Adv Tax.Study Guide - Ch8(FBT) PDF

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FBT Tax law break down of fringe benefuts tax...

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Chapter 8 –30 June 2021 Adv Tax

Chapter Eight – Fringe benefits tax OVERVIEW Objectives The aim of this chapter is to introduce students to the further benefits that can be provided to employees. It is important for students to have a grounded understanding of fringe benefits tax in terms of its interaction with salary packaging.

CHAPTER NINE – OVERVIEW: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Introduction and terminology Imposition of FBT Summary of benefits types Expense payment Car fringe benefits Car parking benefits Loan benefits Living Away From Home Allowance Meal entertainment Reporting of FBT on PAYG payment summaries Conclusion

1. INTRODUCTION AND TERMINOLOGY 1.1

Policy reasons for FBT

 Reading:  Australian Tax Law at paragraphs 26-000 to 26-040 (read generally). Prior to the FBTAA, employers could supply their employees with fringe benefits and there would be no tax payable by the employee or the employer. It was a win/win for employers and employees, and lose/lose for government revenue. Note there was a section in ITAA36 that tried to tax benefits, but it only had limited operation. It was seen as unfair, because an employee could receive many fringe benefits instead of a cash salary (which is taxed). Employees would only pay tax on the cash salary. The fringe benefits would be tax free to the employee.

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EXAMPLE An example of the treatment of fringe benefits prior to 1986 is as follows (assume a flat marginal tax rate of 45%): Felix is an employee on a salary of $180,000. His employer wants to give him a pay increase. If his salary is increased by $10,000 cash, then Felix will get only $5,500 in his hand. (Tax rate is 45%  amount of tax is $4,500.) Instead of a pay rise, the employer gives him a fully maintained company car. The leasing costs of the vehicle are $10,000 per year that the employer meets.  



1.2

The employer wins because they get a tax deduction of $10,000 no matter what. Felix wins because he gets a benefit worth $10,000 that he doesn’t have to pay tax on. He is better off by $4,500 with the car instead of cash salary. -

Actually he will be $18,818 - $5,500 = $12,681 better off with the car benefit instead of the cash salary.

-

He would need to earn $18,181 = $10,000 x 1/(1- 0.45) extra to have $10,000 left over after tax is taken out at 45%

The government loses out on $4,500 in tax.

Terminology Term

FBT year

Meaning The FBT year runs from 1 April to 31 March. It is not lined up with the Income Tax year of 1 July to 30 June. The FBT year was intentionally set apart from the income tax year to spread the workload throughout the year. In practice, it would be more efficient to have the FBT year lined up with the income tax year.

Fringe benefit

To see if there is a fringe benefit, we need to check the definition of fringe benefit in s 136(1) FBTAA. The steps are: 1. There is a benefit 2. provided during the year of tax 3. by an employer, associate, or third party arranger 4. to an employee or associate 5. in respect of the employment of the employee. It does NOT include payment of salary and wages, payment of superannuation or an eligible termination payment.

Employer

The employer could be a previous employer or a future employer.

Employee’s associate

An employee’s associate is defined very widely. See s 159 FBTAA.

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Term

Meaning

Fringe benefits tax (‘FBT’)

FBT is not an income tax. Employees do not pay the tax on benefits they receive. Instead the FBT liability falls on employers, and is deductible for the employer.

FBT instalments

Employers pay an estimate of their FBT liability in quarterly instalments based on their prior FBT year amount.

Reportable benefits

This is a measure introduced for the 30 June 2000 year and onwards. Where the grossed-up amount of fringe benefits exceed $2000 (from 1 April 2007) appears on the employee’s PAYG payment summary.

fringe

2. IMPOSITION OF FBT

 Reading:  Australian Tax Law at paragraph 26-100 to 26-170 (note this should largely be a refresher of what you learnt in the pre-requisite for this course).

2.1

Is there a fringe benefit?

