ACCG924 Taxation Law

Lecture Notes Week 12 2018

 Lecture 12

Readings from Australian Taxation Law 2018 for this week’s lecture
Fringe benefits tax
Fringe benefits tax – key design features -- W26-000 to 26-040
Is there a fringe benefit? -- W26-100 to 26-170
Taxable value of the fringe benefit – W26-200 to 26-250
-- FBT liability – W26-300
Calculation of the employer’s
FBT and GST – W26-340
Reportable fringe benefits -- W26-350
Salary sacrifice arrangements -- W26-360
Car fringe benefits -- W26-400 to 26-405
Loan fringe benefits -- W26-450 to 26-455
Expense payment fringe benefits -- W26-500 to 26-505
Property fringe benefits -- W26-550 to 26-555
Residual fringe benefits -- W 26-650-to 26-660
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 Fringe benefits tax (FBT)
-- key design features
The Fringe Benefits Tax Assessment Act 1986 (FBTAA) establishes a separate
statutory regime for the taxation of fringe benefits

Fringe benefits are broadly defined to include various benefits that may be given
by an employer to an employee instead of salary

FBT is imposed on the employer, not on the employee

The FBT year runs from 1 April to 31 March – the current 2017/18 FBT year runs
from 1 April 2017 to 31 March 2018

FBT rate is 47% for the 2017/18 year – made up of the top 45% tax rate plus 2%
Medicare levy.

FBT is calculated on the value of employer-provided benefits, so FBT may be

payable regardless of whether the employer is in a profit or loss situation
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 Fringe benefits tax (FBT)
-- key design features
Taxable value of a fringe benefit is calculated on a GST-inclusive basis
– eg, if an employer pays $44,000 (including $4,000 GST) for a car that is
provided to an employee, $44,000 (not $40,000) is used to calculate the
employer’s FBT liability

To calculate FBT liability, the taxable value of fringe benefits is grossed-up.

Are two gross-up factors – the appropriate factor depends on whether the
employer is entitled to an input tax credit in relation to the acquisition of the
fringe benefit – so is tied to the employer’s GST status.

Employers are allowed a deduction for the cost of the benefit they provide and
also for the FBT paid.

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 Fringe benefits tax (FBT)
-- key design features
Although the FBT rate is 47%, some fringe benefits attract concessional
treatment (eg, are taxed at less than the full 47% rate) while other benefits
are tax exempt for the employer.

An employee is not liable to income tax when a fringe benefit is provided --

fringe benefit is exempt income or non-assessable non-exempt income for
the employee receiving the benefit: s 23L ITAA36.

But fringe benefits may be reported on an employee’s payment summary, with

income tax consequences.

FBT instalments are reported and paid when an employer lodges a Business
Activity Statement, also an annual FBT return by 21 May.

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 Types of fringe benefits

The FBTAA provides for 12 categories of fringe benefits.

• Car fringe benefit Div 2 -- W26-400 to 26-405

• Debt waiver fringe benefit Div 3 -- W26-430 to 26-440
• Loan fringe benefit Div 4 -- W26-450 to 26-455
• Expense payment fringe benefit Div 5 -- W26-500 to 26-505
• Housing fringe benefit Div 6 -- W26-510 to 26-515
• Living away from home allowance fringe benefit Div 7 -- W26-520 to 26-525
• Board fringe benefit Div 9 -- W26-540 to 26-541
• Meal entertainment fringe benefit Div 9A -- W26-542 to 26-544
• Tax-exempt body entertainment fringe benefit Div 10 -- W26-546 to 26-547
• Car parking fringe benefit Div 10A -- W26-548 to 26-549
• Property fringe benefit Div 11 -- W26-550 to 26-555
• Residual fringe benefit Div 12 -- W26-650 to W26-660

In this unit, we only study Divisions 2, 4, 5,11 and 12.

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 Steps in taxing fringe benefits

Step One: Is there a “fringe benefit”?

Conditions for there to be a fringe benefit, as defined in s136(1) FBTAA

– there must be a benefit
– provided during the year of tax or in respect of the year of tax – an
employer may be deemed to have provided a benefit if they ignore the
fact that an employee is receiving the benefit: s 148(3) FBTAA
– by an employer, associate or third party arranger
– to an employee or an associate, eg a spouse of an employee
– in respect of the employment of the employee, so not for other reasons
such as personal circumstances

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 Steps in taxing fringe benefits

