A fringe benefit will arise if there is:

All of these four elements must be present for a benefit to be treated under FBT. The definition of a benefit in the legislation is very broad and covers everything from reimbursement of the employee's expenses, to free accommodation, private use of employer facilities and private use of employer motor vehicles.

Most of the four requirements of a FB are quite clear but it is important to note that a FB only exists if the benefit is provided in relation to employment. Therefore, if you provide a benefit to a family member that is an employee it may be provided for family reasons rather than because they are an employee. A simple test of whether the benefit is related to employment is whether you claimed a tax deduction for the benefit provided. If a tax deduction is claimed for the benefit it will be in relation to employment. Conversely, if no deduction is claimed then the benefit is more likely private and not a FB.

Once a benefit is identified as a fringe benefit then the taxable value of the benefit will be determined by identifying the type of benefit and applying the valuation processes required by the legislation. The main types of benefits are:

The taxable value of a FB is determined from the rules prescribed for each type of FB. However, the taxable value may be reduced as some benefits are exempt or because of the 'otherwise deductible rule' (see below) which reduces the taxable value of the benefit if the employee would have received a tax deduction if he/she had incurred the expense. The taxable value can also be reduced if the employee contributes to the cost of the benefit such as paying for some of the petrol used during private use of the employer's motor vehicle.

The following is a list of the main items exempted from FBT:

The taxable value of the FB can be reduced if the employee would have been entitled to a tax deduction had they incurred the expense. This is known as the 'otherwise deductible rule' and it aims at avoiding double taxation. For example, where an employee incurred travel and accommodation expenses in attending a stud stock sale, and you reimbursed these expenses, then the taxable FB would be reduced to the extent that the employee could have claimed a deduction for these expenses had they incurred them.

Due to the 'otherwise deductible rule', it is necessary to ask employees to keep records of expenditure relating to travel and other costs that are reimbursed. These records are required so you can determine whether the employee could have obtained a deduction had the expense not been reimbursed.

The employer, not the employee, is liable for FBT and this tax is reported and paid through the BAS. The tax rate is structured so that there is no financial difference for the employer or the employee between paying an employee who is on the top tax rate, a cash wage or the equivalent taxable FB. If the employee is on a lower tax rate the employee will be better off receiving the equivalent wage rather than a taxable FB. This assumes that the FB is equivalent in value after income tax to the employee, and that the employer adjusts the employee's wage to account for any FB. However, FBs that are not taxable can provide after tax savings for both the employer and employee.

To determine the amount of FBT it is first necessary to determine the taxable value of the fringe benefits using the calculation prescribed in the legislation. Once the taxable value is determined this amount is grossed-up (multiplied) by a set factor which depends on whether the employer is entitled to a credit for GST or not on the cost of the FB.

To view a web page containing further information relating to this topic go to the ATO website - www.ato.gov.au.

As a general rule of thumb (the correct factor must be used when doing the actual calculations) the gross-up factor is approximately two, that is, the taxable value is approximately doubled. This grossed-up amount is then taxed at a rate of 46.5 per cent (top income tax rate plus Medicare) to determine the final FBT. Again, as a rule of thumb this means that the taxable FB is first doubled and then taxed at a little under 50 percent, with the final result that the FBT payable by the employer is approximately the same value as the original FB. It is important to note that the gross-up factor is affected by whether the employer is entitled to a GST credit (see GST) on the cost of the benefit provided to the employee.

All these complex calculations are aimed at making both the employer and the employee (on the top marginal tax rate) indifferent as to whether wages are paid in cash or as an equivalent taxable FB. Where the employee is on a tax rate less than the top marginal rate (45%), then the FBT cost to the employer will be greater than the tax saved by the employee. In this case there is no overall tax saving unless the benefit provided is excluded from FBT.

In most cases the employer will be entitled to an income tax deduction for the cost of providing the FB, as well as for the actual FBT itself.

Employers are required to report the employee's grossed-up value of 'reportable fringe benefits' on the employee's 'payment summary' if the employee's reportable FB exceeds $2,000 during the FBT year.

Some FBs are excluded from reportable fringe benefits, and these mostly include personal benefits such as entertainment, health and safety.

Government requires these FBs to be reported on the group certificate because they are used to determine the employee’s eligibility to certain income tested concession and tax liabilities (eg Medicare surcharge).