What is a Fringe Benefit?
A fringe benefit is an extra benefit or perk an employer gives to an employee, apart from their regular salary or wages. Common examples of fringe benefits include:
- Using a company car for personal purposes
- Discounted goods or services provided by the employer
- School fees paid by employers for employees’ children
- Company-paid entertainment or events
When employers provide these extra benefits, there may be tax implications called Fringe Benefits Tax (FBT).
How Does GST Relate to Fringe Benefits?
Goods and Services Tax (GST) is usually charged on most goods and services sold in Australia. The relationship between GST and FBT can sometimes be complex. According to the article:
“The provision of a fringe benefit by an employer to an employee is deemed a supply for the purposes of the Goods and Services Tax Act.”
This means providing a benefit can sometimes trigger a GST liability, depending on the type of benefit provided.
When is GST Payable on Fringe Benefits?
GST becomes payable when an employee makes a contribution towards a fringe benefit that would otherwise attract GST. The employee’s payment is considered the value of the supply, and GST is calculated accordingly.
For example:
“Mark purchases a freezer from his employer at the special employee price of $1,100, normally retailing for $3,300. As Mark contributes $1,100 towards the freezer, GST of $100 (1/11th) is payable by the company.”
However, if the employee does not pay anything towards the benefit, no GST applies even though it remains a fringe benefit.
When Does GST Not Apply?
GST is not charged on fringe benefits that are GST-free or input-taxed. GST-free items include essentials like basic food, education, and medical services. Input-taxed supplies usually include residential property rentals.
Two examples from the article illustrate this clearly:
- GST-free example: A school offering discounted education courses to children of teachers would be GST-free, meaning no GST is payable.
- Input-taxed example: Providing an employee with a residence owned by the employer is input-taxed, so no GST applies.
Can Employers Claim Input Tax Credits?
Employers providing fringe benefits can usually claim input tax credits (GST paid when buying items) if:
- They are registered for GST
- The purchase includes GST
- They have a valid tax invoice
Employers cannot claim input tax credits if the purchase was:
- From a non-registered business (e.g., garage sale)
- GST-free or input-taxed
- Provided at no cost
- Not supported by a valid invoice
The article provides a simple example:
“Melissa’s employer buys two technical books from a garage sale (non-registered supplier). The company can’t claim any input tax credits for this purchase.”
What Are Gross-Up Rates?
Gross-up rates help calculate how much FBT is owed. There are two rates:
- Type 1 benefits (GST claimable): 2.0802
- Type 2 benefits (GST not claimable): 1.8868
These rates increase the taxable value of the benefit, which is then taxed at the FBT rate of 47%.
For instance:
- If an employer can claim GST credits (Type 1 benefit), the benefit’s value is multiplied by 2.0802.
- If no GST credit can be claimed (Type 2 benefit), the value is multiplied by 1.8868.
The article explains it as:
“A gross-up rate of 2.0802 applies if an input tax credit can be claimed (Type 1). A rate of 1.8868 applies if no input tax credit can be claimed (Type 2).”
Calculating Fringe Benefits Tax (FBT)
The article gives a clear process to calculate the total FBT payable:
- Identify total Type 1 and Type 2 benefits separately.
- Multiply each type by their respective gross-up rate.
- Add these totals together.
- Multiply by the 47% FBT rate
For example, if a company provides an employee a $4,400 holiday (GST-inclusive), and the employer can claim GST credits, this is a Type 1 benefit. You multiply by 2.0802, then by 47% to determine the tax payable.
Practical Recording in Bookkeeping
When bookkeepers record these transactions, the FBT itself doesn’t involve GST reporting. However, the purchases themselves, like goods or services given as fringe benefits, usually include GST at the point of purchase. These need to be recorded correctly in the accounting system, as shown in the article’s examples.
Final Points to Remember:
- Fringe benefits can be subject to GST, depending on the type and how they’re provided.
- Employers need to differentiate between Type 1 and Type 2 benefits to calculate their FBT correctly.
- Accurate record-keeping of transactions is crucial for compliance.
Understanding these fundamental concepts helps ensure that both GST and FBT are handled correctly, preventing costly mistakes and ensuring tax compliance.