Even if the employer provides a fringe benefit, there may not be FBT
consequences because the benefit is exempt.
Division 13 FBTAA makes many benefits exempt, for example:
– some minor benefits – taxable value less than $300 and provided
infrequently: s 58P
– eligible work related items, eg laptop computer or protective clothing,
that are primarily for work use: s 58X
– eligible memberships or subscriptions: s 58Y
– newspapers and periodicals for work purposes: s 58H
– single taxi trip beginning or ending at the workplace: s 58Z
Other exemptions are in particular divisions, eg a residual fringe benefit is
exempt if it is: child care provided on an employer’s work premises, use of
an employer’s property on business premises on work days, or free or
discounted transport for travel to or from work where the employer provides
such transport to the public: s 47 FBTAA. 8
 Steps in taxing fringe benefits

Step 2: Determine the taxable value of a fringe benefit

The taxable value of each fringe benefit provided by an employer in a year

must be determined before the employer’s FBT liability can be calculated.
Each division is divided into: (1) Subdivision A, which explains when a
particular fringe benefit exists, and (2) Subdivision B, which gives the
valuation rules.
Eg, in Division 2, Subdivision A (s 7 and 8) explains when a car fringe
benefit is provided and what car fringe benefits are exempt; Subdivision B (s
9 to 13) explains how the taxable value of the benefit is calculated.
Are objective rules (not dependant on the recipient) for determining the
taxable value of each type of fringe benefit, for example:
-- for car fringe benefits, there is a choice of two formulae, and
-- for expense payment fringe benefits, the value is generally the amount paid
by the employer
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 Steps in taxing fringe benefits

In certain cases the taxable value may be reduced by any of the following.

1. Under the otherwise deductible rule, the taxable value of a fringe benefit
may be reduced to the extent that the employee would have been entitled to
a tax deduction if they had paid for the benefit themselves -- because they
intended to use the benefit for income-producing purposes.
For example:
-- if a loan fringe benefit provided to an employee has a taxable value of
$10,000 and the employee uses the money 40% for income-producing
purposes, the taxable value may be reduced by 40% to $6,000.
-- if an employer pays an employee’s telephone bill and the employee has
used the telephone 55% for work-related purposes, the taxable value may
be reduced by 55%.
The employee must give written evidence to the employer of how the benefit is
used.
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 Steps in taxing fringe benefits

2. The taxable value is reduced by the amount of a recipient s contribution

For example, an employer provides a property fringe benefit with a taxable
value of $2,500. If the employee contributes $1,000 to the employer (a
recipient s contribution), the taxable value is reduced to $1,500

3. Various reductions may apply (Division 14), eg if the benefit is provided to

an employee in a remote area, or it relates to relocating an employee or to
employment interviews or is for work-related medical expenses.

4. The first $1,000 of the taxable value of certain in-house fringe benefits
provided to an employee in a year is exempt – unless the benefit is
provided under a salary packaging arrangement: s 62 FBTAA.
For example, an employer who sells computers to the public provides a
computer to an employee (an in-house property fringe benefit) with a
taxable value of $1,800. The first $1,000 may be exempt.
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 Steps in taxing fringe benefits

Step 3: Calculation of FBT payable

FBT payable (s 66 FBTAA) = fringe benefits taxable amount x FBT rate (47%).

Fringe benefits taxable amount (s 5B FBTAA) =

Type1 grossed-up Type 2 grossed-up aggregate non-
aggregate fringe benefits + aggregate fringe benefits + exempt amount

• Type 1 gross-up factor for 2017/18 = 2.0802

• Type 2 gross-up factor for 2017/18 = 1.8868

Type 1 gross-up factor is used where the fringe benefit is one for which a GST input tax
credit would be available to the employer – employer must be GST registered and
have made a creditable acquisition
Type 2 gross-up factor is used where a GST input tax credit is not available to the
employer, eg because the employer is not GST registered, or has not acquired the
benefit that is provided or has not paid GST on the benefit when it was acquired.
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 Steps in taxing fringe benefits

Example
An employer who is registered for GST reimburses an employee for the $10,000 cost of a
domestic holiday.
Is an expense payment fringe benefit so: (i) the employer is liable to tax, and (ii) the
employee is not liable to income tax (s 23L ITAA36)
$10,000 taxable value of the fringe benefit is grossed up by either: (1) 2.0802 if the
cost of the benefit to the employer includes GST, or (2) 1.8868 in other cases
GST is payable on domestic holidays, so 2.0802 applies
Steps in calculating the employer s tax liability
1. Taxable value of the expense payment fringe benefit is $10,000
2. Gross up the taxable value: $10,000 x 2.0802 = $20,802
3. Employer s FBT liability is: $20,802 x 47% = $9,777
4. Employer gets tax deduction for:
-- the $9,777 FBT paid, and
-- $10,000 paid to provide the benefit (or, if the employer claims an input tax credit for
the GST on the benefit, the employer gets a deduction for the amount remaining after
the input tax credit is subtracted: s 27-5 ITAA97)
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 Reportable fringe benefits

Employees do not pay income tax on fringe benefits: s 23L ITAA36.

