National Remuneration Centre
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Melbourne Vic 3000
Ph: (03) 9650 0868
Effective March 2016
Fringe Benefits Tax on Employer Provided Vehicles
As a general principle, the FBT on a benefit provided by an employer to an employee is equal to the amount of income tax the employee would have paid had the employee received sufficient extra cash salary to acquire the benefit themself. The general principle assumes that the employee is on the top marginal tax rate of 45%, plus the 2% Medicare levy. However, during the period 1/4/15 to 31/3/17 there is an additional 2% budget repair levy.
The objective of fringe benefits tax is to eliminate arbitrage between cash and non-cash benefits. In other words, the employee would, in purely financial terms, be indifferent to receiving either the extra cash salary or the benefit.
|FBT Year Ending:|
|March '16 & '17|
|Gross-up Rate: Entitled to GST credits: Type 1||2.0802||2.1463||2.0802|
|Gross-up Rate: Not entitled to GST credits: Type 2||1.8868||1.9608||1.8868|
Only use Type 2 gross-up rate for employee payment summaries.
For example (effective March 2016): Assume the employer pays the employee's $100 golf club membership fee, plus $10 GST. The value of the fringe benefit is $110. The employee would need to be paid $215.69c ($110 x 1.9608) in extra salary to pay the membership fee. The employee would pay 49% of this amount in tax ($215.69c multiplied by 49% equals $105.69c), leaving the required balance in hand of $110 ($215.69c - $105.69c).
If the employer pays for the benefit then the employer also pays FBT. In the above example, the amount of FBT to be paid by the employer is $115.69c ($10 more than the tax paid by the employee). However, the employer can claim a $10 input tax credit arising from the GST paid.
The calculation here is: Gross amount of benefit including GST is $236.09c [$110 x 2.1463 (the gross-up rate)]. The FBT paid by the employer is $115.69c [$236.09c X 49% (the FBT rate)].
We see therefore that there is no advantage in doing the deal one way or the other. If the deal were done though the employee receiving extra salary the employer would pay the employee $215.69c. If the benefit was provided as a fringe benefit, the employer would pay $100 (the basic membership fee) plus $115.69c in FBT. (The $10 GST is neutral to the employer because once paid it also becomes a tax credit.)
There are a number of special rules and concessions in the FBT legislation. These cause the perfect arbitrage to be lost. One such special rule is the way car fringe benefits are treated. The 'statutory formula method' for calculating the FBT on a car fringe benefit assumes a certain percentage of business use of the car, which may not be the actual percentage of business use. The difference in assumed and real usage provides the opportunity for an employer provided car to be more advantageous from a taxation perspective than having the employee fund the car out of after tax earnings. The personal taxation position of the employee needs to be considered however when adopting this approach to determine if indeed a tax advantage exists. It may not exist or only be of limited benefit for employees on a sufficiently low marginal tax rate.
The general formula for calculating the FBT on an employer provided benefit is:
Taxable Value X Gross Up X FBT Rate
The terms in this formula will now be defined and the calculation as applied to employer provided cars using the statuory formula method, which requires several steps, will be explained.
1. Determine the 'Base Value' of the benefit.
The base value of the benefit is the cost of the car to the employer, including GST. Delivery charges and accessory\ies not required for business use are included, but not registration or stamp duty. Also excluded is the cost of any business-related items fitted to the car, for example, a CB radio.
If the car was imported and the employer obtained a customs concession, the concession is added to the cost of the car.
If at the start of the FBT year the employer had owned the car for more than four years then the base value is reduced by one-third.
If the employer is in the car industry, the base value is determined in a different manner (a manner outside the scope of this paper).
2. Determine the 'Statutory Percentage', which is applied only in the case of car benefits.
For any new commitments entered into from 1 April 2015, a flat statutory percentage of 20% applies regardless of the distance travelled.
For any commitments entered into prior to 7.30pm AEST on 10 May 2011, and where there has been no change to that commitment, the statutory percentage is based on the annualised number of kilometres travelled as follows:
Less than 15,000 km
15,000 to 24,999 km
25,000 to 40,000 km
More than 40,000 km
For any commitments entered into from 10 May 2011 to 31 March 2015, the transitional rules applied. From 1 April 2015, a flat statutory percentage applies regardless of the distance travelled.
3. Consider Employee Contributions towards the cost of the benefit. Employee contributions are any amount the employee pays: An employee contribution does not include an amount paid by the employee that is reimbursed by the employer.
