (but not Uber)
- Housing and accommodation
- A company mobile phone
- Private health insurance
- Some salary sacrifice agreements
To understand why fringe benefits tax exists, we need to get into the mindset of the ATO.
From the ATO’s perspective, fringe benefits are a form of remuneration or payment – as such, they should be treated just like financial remuneration.
And that means they will incur a tax – hence, FBT.
What ISN’T a fringe benefit?
Not all benefits will incur an FBT liability – many common fringe benefits are specifically exempted from fringe benefit tax.This includes essential work-related items that are used solely for work usage.
For example, a company car won’t be incur fringe benefit tax if it’s only driven during work hours.
If you let your staff use the car for personal reasons, then you will be liable for FBT.
Additionally, the ATO also specifies that “one item per FBT year for those that have a substantially identical function” will be exempted from the tax.
Translation: only one item of each type will be exempted per employee – any others will be treated as extras, or non-essentials, and taxed accordingly.
For example, if you give an employee two work phones, only the first will be exempted.
Finally, most salary-sacrificed superannuation contributions are also exempt from FBT… unless contributions are made on behalf of an associate, family member or spouse rather than the employee themselves.
Additionally, payments to non-compliant funds will still be taxed.
Confused? It’s a lot to take in… luckily, a business tax accountant in Melbourne can help you wrap your head around fringe benefits tax.
How if FBT calculated?
Unlike other taxes which are based on a financial year that runs from July 1st to June 31st, FBT has its own calendar that runs from April 1st to March 31st – that means filling out a separate FBT return.
What’s more, you may also have to pay FBT in throughout the year, depending on your liability – if it exceeds $3000 for example, you’ll have to pay in quarterly installments.
How the maths works
It all starts by calculating the financial value of the fringe benefits your business offers. When running the numbers, you’ll want to calculate the value of each benefit individually.
It’s extra work, but there’s a very good reason for this: that’s because certain benefits are eligible for a GST credit, while others aren’t. As such, both will need to be treated differently.
(If you’re confused about which one is which, you can always call a small business accountant!)
Once you have your benefits with GST credits and those without, you’ll want to multiply them by the relevant gross-up rate and total the results to get your total taxable fringe benefits.
Finally, multiply the result by the FBT rate (currently 47%) to get your FBT liability.
Reporting, lodging and paying FBT
As we mentioned before, FBT returns are separate documents from your annual business tax returns
What’s more, you’ll also have to register as an FBT organisation first before you get started on your FBT return.
Thankfully, registering can be as easy as setting up a conversation with a business tax accountant in Melbourne, calling the ATO… or simply by lodging your first FBT return!
And like your main business tax return, any years where you don’t lodge, you’ll need to submit a notice of non-lodgement.
Talk to a business tax accountant in Melbourne
Working out your business tax liability can be a major headache – especially with all the different expenses, exemptions and more that come with small business accounting.
Make things a little bit easier with Bruce Edmunds & Associates.
Our business tax accountants in Melbourne have one mission: to help your business thrive.
For almost 50 years, our qualified financial advice and tax assistance are our tools for helping you get there.
We’ll help you get your tax affairs in order, ensuring that your tax returns:
- Are accurate;
- Include all the exemptions you qualify for;
- Avoid unnecessary tax liabilities.
Whether you need help with your tax return this EOFY or want help with BAS lodgements, our qualified tax accountants and financial advisors are on your side, helping your business grow.