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 1.5% Medicare 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.

For example: 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 $205.61c in extra salary to pay the fee. The employee would pay 46.5% of this amount in tax ($205.61 multiplied by 46.5% equals $95.61c), leaving the required balance in hand of $110.

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 $105.61c ($10 more than the tax paid by the employee). However, the employer can claim a $10 input tax credit arising from the GST paid.

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 $205.61c. If the benefit was provided as a fringe benefit, the employer would pay $100 plus $105.61c 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 of 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, which requires several steps, will be explained.

The base value of the benefit is the cost of the car to the employer, including GST. Delivery charges 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).

The statutory fraction depends on the number of kilometers travelled by the car during the FBT year in which the employer owns the car. If the car is not owned for the full FBT year, the number of kilometers travelled are annualised. To annualise the number of kilometers travelled, multiply the kilometers by the number of days in the FBT year and divide by the number of days the car was owned. (Note that the FBT year runs from 1 April to 31 March.)

The statutory fraction is then calculated from the annualised number of kilometers travelled as follows:

Recipient's payments are any amount the employee pays:

• the employer for the car (including any GST);
• for fuel and oil expenses (including any GST) (which the employee needs to either declare or provide the employer documentary evidence of);
• for registration, insurance, repairs and maintenance (including any GST) (which the employee needs to provide the employer documentary evidence of).

A recipient's payment 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 Fraction.

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, i.e. the Recipient's Payment.

Note regarding determination of Taxable Value in NRC surveys.
NRC surveys make allowance for varying levels of use of the car by an employee during the tax 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%.

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 46.5%, and as mentioned in the introduction, is equal to the top marginal tax rate of 45%, plus the 1.5% Medicare levy. 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 2.0647 and is calculated from the rather messy looking formula:

If the FBT Rate is 0.465 and the GST Rate is 0.10, then substituting in the above formula gives:

(0.465 + 0.10)
--------------------------------------
(1 - 0.465) X (1 + 0.10) X 0.465

which equals 2.0647

In the second case, where there is no input tax credit claim, the gross up factor is 1.8692 and is calculated from the simpler formula:

1
------------------
(1 - FBT Rate)

If the FBT Rate is 0.465, then substituting in the above formula gives:

1
------------
(1 - 0.465)

which equals 1.8692

Tax is imposed on the 'FBT taxable amount' at the current FBT rate of 46.5%. This, again, gives the final formula:

Base Value = $35,000.
Annualised number of kilometers travelled = 20,000.
Vehicle is available to employee for private use for full year.
No recipient payments.

Based on 20,000 km travelled, the statutory fraction is 0.20

Hence, the taxable value is $35,000 X 0.2, which equals $7,000

Grossed up taxable value, i.e. FBT taxable amount, is $7,000 x 2.0647, which equals $14,452.90c

FBT payable is $14,452.90 X 0.465, which equals $6,720.60c

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 recipient payments 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 $11,975.26 and the FBT payable $5,568.50c