Understanding Fringe Benefits Tax (FBT)

Fringe Benefits Tax (FBT) was part of a tax reform package introduced by the Hawke Government in 1986.  During the 1970’s and 80’s salary packages commonly included a range of tax-free benefits including, company cars, travel, restaurant meals and school fees. Is it any wonder that there was an economic revolution during that time.

The premise behind the reform was to put everyone on an even footing when it came to public and private enterprise and to ensure a degree of fairness through the tax system. If you enjoyed such salary packages during that time I am certain you would not have seen it that way.

In short, a fringe benefit is a benefit provided to an employee (or their associate) because that person is an employee. That includes you as the director of your company – even if you don’t draw a salary, you would be deemed to be an employee for FBT purposes.

Fringe Benefits Tax is paid by the employer and not the employee. So it is very important to understand the basics behind the system to ensure team members receive the remuneration you have agreed upon and you the employer is not paying additional and unplanned tax.

In the world of small business we typically see the following areas where most benefits are provided:

  • motor vehicles;
  • entertainment;
  • interest Free Loans;
  • accommodation; and
  • various expense payments for non-business related items such as home electricity and various insurances.

Often the business owner is of the belief these various expenses are paid for in the necessary course of doing business and are 100% deductible. In most instances this is correct. What is unknown to many, is that these expenses may still fall under the FBT regime.

In very basic terms this means that if the business pays $100 for an expense that is subject to the fringe benefits regime, it will pay a further $95 in fringe benefits tax. Crazy and expensive huh!

For many of our clients, we don’t prepare an actual Fringe Benefits Tax return. We take care of this in the background for you and ensure that any benefits that are subject to FBT are reduced by personal contributions to the business.

So when it comes to maximising your bottom line and before you finalise negotiations around a salary package or agree to pay for certain expenses on behalf of any team member, we should talk.  If the employer – you, get it wrong, it can be very costly.