The elements required for a taxable fringe benefit are: 

There must be a benefit



Provided during the fringe benefit year.



By an employer, associate, third party arranger or other relevant person



To an employee or an associate



In respect of the employment of the employee.

2.1.1

Benefit

The FBTAA defines benefit in sec 136(1). Benefit includes “any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility...” Certain employee benefits are expressly excluded from the definition of fringe benefit. These include salary and wages, superannuation, ETPs, payment for a personal injury or restraint of trade arising from a contract, dividends, and shares under certain employee share schemes. Note from 7 September 2000 superannuation contributions made to an associate of an employee are subject to FBT, compared to superannuation contributions for the actual employee which are not subject to FBT.

2.1.2

Provided during the year

The fringe benefit year is from 1 April to 31 March the following year.

2.1.3

By an employer, associate, or third party arranger or other relevant person

Employer is defined to mean a current, future or former employer.

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A current employer is defined to mean a person who pays or is liable to pay salary or wages. Section 137 expands the definition to cover situations where an employee receives just non-cash benefits, which, if provided in cash, would be salary or wages. A former employer is a person who has been a current employer A future employer is a person who will become a current employer. An associate of the employer is defined widely A third party arranger catches situations where the employer arranges with another entity to provide benefits for its employees

2.1.4

To an employee or an associate

Employee means a current, future or former employee. A current employee is a person who receives/is entitled to receive salary or wages as defined s 136(1). An employee’s associate is defined very widely. See sec 159 FBTAA.

Employee vs Independent Contractor Refer to TR 2005/16 for the distinction between employee vs independent contractor. In Hollis v Vabu Pty Ltd 2001 ATC 4508, the Full High Court held that a pushbike courier was an employee rather than an independent contractor because he had no ability to generate goodwill; had little control over his work; and was required to wear the employer’s uniform. The impact was that the employer was responsible for PAYG withholding, FBT and Superannuation Guarantee obligations from the date of the High Court decision (8 August 2001).

2.1.5

In respect of employment

 Reading:  Slade Bloodstock v FCT [2007] FCAFC 173 (23 November 2007). "In respect the employment of the employee" is a very important part of the test for a fringe benefit. The benefit must be provided "by reason of, by virtue of, or for or in relation directly or indirectly to" the employment. Very important part of the test for a fringe benefit is that there must be a nexus between providing the benefit and employment: s 136(1). The benefit must be provided “by reason of, by virtue of, or for or in relation directly or indirectly to” the employment.

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Subsection 148(1) states that the provision of a benefit will be taken as provided in respect of employment of an employee: 

      

whether or not the benefit is also provided in respect of or in relation to any other matter or thing whether the employment will occur, is occurring, or has occurred; whether or not the benefit is surplus to the needs or wants of the recipient; whether or not the benefit is also provided to another person; whether or not the benefit is, to any extent, offset by any inconvenience or disadvantage; whether or not the benefit is used in connection with that employment; whether or not the provision of the benefit is in the nature or income; and whether or not the benefit is provided as a reward for services by the employee.

MT 2016 states that s148 is there to anticipate arguments that might otherwise be put forward, which might narrow the defined meaning of fringe benefit. A mere gift will not satisfy the nexus test if it is provided because of a personal relationship.

2.2

Calculation of taxable value

 Reading:  Australian Tax Law at paragraph 26-200 Once you have determined that there is a fringe benefit, you need to determine the fringe benefit’s ‘taxable value’. The taxable value of a benefit may be reduced by any contributions received from the recipient or if the benefit falls under the otherwise deductible rule. Special rules apply for the particular benefit type in determining what is the taxable value. First check the specific rules for that type of benefit to see the formula to work out the taxable value. You also need to check if the benefit falls under the otherwise deductible rule.

