A fringe benefit is a payment to an employee that takes on a different form to salary or wages. This payment commonly takes the form of work benefits, which can include use of a work car for private use, giving a discounted loan, providing entertainment tickets and reimbursing expenses incurred by the employee such as school fees.
Fringe benefits tax is paid by the employer for the benefits they provide to their employees or the employees family. This tax is separate to income tax and is calculated on the taxable value of the benefit provided. The employer must self-assess their fringe benefit tax liability and lodge a return for the fringe benefit tax year (1 April to 31 March). Employers are generally able to claim income deductions and GST credits for the cost of providing these fringe benefits to the employee. You do not need to register for fringe benefits tax as once you lodge your first return you are automatically registered.
Car Fringe Benefits
Car fringe benefits is a very common benefit provided to employees by the employer. For a fringe benefit to take place, the car must be available for private use by the employee. The definition of available means the even if the car is not used by the employee for private use, but could be used (e.g., car parked overnight at employee’s house with keys in the employee’s possession) then there is a fringe tax liability for the employer. There are two methods for calculating the tax liability for car fringe benefits, statutory formula method and operating cost method.
The statutory cost method calculates the tax liability from a percentage of the cars base cost upon purchase. The percentage used is 20% of the base cost. The days the car is available for use is then used to apportion the total tax liability. Any cost paid for by the employee (e.g., employee pays for own petrol for private use) is also subtracted from the total tax liability. For example, a cars base value is $30,000, available for 365 days and the employee has paid for $1,100 of the cars running cost.
20% of $30,000 is $6,000
$6000 minus the employee’s contribution of $1,100 is $4,900
Therefore, the total car fringe benefit tax liability is $4900
Operating Cost Method
The operating cost method calculates the tax liability using the actual expenses of running the car. Although more recording keeping is required than the statutory method, the tax liability is often greatly reduced using the operating cost method. The records required to be kept are:
- All receipts from fuel, services and repairs, registration, and insurance.
- Depreciation calculations and interest cost on loans
- 12-week logbook of all driving trips to calculate private use percentage (valid for 5 years once completed)
- Opening and closing odometer at the start and end of the fringe benefit year
The tax liability is calculated as the private use percentage of the total running cost. For example, if the total running cost is $10,000 and the private use is 25%, the tax liability would be $2,500.
Other Fringe Benefits
Common other Fringe Benefits:
- Loans provided at a discounted interest rate
- Payment of employees expenses that are not tax deductible.
If an employer provides any of the above to an employee, that expense must either be treated as a non tax deductible expense or fringe benefits tax must be paid.
Fringe benefits is complex area of tax compliance. We recommend that if you are considering substantial expenditure that could be classed as fringe benefit you contact our office to discuss how it should be structured before committing to the expenditure.
This article appeared in our February 2022 newsletter and was written by Ian Linton.