But their “reportable fringe benefits amount” may have tax consequences for
the employee -- is taken into account to determine, for example:
(a) entitlement to family tax benefit or deductions for personal
superannuation contributions, and
(b) liability to the Medicare levy surcharge and HELP repayments.
An employee has a “reportable fringe benefits amount” if their “individual fringe
benefits amount” for the FBT year is more than $2,000: s 135P FBTAA –
means their employer has provided fringe benefits to them in the FBT year
with a taxable value more than $2,000.
The employee’s reportable fringe benefits amount is calculated using the
1.8868 Type 2 gross-up. For example, $3,000 of fringe benefit grossed up
by 1.8868 becomes a reportable fringe benefits amount of $5,660.

An employee’s reportable fringe benefits amount is recorded on the employee’s

payment summary given by the employer to the employee after 30 June.

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 Salary sacrifice arrangements

A salary sacrifice arrangement involves an employee agreeing to give up part

of their salary in return for the employer providing a fringe benefit of a
similar value. The advantage is that the employee is taxed only on the
lower salary.

The employer is liable for 47% FBT, but some fringe benefits are exempt from
FBT and others receive concessional treatment
-- the provision of fringe benefits that are taxed at a lower rate than the
employee’s marginal tax rate is what makes salary sacrifice
arrangements popular
-- are most effective to reduce tax for high income employees whose
marginal tax rate is 47%.

In Taxation Ruling TR 2001/10, the Commissioner states that salary sacrifice

arrangements are only “effective “ to reduce tax on an employee’s salary
if they are entered into before the employee earns the salary.

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 Salary sacrifice arrangements

Example
Employee is entitled to a salary of $80,000 and enters into an arrangement with
her employer to salary sacrifice $30,000. Under the arrangement:
(1) $10,000 additional superannuation contributions for the employee
(2) private use of a car (car fringe benefit) – assume taxable value $20,000
Consequences:
1. Employer is not liable for FBT on the superannuation contributions because
they are exempt if made to a complying superannuation fund
2. Employer is liable to FBT on the car fringe benefit:
-- $20,000 is grossed up by 2.0802 = $41,604
-- employer pays FBT of $41,604 x 47% = $19,554
2. Employee has sacrificed $30,000 and is only taxed on $50,000 salary.
3. Employer receives a tax deduction for the $50,000 salary, for the $19,554
FBT paid and for the $30,000 cost of providing the two fringe benefits
(minus the amount of input tax credit claimed).
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 Specific fringe benefits

Car fringe benefit

Definition of a car fringe benefit (s 7 FBTAA) – basically, a “car” available for
the employee’s private use: W26-400.

Taxable value of a car fringe benefit (s 9 to 13 FBTAA): W26-405

Two valuation methods: (i) statutory formula method and (ii) operating cost
basis. Operating costs include fuel, repairs, registration, insurance and
deemed interest and deemed depreciation.
Statutory formula method applies unless the employer elects otherwise, and
always applies if it would give the lower FBT liability
Can’t use the operating cost basis unless keep log book and odometer records

No “otherwise deductible” rule for car fringe benefit because the business or
private use of the car is built into the two methods: (i) with the statutory
formula, number of “private use days”, and (ii) with the operating cost basis,
“business percentage”
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 Specific fringe benefits

Loan fringe benefit

Definition of a loan fringe benefit (s 16 FBTAA): W26-450

Is only a loan fringe benefit if the employer lends at an interest rate lower than
the statutory interest rate.
Statutory interest rate for 2017/18 FBT year is 5.25%
Calculating the taxable value of a loan fringe benefit: W26-455
Otherwise deductible rule or recipient’s contribution may be relevant

Example: an employer lends $100,000 to an employee on 1 April 2017 at an

interest rate of 4%. The loan continues through all of the 2017/18 FBT year.
The taxable value of the loan fringe benefit is:
$100,000 x (5.25% - 4%) = $1,250
If the employee gives written evidence to the employer that the loan money
is used 30% for income-producing purposes, the taxable value would be
reduced by 30%, so the taxable value would be: $1,250 x 70% = $875.
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 Specific fringe benefits

Expense payment fringe benefit

Definition of an expense payment fringe benefit (s 20 FBTAA) – an amount

paid or reimbursed by an employer
Does not include the payment of an allowance, which is assessable income for
the employee: W26-500
Example:
An employer reimburses the cost of an employee’s travel to Brisbane to
watch the tennis – an expense payment fringe benefit
An employer pays an employee $150 a week to help pay for the employee’s
clothing for work -- an allowance

Generally, taxable value of an expense payment fringe benefit is the amount

paid or reimbursed: W26-505
Otherwise deductible rule or recipient’s contribution may be relevant