2.2.1

Exempt benefits

While still a fringe benefit, some benefits are exempt to minimise the cost of complying with the legislation, eg notebook computers, mobile phones used primarily in employment. Div 13 lists other exempt benefits. There are also exempt benefits eg. benefits provided by certain public and non-profit hospitals to their employees s57A (3) ; and minor benefits and certain other work related benefits as below: 

     

Laptop and other portable computers (limited to one person per FBT year and must now be work related use) From 1 March 2016 there will be Fringe benefits tax exemption for portable electronic devices for small businesses. The amendments extend the exemption to small businesses that provide employees with more than one work-related portable electronic device (such as mobile phones, laptops and tablets) in a given year, even where the devices have substantially identical functions. Portable printers, personal digital assistants Protective clothing required for employment Briefcases, calculators, tools of trade Subscriptions to trade and professional journals Newspapers and periodicals Minor benefits under $300 [from 1 April 2007](previously $100): See Taxation Ruling TR 2007/12: Fringe benefits tax: minor benefits for a discussion about section 58P.

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Corporate credit card membership Airport lounge membership Business related software Electronic diaries Car phones and mobile phones primarily used in employees employment Taxi travel between employee’s home and work Car parking for small businesses Car parking for some exempt businesses Car fringe benefit when car is utility and private use only minor, infrequent and irregular (see below)  Some short-term loans to employees for rental bond or employment expenses  Accommodation expenses when employee required to live-away from home  Property fringe benefits consumed by the employee on a working day  Child care facilities on employer’s premises  Car expense payment when relating to a car fringe benefit  Employment interviews  Removal and storage expenses because of relocation  Engagement of relocation consultants  Sale or acquisition of dwelling because of relocation  Connection of utilities because of relocation  Leasing of household goods while living away from home  Relocation transport  In-house health care facilities  Temporary accommodation because of relocation  Education of overseas employee’s children Practical Compliance Guideline PCG 2018/3 outlines the circumstances in which the ATO will not apply compliance resources to determine if the private use of an eligible vehicle was limited for the purposes of the car-related FBT exemptions. The FBT exemptions are for minor, infrequent and irregular private use of vehicles in s 8(2) and 47(6) of the Fringe Benefits Tax Assessment Act 1986.         

Further, the employee must use the vehicle in the following way: • for travel between home and the work place and any diversion adds no more than two km to the ordinary length of that trip • for journeys undertaken for a wholly private purpose (other than travel between home and place of work), the employee does not use the vehicle to travel more than 1000 km in total, and, a return journey that exceeds 200 km. Additionally, some employers are exempt from paying FBT on benefits provided to their employees, such as religious institutions, public benevolent institutions and certain hospitals: section 57A. But now the amount of benefits that can be provided by such employers exempt to employees is subject to a cap.

2.2.2

Concessional Fringe benefits

! Announced Changes From 22 October 2012 there was the removal the concessional fringe benefits tax (FBT) treatment for in-house fringe benefits accessed through a salary sacrifice arrangement.. In-house fringe benefits arise when employees receive goods or services from their employer or an associate of their employer that are identical or similar to those provided to customers by the employer or an associate of the employer in the ordinary course of business. Under the reforms, the taxable value of in-house fringe benefits provided through a salary sacrifice arrangement will be (depending on the nature of the benefit) either:  the lowest price that an identical benefit is sold to the public  the lowest price under an arm's length transaction.

2.2.3

Recipient contributions

A recipient’s contribution is an amount given to the employer by the employee (or their associate) to contribute towards the cost of the fringe benefit. It is very common in small business for recipients to make a contribution. This may be done by journal entry.

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Note there can be GST implications because of an employee contribution.

2.2.4

Otherwise deductible rule

The otherwise deductible rule applies to certain fringe benefits only: loan, expense payment, airline transport, board, property and residual. The rule states that if the employee had been able to claim a tax deduction for the benefit had they paid for it themselves, then the taxable value can be reduced by the otherwise deductible amount. The otherwise deductible rule only applies to employees, not to associates of employees.

