Fringe Benefits Tax: Benefits Tax Assessment Act.
Answer:
Introduction:
Fringe Benefits Tax Assessment Act was introduced in 1986 (FBTAA, 1986) as a separate tax to be levied on those payments which the employers paid to their employees in the form of benefits. As these amounts were paid to the employees as out-of-pocket compensations against extra services performed by the employees, these were not included in the regular salary of the employees, (Marsden, 2010). The employer deducted these amounts as expenses and both, the employer as well as the employee, did not pay any income tax on these amounts. Majority of these benefits were provided in non-cash form and included, car allowance, entertainment allowance, traveling allowance and so on, (Marsden, 2010).
Section 136(1) of the FBTAA, 1986 defines a fringe benefit as a benefit, provided during a tax year, to an employee or to the associate of the employee, by the employer or by the associate of the employer, or through a third party by the employer. Broadly, Fringe benefits include any amount paid towards any privilege, service or facility provided to the employee by the employer, (Macmillan (ed.), 2000). On the other hand, fringe benefits shall exclude salaries and wages as defined in Section 136 (1) (f) of FBTAA, 1986, as well as allowances, commissions or bonuses as detailed under Section 12-35 of Schedule-1 of TAA, 1953, (Macmillan (ed.), 2000).
Employment vs Business Relationship
Cash Payments
Salary and wages are those cash payments which are assessable incomes under Section 6-5 of ITAA, 1997 and Section 15-2 of ITAA, 1997 (Section 26e of ITAA, 1936). Apart from these, any amount less than $2,000, if paid in cash as a fringe benefit, shall not be treated as “Reportable Fringe Benefit”, (CCH Editors, 2011). However, employers can report inter-connected fringe benefits under different heads so as to keep them under the exempted level of $2,000. This is particularly applicable in cases where meal expense, night accommodation and taxi travel by the employee is claimed. Here, the employer has to consider each expense as individual benefit provided to the employee so as to keep it under the exempt limit, (CCH Editors, 2011).
Non-Cash Benefits
All non-cash benefits provided to the employee, such as a company car provided to the employee for private use, where all expenses are borne by the employer are assessed under the FBTAA, 1986. However, as per Section 21A of ITAA, 1936, the fringe benefits provided by the employer to its employees are not to be treated as assessable income at the hands of the employee. Liability of paying the FBT lies with the Employer, (CCH Editors, 2011).
Implications of FBT
Allowances not subject to FBT
Section 15-2 of ITAA, 1997 does not apply to fringe benefits covered under FBTAA, 1986. These include allowances and other payments made in respect of employment or services, paid directly or indirectly to an employee as a consequence of employment. These include –
- Cash allowances, such as travel allowances, uniform allowances and overtime payments.
- Gratuities including gratuitous gifts, whether in cash or non-cash form, which are paid for employee’s good performance.
- Any type of compensation.
- All Bonuses or Premiums, (Horwath, 2009).
Expense Payments (Section 20 of FBTAA, 1986)
Under Section 6-5 of ITAA, 1997, Section 23L of ITAA, 1936 and Subsection 136(1) of FBTAA, 1986 following are some of the payments which shall be considered as fringe benefits paid to the employee –
- Employee’s home internet bill.
- Employee’s golf club membership.
- Employee’s kids’ school fees, (Horwath, 2009).
The taxable value of the payment is equivalent to the amount paid or reimbursed less the amount contributed by the employee.
Calculating FBT
The company has to
1. Determine that there is a fringe benefit.
2. Determine the type of benefit and the section applicable from FBTAA, 1986.
3. Determine whether the benefit is of Type-1 or Type-2.
Type-1 Benifits:
Those benefits for which employer can claim GST input tax credit.
Type-2 Benifits:
Those benefits for which employer cannot claim GST input tax credit as the amount involved does not attract GST.