4. Determine the Taxable Value of the benefit. The taxable value of a car fringe benefit is determined by the statutory formula method, unless the employer elects to apply the alternative operational cost method.
NRC salary surveys use the statutory formula method. This method is now discussed. When applying the statutory formula method the taxable value of the car fringe benefit is: Where: A is the Base Value of the car. B is the Statutory Percentage. C is the number of days in the FBT year that the car was made available to the employee for private use. D is the number of days in the FBT year (1 April to 31 March). E is the amount, if any, of the employee's contribution. Note regarding determination of Taxable Value in NRC surveys.
A X B X C
NRC surveys make allowance for varying levels of use of the car by an employee during the FBT year. Three options are recognised: (1) Full private use, for which the fraction C/D is set at 100%; (2) Part private use, where C/D is 75%, and, (3) Commuter only use, where C/D is 25%.
3. Consider Employee Contributions towards the cost of the benefit.
Employee contributions are any amount the employee pays:
An employee contribution does not include an amount paid by the employee that is reimbursed by the employer.
4. Determine the Taxable Value of the benefit.
The taxable value of a car fringe benefit is determined by the statutory formula method, unless the employer elects to apply the alternative operational cost method.
NRC salary surveys use the statutory formula method. This method is now discussed.
When applying the statutory formula method the taxable value of the car fringe benefit is:
A is the Base Value of the car.
B is the Statutory Percentage.
C is the number of days in the FBT year that the car was made available to the employee for private use.
D is the number of days in the FBT year (1 April to 31 March).
E is the amount, if any, of the employee's contribution.
Note regarding determination of Taxable Value in NRC surveys.
Where a car is parked at the employee's home each night, the car is considered to be available for private use100% of the time regardless of the business/private kilometres travelled.
5. Gross up the Taxable Value of the benefit to obtain the FBT Taxable Amount.
The FBT taxable amount is the 'grossed up' taxable value of the fringe benefit. The FBT taxable amount is the amount on which FBT is levied at the FBT Rate. The current FBT rate is 49%, and as mentioned in the introduction, is equal to the top marginal tax rate of 45%, plus the 2% Medicare levy, plus the 2% budget repair levy applicable from 1/4/15 to 31/3/17. The current GST rate is 10%.
There are two formulas for calculating the amount by which to 'gross up' the taxable value to arrive at the taxable amount. One formula applies where the employer can claim input tax credits (in the above golf example the employer claimed an input tax credit of $10). The second, is where the employer cannot claim an input tax credit for the acquisition of the benefit. For example, Financial Institutions cannot claim input tax credits for many of their acquisitions.
Where the employer can claim input tax credits the gross up factor is currently 2.1463 and is calculated from the rather messy looking formula:
|(FBT Rate + GST Rate)
(1 - FBT Rate) X (1 + GST Rate) X FBT Rate
If the FBT Rate is 0.49 and the GST Rate is 0.10, then substituting in the above formula gives:
(0.49 + 0.10)
(1 - 0.49) X (1 + 0.10) X 0.49
which equals 2.1463
In the second case, where there is no input tax credit claim, the gross up factor is currently 1.9608 and is calculated from the simpler formula:
(1 - FBT Rate)
If the FBT Rate is 0.49, then substituting in the above formula gives:
(1 - 0.49)
which equals 1.9608
6. Apply the FBT Rate to the FBT Taxable Amount.
Tax is imposed on the 'FBT taxable amount' at the current FBT rate of 49%. This, again, gives the final formula:
FBT on employer provided car = Taxable Value X Gross Up X FBT Rate
Base Value = $35,000.
Vehicle is available to employee for private use for full year.
No employee contributions.
The statutory percentage is 20% (fixed percentage from 1 April 2015)
Hence, the taxable value is $35,000 X 20%, which equals $7,000
Grossed up taxable value, i.e. FBT taxable amount, is $7,000 x 2.1463, which equals $15,024.10c
FBT payable is $15,024.10c X 0.49, which equals $7,361.81c
If the car were available for private use for only half the year, then the taxable value would be half the amount shown in the above calculation, as would the resultant FBT payable.
If employee contributions amounted to $1,200 in the year, then the taxable value would be reduced by this amount to $5,800. The grossed up taxable value would be $12,448.54c and the FBT payable $6,099.78c
The National Remuneration Centre provides this commentry for information only and is exempted from any liability arising from its use however construed.
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