How Australia Makes Taxing Fringe Benefits So Simple
The fringe benefits tax is a tax levied on benefits provided by your employer. This tax is separate from income tax that is assessed on an employee’s regular salary. Companies have treated fringe benefits more liberally in the past before the tax code changed. Many companies legally avoided the fringe benefits tax by including those benefits within their overall employee remuneration. Fringe benefits taxation was ultimately introduced to put a stop to this loophole.
What is a fringe benefit?
A benefit is broadly considered to be any good thing that flows from an employer to their employees. A fringe benefit occurs whenever an employer pays an employee anything that can be construed as providing the employee utility. The definition of a fringe benefit is broad and is open to some flexibility in interpretation. Because of this leeway, a fringe benefit might include a variety of perks. Ergonomic equipment could be considered a fringe benefit, as could being able to use the company’s facilities during the weekend.
What is not considered a fringe benefit?
Fringe benefits can include any rights, compensation or privilege that’s provided as part of an employee’s compensation for employment. There are some benefits (like superannuation contributions) that are specifically excluded from the calculation of fringe benefit taxes. Salary-sacrificed superannuation contributions, as well as losses from financial investments, can not be considered fringe benefits.
The salary of an employee will be assessed an income tax to be paid by the employee. The government doesn’t need to impose any “benefits” tax on salary because they’ve already got it as part of the employee’s income tax. Benefits that are tax-deductible are not considered fringe benefits for taxation purposes. The otherwise deductible rule says that if the employee had to pay for a deductible expense, then it won’t be governed by the fringe benefits tax.
Your company has some latitude in what it considers fringe benefits.
How each company calculates fringe benefits taxation will depend on their accounting practices. A company may classify service entitlements as payments for tax purposes. They might also cover out of pocket expenses incurred by their employees. They could make the case that these costs are incurred as a result of the unique nature of their employees’ employment
The calculation and reporting of fringe benefits on your payment summary are the responsibility of your employer to figure. Your company’s accounting offices must comply with the law when assessing these fringe benefit tax amounts upon employees’ compensation.
How to calculate fringe benefits taxes.
The government decided to shift the burden of paying fringe benefits taxes from the employee and onto the employer. The government tax office attempted to draw up an equivalency between fringe benefits tax and marginal tax rates. They wanted to make it such that it wouldn’t matter if a company gave either a fringe benefit or the equivalent benefit amount in salary. The equivalency was targeted at the highest marginal tax rate (currently at 47%) as hourly workers rarely enjoy fringe benefits.
Performing tax calculations for workplace fringe benefits is a pretty straightforward exercise. Let’s imagine that an employer could pay $100 direct to an employee. It doesn’t matter if the company gives a hundred dollars to an employee (and he pays his own tax) or the company pays the tax directly. The company could give the employee $53 worth of benefits while paying $47 worth of fringe benefits taxes directly to the government. It will cost the company $100 total either way, so it’s just a matter of accounting as to which way they’d rather pay out the benefit.
If the taxable value of so-called reportable fringe benefits provided to you by your company is more than $2,000 per year, then your company is legally obligated to report these benefits on their taxes.
This reported amount is referred to as the reportable fringe benefits amount.
These calculations assume that the employee is already in the top marginal tax bracket. Fringe benefits taxes make it nearly impossible for employers to provide these type of benefits to employees in lower marginal tax brackets. They are generally provided to executives who are already on the highest marginal tax rate. If an hourly employee is in the 19% tax bracket, then it makes better sense to give them a $100 in wage rather than $100 in benefits. The tax on the wage increase would be $19, whereas the fringe benefits tax would be much higher at $47. Anybody who is receiving fringe benefits in Australia is almost always going to be at the executive level anyway.
All fringe benefits tax returns and supporting documents are subject to review by the Australian Taxation Office. It’s important that employees check their annual statement of fringe benefits using the guidance provided by your employer. Thoroughly go over your annual statement until you are satisfied that the information contained in your statement is correct.
This should provide you an overview as to why the government levies a fringe benefits tax and how it’s assessed. A fringe benefit is anything that an employer gives to employees that’s not wages or anything else they would have otherwise received a deduction for. Companies sometimes use fringe benefits as a way to help employees. Since they are benefits and not income, employees avoid having to pay income tax on these benefits. The system of fringe benefits taxation makes the employer responsible for paying taxes on these benefits. It ultimately doesn’t matter whether companies pay their employees in cash or fringe benefits. Accountants will tell you that the government will get their share either way.
It can be quite an ordeal measuring fringe benefits taxes and its impact on other benefits. This article is only a starting point to help you understand a few of the nuances of this topic. You shouldn’t rely solely on this information to make important tax decisions. Should you need clarification of your particular fringe benefits circumstance, we encourage you to seek advice from a qualified accountant or tax agent.