Wanting to reward your employees seems like a simple thing, but depending on how you choose to reward them, you could find yourself in a difficult situation. The worst outcome is you become overwhelmed by taxes, conditions, and options, and end up quitting the whole idea.
Quitting makes the problem go away, but only temporarily. Teams that are more engaged are happier, efficient, and productive.
Something you might have come across that makes you want to give up is Fringe Benefit Tax (FBT). It’s hard to know when FBT applies and when it doesn’t, and each type of benefit can have its own implications.
Fringe benefits are items given to employees that are not cash and are outside of their regular salary.
They include items such as
There are many more examples of what a fringe benefit would be, as anything you give to an employee could come under this definition.
However, items that are definitely not a fringe benefit include
The following work-related items commonly provided in salary sacrifice arrangements are exempt benefits provided they are primarily used for work (limits apply):
Other exemptions include expenses that would otherwise be deductible to the employee, along with minor and infrequent benefits.
There are also a number of additional exemptions and concessions available to Not-for-profits, charities and religious institutions.
A really easy way to understand what is and isn’t a fringe benefit is to ask whether or not the employee receives a personal benefit outside of work, thanks to the benefit in question.
FBT is an anti avoidance measure put in place to stop employers providing non-salary benefits to employees in an attempt to avoid income tax.
FBT is a tax on the employer to apply the same amount of taxation as the situation where the employee received salary, was taxed at top marginal rate and paid for the benefit out of after tax pay.
Where a benefit is both less than $300 in notional taxable and unreasonable to be treated as a fringe benefit, it is counted as a “minor benefit” and exempt from FBT.
To be classed as “unreasonable”, a number of factors are considered, such as the frequency and regularity of the minor benefits; the total of the value of the benefit itself, as well as in combination with other benefits; the difficulty in determining the value of the benefit; and the circumstances in which the benefit is given.
Calculating FBT is incredibly complex and different types of benefits are calculated in different ways.
Essentially the first step is to calculate the value of the benefit provided. This is generally the cost to the employer of the benefit (including GST), but there are different ways to calculate this for different types of benefits.
The value of the benefit is then ‘grossed up’ to give the taxable value. Grossing up means increasing the taxable value of benefits you provide to reflect the gross salary employees would have to earn at the highest marginal tax rate (including Medicare levy) to buy the benefits after paying tax.
FBT is payable at a total of 47%. This is made up from a 45% tax rate, the highest marginal income rate, plus an additional 2% for the Medicare levy.
It all sounds like a pretty big admin nightmare, so why do companies even bother?
Perks and benefits are usually offered in order to attract, retain, or motivate employees. If a company wants to hire a top tier employee, they can use fringe benefits to get more applications.
Using some clever exemptions, tech giants have managed to introduce perks like Google’s free cafeteria for every meal of the day (“food consumed on premises” is one exemption), scooters for transport, and education subsidies (also an exemption).
Giving your employees a sense that you value them, have their backs, and are there to help them fosters a better office environment and promotes a range of things, from productivity to work-life balance.
In certain circumstances, fringe benefits can bring some tax benefits to employees - meaning they pay less income tax.
If your reportable fringe benefits taxable total exceeds $2,000 in the FBT year (1 April to 31 March), you’ll need to report it on your income tax return (although not all fringe benefits are reportable).
The good news is your employer is responsible for letting you know this figure, and including it on your payment summary. There will be a dedicated section on your summary titled “reportable fringe benefits amount”.
Whilst Fringe Benefits are not taxable income, it will be included in your adjusted taxable income (ATI) which is used to calculate other items such as the Medicare levy and compulsory HECS or HELP repayments. Your adjusted taxable income also impacts other items outside your tax return such as Centrelink benefits and child support obligations.