Following on from our discussion on salary sacrificing, below is some detail on fringe benefits tax.
What is a fringe benefit?
A fringe benefit is a benefit provided by an employer (or an associate of the employer) to an employee (or and associate of the employee) in respect of the employee’s employment.
A common scenario is where an employer pays a private expense on behalf of an employee, for example, their mortgage payments.
It is important that as an employer, you do not inadvertently provide a benefit to an employee that should be subject to fringe benefits tax. An employer does not have a choice whether fringe benefits tax applies or not.
Also, the value of a fringe benefit is reduced by any employee contribution.
Impact on Employers
When employers are providing a fringe benefit to an employee, it is important to remember that the total outlay to the employer should not be more when paying a fringe benefit than if they were just paying a normal salary.
For example if an employees normal salary is $50000 and they ask an employer to pay mortgage payments of $10000, it is essential for the employer to work out the fringe benefits tax applicable and take this into account when looking at the reduced gross salary payable to the employee.
It should be noted that the fringe benefit is a tax deductible expense to the employer as is the fringe benefits tax payable. An employer can also claim any GST payable on the expense.
Providing fringe benefits to employees can be a positive step towards building happy relationships between employees and employers HOWEVER it is essential to do the necessary calculations as quite often it is not in the best interest of the employee.
The provision of fringe benefits by employers also increases their annual paperwork as it is generally necessary to prepare a fringe benefits tax return.
Impact on Employees
When negotiating a salary package providing fringe benefits with an employer, it is essential to perform the necessary calculations to ensure that the take home pay is more than the original package. You cannot assume that you will be better off if your employer pays an expense on your behalf and your overall gross salary is reduced. In most cases, you will be worse off after the employer works out their adjustment.
Any fringe benefit with a taxable value of over $2000 is required to be reported on an employees PAYG Payment Summary. This means that it gets added back to the employees income for the following purposes –
- Tax offsets
- Centrelink income purposes
- HECS and HELP repayments
- Child support obligations
This is so employees don’t minimise their income using fringe benefits to maximise their entitlements to the above.