Since its introduction in 1986, Australia’s
Fringe Benefit Tax (FBT) has grown to become a considerable compliance
burden on Australian businesses.
The tax applies to a wide range of benefits provided by employers
to their employees – benefits in kind which include the use
of a car, loans, a debt waiver, an expense payment, housing, board,
airline transport, the “living-away-from-home” allowance,
property, use of equipment, car parking, entertainment and healthcare
insurance plans offered by a third party.
Andrew Gardiner, FBT expert and senior tax manager with the National
Tax and Accountants’ Association, warns: “Many employers
do not realize how day-to-day employee expenses may be subject to
FBT.”
Consider the following example:
An employee takes their employer’s
one-tonne utility vehicle home each day and is allowed private
use of the vehicle in the evening
and on the weekends. The employee estimates that they travel 100
kilometres a week and does not make any employee contributions towards
the vehicle. The vehicle thus travels 5200 Km a year and the total
operating costs
are deemed at $20,080.
What does it cost to the employer? The
taxable value of this is the number of private kilometres traveled
times
the
rate
per
kilometre. The employee contribution (excluding fuel) is then
subtracted from this total. In this example, the taxable value
of this fringe benefit
costs
the employer
$2080. (Source:
Australian Taxation Office)
The rationale behind FBT is that it helps restore equity and fairness
to those employees who do not receive such benefits. Yet when it
comes to providing benefits to employees, it is employers who bear
all the risk under the laws of the FBT.
The tax has gone through many changes in the past 20 years, often
being the subject of considerable debate concerning its “complexities,
inequities and economic inefficiencies,” writes Neil Faulkner,
President of The Institute of Chartered Accountants in Australia.
This organization recently released a proposal in March, 2006,
with effective recommendations and strategies to re-design the
FBT.
This is nothing new. Proposals for FBT reform have occurred frequently
since the tax’s introduction in 1986. The Ralph Review of
Business Taxation suggested major structural reforms in 1999, and
over the
years many professional associations such as The Institute of Chartered
Accountants in Australia, CPA Australia, The Law Council of Australia,
The National Institution of Accountants, Taxpayers Australia and
The Taxation Institute of Australia have put in their own recommendations.
Many industry associations, including the Australian Chamber of
Commerce and Industry (ACCI), the Business Council of Australia
and AI Group,
have also recommended changes to the tax, as have FBT academics
and economic consultants.
THE METHOD: Fringe Benefit Taxes in Australia are collected from
employers, levied on a comprehensive base and taxed at a flat rate
equal to the top personal income marginal tax rate (48.5%).
In 1994, the government decided to “gross up” fringe
benefits (resulting in a marked increase in the revenue incurred
from this tax!), making Australia one of the few countries to adopt
this practice (New Zealand and Ireland are the other two countries
that do it). The UK, Canada and the US, in contrast, do not gross
up benefits.
As Neil Warren, Associate Professor in the Faculty of Law at UNSW,
explains:
When an employee receives a fringe benefit
it is akin to post-tax income. Therefore, for the fringe benefit
to be valued equivalent
to an employee’s pre-tax (gross) salary, it needs to be grossed-up
from the equivalent of post-tax dollars to pre-tax dollars, using
the rate 1/(1-t), where t is the tax rate. If, as in the Australian
case, t equals 48.5 percent, then the gross-up rate is 1.9417.
Therefore, a $1000 fringe benefit (post-tax income) is equivalent
to $1,941.70
of pre-tax income.
Under the mantle of the FBT, employers
are taxed on the latter.
Employers are also at risk of being hit with an unexpected FBT
liability on benefits given to their employees by a third party
(ie. Healthcare
premiums). This occurs when the employer is involved with the arrangement,
yet even if the employer is not involved but should have known
about the benefit, they may still be liable for FBT on any benefits
provided
to employees by a third party.
Julia Ng, Vice President of Finance & Corporate Services for
The Personnel Department, a global staffing and recruitment agency
operating in Australia, gives the following example to how much
more an employer is required to pay for monthly healthcare costs
because
of the FBT:
“Say that you’re paying a $200 monthly premium to an Insurance
Carrier,” she says. “You multiply $200 by 1.9417 and
then by 48.5%. This equals $188.32, which becomes the monthly amount
that an employer must pay in fringe benefit tax for each employee.
This means that you’re paying almost double each month for
each individual employee’s health plan, which becomes
a lot of money!”
There is little doubt that the taxation of fringe benefits in
Australia is neither simple, equitable nor economically efficient.
And although
major changes to the structure of the Australian Tax System have
occurred within the past 5 years, nothing has been done to alter
the FBT.
Those who keep persisting for change are calling for three broad
areas of reform:
1) To improve its everyday administration.
2) To change the base of the tax.
3) To change the operation of the tax.
Because the FBT is complex to administer and difficult to comply
with, often what occurs is that employers evade their FBT compliance
by not providing fringe benefits to their employees. Yet,
as Warren points out, the reality is that to carry on normal
business
practices, benefits in kind can and do accrue. As well, fringe
benefits are also an important way for many businesses to attract
employees.
Another means by which employers recover the tax from employees
is by reducing gross salary/wages by an equivalent amount. This
means
that employees must 'salary sacrifice' to receive the benefits.
Salary sacrificing (or packaging) is an arrangement made between
employer
and employee. In this agreement, the employee agrees to forgo
part of their salary in return for benefits of a similar value.
Most countries tax fringe benefits on employees. Ireland, for
example (which is similar to Australia in that fringe benefits
are grossed-up),
has added the value of fringe benefits directly to employee wages
and salaries, which is then subject to Pay As You Earn (PAYE) – a
payroll deduction system in which tax is regularly deducted from
a person’s income.
Although Fringe Benefit Tax is a fact of life for business organizations,
it certainly doesn’t need to be the burden that it has become
to Australian employers. Looking to other countries for inspiration,
professional
organizations, industry associations and both academic and economic
consultants frequently offer their recommendations to change the
FBT, yet – so far - the Australian government displays an
inertia to act.
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