1. Determine the Taxable Value (TV).
2. Multiply the TV of step-3 by the applicable Gross-up factor as shown in the table below.
3. Multiply the Grossed-up TV by 49% (the FBT Rate for FBT year 2015/16) to determine the FBT liability, (Ault & Arnold, 2004).
|
FBT Year |
1/4/13 to 31/3/14 |
1/4/14 to 31/3/15 |
1/4/15 to 31/3/16 |
1/4/16 to 31/3/17 |
1/4/17 to 31/3/18 |
|
Gross-up factors |
Type-1: 2.0647 Type-2: 1.8692 |
Type-1: 2.0802 Type-2: 1.8868 |
Type-1: 2.1463 Type-2: 1.9608 |
Type-1: 2.1463 Type-2: 1.9608 |
Type-1: 2.0802 Type-2: 1.8868 |
|
FBT Rate |
46.5% |
47% |
49%* |
49%* |
47% |
|
*FBT Rate between 1/4/15 and 31/3/17 has been increased to reflect the temporary Budget Repair Levy. | |||||
FBT: How to Calculate
The payment of $15,000 made by the employer towards school fee of John’s child is a fringe benefit under the FBTAA, 1986. Employer is liable for FBT under Section 20 of Division 5: Expense Payment Benefits under FBTAA, 1986. This fringe benefit is of Type-2, as there is no GST element. Multiply the amount by the Gross-up Factor of 1.9608 and the Grossed-up Taxable Value comes to $29,412. The FBT Liability of the employer is = (Grossed-up Taxable Value) x (FBT Rate for the FBT year 2015/16)
= ($29,412) x (49 %)
= $14,412.
This is a fringe benefit as detailed in Section 25 of Division 6: Housing Benefits of FBTAA, 1986. According to the Act, such a benefit arises when the employer provides an employee an accommodation at a reduced rent rate or rent-free and the accommodation is the employee’s usual place of residence. However, any accommodation provided by the employer to employee in a remote area is exempt from FBT.This fringe benefit is of Type-2, as there is no GST element. The market value of the rent for the accommodation provided is $800 per week and John contributes $100 towards this cost. Hence, the Net Value of the Fringe Benefit is $700 per week. The annual amount will be $700 x 52 = $36,400. Multiply this by the Gross-up Factor of 1.9608 and we get the Grossed-up Taxable Value of the fringe benefit as $71,373.
The FBT Liability of the employer is
= (Grossed-up Taxable Value) x (FBT Rate for the FBT year 2015/16)
= ($71,373) x (49 %)
= $34,973.
Hence, the total FBT liability of the employer is
= $14,412 + $34,973
= $49,385
Goods and Service Tax
As per Division 9 of the Goods and Services Tax Act 1999 (Cth) (GSTA, 1999) GST is applicable on sale of merchandise and services by a registered entity. However, it is detailed under Section 9-15 of the GSTA, 1999 that the sale of goods or services must have been made for a consideration to an entity which is registered for GST as per Division 23 of the Act and the sale conforms to Section 9-20 of the Act. Payments for employment services or hobby income are not covered under the GSTA, 1999, (Ault & Arnold, 2004). All enterprises registered for GST are required to submit a Business Activity Statement (BAS) reporting their GST activities to the Australian Taxation Office (ATO) for quarters ending on March, June, September and December. Registered entities are required to submit their BAS with the ATO within 20 working days after the end of the relevant quarter, (Hayes, 2009).
GST is applicable for refund when a product is recalled, provided the transactions has been reported by the registered entity, or is required to be registered under the GST Act. How the refund of GST, as mandated in the GSTA, 1999, shall apply to goods which have been recalled, shall depend on to whom are the goods returned and whether they have been exchanged for money or are replaced by fresh goods, (Hayes, 2009).
Refunding of Returned Goods
When goods are returned by Wonder Sports to the manufacturer Aussie tennis Goods, it shall be considered as cancellation of the sale by Wonder Sports. Since the GST amount would have already been paid to the ATO by the manufacturer Aussie Tennis Goods and the buyer Wonder Sports would have claimed the GST credit, it is mandatory for both parties to make adjustment entries, (Horwath, 2009). In case the manufacturer Aussie Tennis Goods makes a refund to the buyer Wonder Sports against the returned goods, then Aussie Tennis Goods will report a GST credit for the GST component related to the returned goods which it must have included in its previous BAS. This is known as a decreasing adjustment. The manufacturer Aussie Tennis Goods will issue an adjustment note to Wonder Sports who has returned the goods. Wonder Sports, as the buyer will be required to make an increasing adjustment in its next BAS in case it has previously claimed the GST credit against the GST it paid for the goods it has now returned, (Horwath, 2009).