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 Specific fringe benefits

Property fringe benefit

Definition of a property fringe benefit (s 40 FBTAA), basically where an
employer provides property to an employee: W26-550
If property and services are provided together (eg, property plus repairs to
the property), is a residual, not property, benefit (s 153 FBTAA)
Taxable value depends on whether is an in-house or external benefit
Otherwise deductible rule or recipient’s contribution may be relevant

Residual fringe benefit

Definition of a residual fringe benefit (s 47 FBTAA), basically where an
employer provides a benefit not covered by any other category: W26-650
Eg, child care, free or discounted services or a non-car vehicle
Taxable value depends on whether is an in-house or external benefit
Otherwise deductible rule or recipient’s contribution may be relevant
 Specific fringe benefits
Taxable value of a property fringe benefit and a residual fringe benefit depends on
whether it is an in-house or external fringe benefit: W26-555, W26-660.
Generally, a benefit is an in-house fringe benefit if it is provided by an employer who
provides identical or similar items to the public, eg a retailer sells clothing to the public
and provides clothing to an employee.
Otherwise, it is an external fringe benefit.
In-house property or residual fringe benefit -- taxable value is most commonly:
-- if the employer acquired the benefit to provide to the employee, the arm’s length
acquisition price, or
-- if the employer manufactured the benefit, 75% of the lowest price at which identical
property is sold to the public.
External property or residual fringe benefit -- taxable value is most commonly the amount
the employer would be expected to pay to acquire the benefit.
Need to consider otherwise deductible rule, recipient’s contribution and s 62.
Calculating the taxable value of a property fringe benefit – in-house and external property
fringe benefits: W26-555
Calculating the taxable value of a residual fringe benefit – in-house and external residual
fringe benefits: W26-660
Otherwise deductible rule or recipient’s contribution may be relevant
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 FBT sample question

Luxury Hotels Australia Pty Ltd (Luxury Australia) is a subsidiary of a listed US

corporation, Luxury Hotels Ltd (LHL). LHL is the parent company to a chain
of hotels owned by subsidiaries around the world. Luxury Australia owns
and runs a number of hotels in Sydney, Brisbane, Adelaide, Perth and
Melbourne, Australia.

Jason is the senior marketing manager of LHL who is transferred to Sydney

effective 1 July 2017 to work for Luxury Australia.

It has been agreed that the remuneration package to be provided by Luxury

Australia to Jason, in addition to salary and wages and superannuation, will
include the following items.
-- furniture to the value of $10,000 may be taken from the Sydney CBD hotel
by Jason to fit out his apartment in August 2017 -- the furniture will become
Jason’s property which he can keep or sell at the end of his 2-year contract

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 -- a motor vehicle will be provided to Jason for use during his employment with
Luxury Australia. An Audi A5 was acquired by Luxury Hotels for $120,000 on 1 July
2017. It is not anticipated that Jason will need to use the car very often for work
purposes during the first year as he will be living and working in the city. For one
week in February 2018 Jason is unable to use the car as it is in the workshop for
repairs. The estimated kilometres to be travelled by Jason in the FBT year ended
31 March 2018 would be less than 5,000 kilometres. It is not expected that Jason
would keep a log book in respect of his motor vehicle travel.
-- newspapers and periodicals to be used by Jason in keeping abreast of business
and industry issues will be provided by Luxury Australia.
-- Luxury Australia will pay for Jason and a friend to attend three international
sporting events in Sydney during the two year transfer. Jason will buy the tickets
and then be reimbursed by Luxury Australia for his expenditure.
Required
(a) Discuss the FBT treatment of each of the items of remuneration provided by Luxury
Australia to Jason. In your answer state the category of fringe benefit where
applicable and the method to be used to calculate the taxable value of the fringe
benefit.
(b) Calculate the fringe benefits taxable amount and reportable fringe benefit amount,
if any, in respect of the car for the year ended 31 March 2018.
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Furniture to the value of $10,000 is an external property fringe benefit.
-- The taxable value for FBT purposes is the cost to Luxury Australia of acquiring the
furniture.
Car fringe benefit.
-- statutory formula method is required as no log book is kept by Jason.
-- taxable value of the car fringe benefit is calculated using the statutory method
-- statutory fraction is 0.20
-- cost $120,000
-- number of days available for private use from 1 July 2017 to 31 March 2018 less
seven days in for repairs: 274days – 7 days = 267 days
-- Taxable value 0.20 x $120,000 x 267days/365days = $17,556
-- fringe benefits taxable value is: $17,556 x 2.0802 = $36,520
-- reportable fringe benefit amount is: $17,556 x 1.8868 = $33,125
Newspapers and periodicals exempt fringe benefit (s 58H) as primarily for work
purposes.
Reimbursement of cost of tickets to the sporting event would constitute an expense
payment fringe benefit. Taxable value is the amount reimbursed.

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