Understand how to calculate FBT (or the fringe benefits tax) is an important tax and compliance consideration for all employers who provide fringe benefits to their employees.
It’s up to each individual employer to record and report fringe benefits to the Australian Tax Office (ATO) for business tax purposes. More than likely, you’ll need to learn how to calculate fringe benefits, how fringe benefit tax works, and how fringe are benefits taxed.
What is a fringe benefit?
A fringe benefit is goods or a service that you provide your employees outside of their regular remuneration package.
You may also use an outside entity (such as a business, trust or associate) to provide fringe benefits, like a business providing goods or services to an employee on your behalf.
Fringe benefits can also be provided to the family or associate of the employee, to the same effect.
For example, a fringe benefit may be classified as one of the following:
- You provide a company vehicle to an employee who also has the benefit of using it for personal reasons.
- You provide reimbursement to employees for non-business-related expenses such as school fees, gym memberships or private health insurance.
- You provide food, beverages, or entertainment to your employees.
- You provide an employee a cheap loan.
- You provide your employee with shares.
- You provide goods for free as a gift to an employee.
If you provide any such fringe benefits to your employees, you need to learn how to calculate FBT.
How fringe benefit tax works
Now we understand what a fringe benefit is, let’s find out how the fringe benefit tax works.
If you provide your employee a fringe benefit, you must self-assess this fringe benefit and pay tax on it. FBT is separate to income tax and is calculated on the taxable value of the fringe benefit.
An employer must submit an FBT return to the ATO to assess their FBT liability. In general, an employer will be able to claim a tax deduction for the fringe benefits they provided, as well as the FBT paid. An employer will also generally be able to claim a goods and services tax (GST) credit for fringe benefits provided.
The FBT financial year is April 1 to March 31, so if you provide fringe benefits in this period you must complete an FBT return with the ATO.
How are fringe benefits taxed?
So how exactly are fringe benefits taxed? They’re taxed separately from income tax and are based on the cost of the benefit to an employer.
There are two types of FBT rate:
FBT Type 1: gross-up rate
This type is used when a business is entitled to a GST credit for the fringe benefits they provide.
As of the financial year 2020-2021:
- FBT rate of 47%
- Type 1: gross-up rate of 2.0802
FBT Type 2: lower gross-up rate
This type is used when a business is not entitled to GST credits on the fringe benefits they provide.
As of the financial year 2020-2021:
- FBT rate of 47%
- Type 2: gross-up rate of 1.8868
How to calculate fringe benefits
So how do you calculate fringe benefits? The quick answer is to talk to your accountant or advisor to manage this process on your behalf. If you want to work this out yourself, use the following steps provided by the ATO.
Step 1
Work out the taxable value of each fringe benefit you provide to each employee. The rules for calculating the taxable value of a fringe benefit vary according to the type of benefit.
Step 2
Work out the total taxable value of all the fringe benefits you provide for which you can claim a GST credit (including excluded fringe benefits).
Step 3
Work out the grossed-up taxable value of these benefits by multiplying the total taxable value of all the fringe benefits you can claim a GST credit for (from step 2) by the type 1 gross up rate.
Step 4
Work out the total taxable value of all those benefits for which you can’t claim a GST credit (for example, supplies you made that were either GST-free or input taxed).
Step 5
Work out the grossed-up taxable value by multiplying the total taxable value of all the fringe benefits you can’t claim a GST credit for (from step 4) by the type 2 gross up rate.
Step 6
Add the grossed-up amounts from steps 3 and 5. This is your total fringe benefits taxable amount.
Step 7
Multiply the total fringe benefits taxable amount (from step 6) by the FBT rate. This is the total FBT amount you have to pay.
If you require further information on calculating FBT or lodging an FBT return, please see the ATO’s FBT page.