Exchanging with New Goods
In case the retailer Wonder Sports returns the defective goods to the manufacturer Aussie Tennis Goods for exchange with new goods, then the manufacturer Aussie Tennis Goods will cancel the previous sale invoice of the recalled goods and will report a new sale. Aussie Tennis Goods can claim back the GST it had already deposited on the original sale of the goods which now stand returned, by making a decreasing adjustment to its net GST payable in its next BAS, (Marsden, 2010). Aussie Tennis Goods will also be required to issue an adjustment note to the buyer Wonder Sports. The manufacturer Aussie Tennis Goods is also required to report the GST on the sale of the new goods to Wonder Sports in its next BAS and also must issue a tax invoice for the new goods to Wonder Sports in case the GST inclusive amount of the goods is more than $82.50, (Marsden, 2010).
In the case of the retailer Wonder Sports, it is mandatory for it to repay the previously claimed GST credit and this will be done by it by making an increasing adjustment in its next BAS to its net GST amount it is required to pay. The retailer Wonder Sports can also claim a GST credit for the GST amount included in the price of the new goods delivered to it, in case the GST inclusive amount for the new goods is above $82.50. The retailer Wonder Sports must keep record of a valid tax invoice for the new purchase before claiming the GST credit, (CCH Editors, 2011).
In case the retailer Wonder Sports is maintaining its accounts using the Cash Method, then as stipulated under Section 19 of ITAA 1936; Section 28 of ITAA 1936; Section 70-35 of ITAA, 1997; Subsection 995-1(1) of ITAA, 1997; Subsection 25(1) of ITAA 1936; Subsections 6-5 (2), (3) and (4) of ITAA, 1997; and Subsection 6(1) of ITAA 1936, Wonder Sports can, for taxation purposes, reverse the entries made under the GST accounts in its account books. Under the cash method, commonly known as the ‘Receipts Method’, the above noted statutes of the law state that any amount shall be considered as having been incurred by Wonder Sports only when it has been actually or constructively been incurred by Wonder Sports so as to complete a business activity, (CCH Editors, 2011).
Four-year Time Limit
However, in case Wonder Sports is maintaining its accounts using the Accrual Method, there is the four-year time limit option available to it for the claiming any GST credit against returned goods for purchases. The four year limit ends from the due date of the BAS it is required to file for its earliest tax period in which Wonder Sports would have claimed the credit and it is not required to hold a valid tax invoice for making the claim, (Macmillan (ed.), 2000).
In case Wonder Sports maintains its account for GST purposes using the non-cash (accruals) method, then the earliest tax period in which it could have claimed the GST credit for the purchase would have been the first tax period in which either an invoice for the purchase was issued or it provided part or full payment for the purchase, (CCH Editors, 2011).
Wonder Sports can also avail this four-year limit even if it maintains its accounts for GST purposes using the cash method. The earliest tax period in which Wonder Sports could put a claim for a GST credit for a purchase would be that tax period in which Wonder Sports provided payment for the purchase, (Macmillan (ed.), 2000).
Reference List
Ault, H. J. and Arnold, B. J. (2004) Comparative Income Taxation: A Structural Analysis. (2nd ed). Amsterdam: Kluwer Law International.
CCH Editors. (2011) Australian Master Tax Guide 2011. (48th ed). Sydney: CCH Australia Limited.
Hayes, G. (2009) A Practical Guide to Business Valuations for SMEs. Sydney: CCH Australia Limited.
Horwath, C. (2009) International Master Tax Guide. (6th ed). Sydney: CCH Australia Limited.
Macmillan, F. (ed). (2000) International Corporate Law. (Volume-1). Portland: Hart Publishing.
Marsden, S. J. (2010) Australian Master Bookkeepers Guide. (3rd ed). Sydney: CCH Australia Limited.
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