 Review Activity 8-1: Co Pty Ltd pays an employee’s home phone account. At 31 March of the current FBT year, the total paid for the FBT year was $4,300 (including GST). The employee is on call and makes a lot of calls from her home phone. She kept a diary for 12 weeks that showed 40% of the calls were for business. Calculate the ‘taxable value’ of this benefit.

 Review Activity 8-2: Refer to RA 8-1. Can the employee claim a tax deduction in respect of the reimbursed business telephone calls?

2.3

Calculation of actual FBT liability

Due to changes in the Medicare Levy and the income tax rates the FBT rate can change

FBT rate Type 1 gross-up Type 2 gross-up

2.3.1

2021 FBT year 47% 2.0802 1.8868

Non-exempt employers

 Reading:  Australian Tax Law at paragraph 26-300 Once you have determined the taxable value, you can then calculate the actual fringe benefits tax payable. This involves initially ‘grossing-up’ the taxable value, then multiplying the resulting amount by the FBT rate to give the FBT liability. The gross-up is classified according to whether GST input tax credits can be claimed on the benefit by the employer. This classification was introduced so that employers would not be advantaged when providing fringe benefits by being able to claim input tax credits on the benefits provided. There are “Type 1” and “Type 2” benefits – their amount depends upon the highest marginal tax rate plus medicare levy. FBT year 2021

Type 1 gross up rate 2.0802

Type 2 gross up rate 1.8868

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Type 1 benefit: GST input tax credit available Type 1 benefits are added together and grossed up by the relevant Type 1 gross-up rate.This is calculated by the following formula:

FBT rate + GST rate [1-FBT rate] x [1+GST rate] x FBT rate

= Type 1 gross-up rate

Type 2 benefit: No GST input tax credit Type 2 benefits are added together and grossed up by relevant Type 2 gross-up rate. This is calculated by the following formula: ______1______ FBT rate

Multiply by the FBT rate Then the next step is to multiply the ‘total grossed up amount’ (adding together both the ‘grossed up amounts for Type 1 and 2) by the he FBT rate, FBT year 2021

FBT Rate 47%

 Review Activity 8-3: Refer to Activity 8-1 – calculate the ‘fringe benefit tax payable’ on this benefit for the current FBT year.

2.3.2

Tax exempt (rebatable) employers

 Reading:  Australian Tax Law at paragraphs 26-310 Some employers are income tax exempt. To make the operation of FBT fair for them, as they do not pay tax and do not get the benefit of a tax deduction for FBT paid, there is a rebate available. The formula is found in sec 65J(2), and the rebate is 47% - though now it is capped to either $17,000 (hospitals) or $30,000 (other public benevolent institutions) of the gross taxable value for each employee. The rebate is claimed after the normal FBT liability is calculated. Because of this rebate, the provision of fringe benefits by these employers can be tax effective. Refer to the salary-packaging chapter.

3. SUMMARY OF BENEFITS TYPES The specific benefits are: (i) Car Fringe benefits. Where an employer provides a car to an employee (or their associate).

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(ii) Debt waiver fringe benefits. This occurs when an employee owes the employer money, and the employer forgives the debt. (iii) Loan fringe benefits. These occur when an employer makes a loan to an employee at less than a commercial rate of interest. (iv) Expense payment fringe benefits. These are very common and examples include an employer paying an employee’s home phone bill, children’s school fees, home electricity bill etc. (v) Housing fringe benefits. Where the employer provides accommodation to the employee at less than a commercial rent. (vi) Living Away From Home Allowance fringe benefits. Where an employee is temporarily relocated and the employer gives them an allowance to pay for food, however special rules apply. (vii) Airline transport fringe benefits are specifically for airline employees or travel agents that receive free airline travel with a stand-by restriction. The first $500 in airline transport benefits in a year are exempt. (viii) Board fringe benefits are meals provided to certain employees under specific circumstances. See TR 94/1 and TD 94/47. (ix) Meal entertainment fringe benefits occur where an employer provides entertainment by way of food or drink to...