Calculating Fringe Benefit Tax Liability For Montgomery’s Pty Ltd

Sales Manager

Issue:

Determining the Fringe Benefit Tax liability of Montgomery’s Pty Ltd is the main topic of discussion here.

Rules:

Often employers provide non-monetary benefits to their employee in addition to the salary and other monetary benefits to motivate them to work efficiently for the organizations. Such non-monetary benefits are not taxable in the hands of the employee rather the employers are required to pay Fringe Benefit Tax on such non-monetary benefits. Taking into consideration the provisions of Fringe Benefits Tax Assessment Act 1986 (FBTAA) the practical scenarios shall be elaborated in this document. Division 2 of Part III of FBTAA specifies that an employer is liable to pay Fringe Benefit Tax (FBT) for making available the car owned or leased by the employer for the personal use of the employee.  

Application:

• Cash salary of $125000 is a taxable income of Brad Cruise and he will be liable to pay income tax on such salary as per Income Tax Assessment Act 1997 (ITAA). Thus, the amount of salary is not subjected to Fringe benefit tax (FBT).
• Superannuation contribution both by the employer as well as employee is not subjected to FBT.
• The Audi Sedan provide to Brad Cruise is subjected to FBT. The FBTAA allows an employer to choose statutory formula or operating method to determine the taxable value of fringe benefits. The method that will yield lowest value shall be chosen by an employer to reduce the liability of FBT. Section 53 (1) of FBTAAprovides that benefits provided in the form of car to the employees if available for personal use of the employee shall be liable to FBT.

• Entertainment allowance is taxable in the hands of the employee. No FBT liability arises to an employer for such entertainment allowance.

• Reimbursement of $350 for personal telephone call and cable is liable for FBT. Taxable value of fringe benefits for this purpose is $350 (Type 1 benefit).

• Since the loan was provided to Brad’s wife at lower rate of interest than bench mark interest rate hence entire loan is subjected to fringe benefit tax even if invested in income producible asset. The difference between the actual interest rate charged by the company and the benchmark interest rate shall be used to calculate the taxable value of fringe benefit for the loan provided to the wife of Brad as per division 4 of FBTAA.        

• There is no FBT liability for the purchase of the desktop at $2,500 assuming that it is not lower than the cost of manufacturing the desktop to Montgomery’s Pty Ltd.

• Sales managers’ organization membership fees is business expenditure as it is for the benefit of the company and not liable to FBT. Hence, no FBT liability will arise for payment of $650 in respect of membership fees in the sales managers’ organization.

• Again the cost of new paper is a business expenditure as it was provided for checking the prices of competitors hence, cost of newspapers $530 is business expenditures and not subjected to FBT liability.

• Gift of $280 via visa card prepaid is liable to be taxed for fringe benefits purpose (Type 2 benefit).

• Since, the chemist shop was almost 90% way to the home hence the travelling cost of $96 is not subjected to FBT liability.

• Since the nearest car parking facility is situated 2 kilometres away hence, no FBT liability will arise for the car parking facility provided to Brad. Chapter 16 of FBTAA provides that only when the car parking facility is within 1 kilometres radius from the factory or office premises that the liability to FBT arise. Division 10A of the act provides that only in case certain conditions are fulfilled then the free car parking facilities to employees will not be considered for FBT purpose.   

Conclusion:

It is clear from the above that the business expenditures are not subjected to FBT and only the non-monetary benefits which are not subjected to ITAA and not business related expenditures are liable to FBT as per the FBTAA.

Issue:

The issue is to determine the taxable value of fringe benefits for the BMW X provided by Montgomery’s Pty Ltd to its new marketing director.

Rules:

The taxable value and resultant tax liability for fringe benefits are contained in Fringe Benefits Tax Assessment Act 1986.  Section 53 (1) of Fringe Benefits Tax Assessment Act 1986 (FBTAA) allows the employers to use either statutory formula or operating cost method to calculate the taxable value of fringe benefits. An employer generally choses the method that reduces his FBT liability. Division 2 of Part III of FBTAA act mentions the provisions to be followed to calculate the taxable value of fringe benefits of an employer for providing car benefit to the employees.     

Application:

Since no information in relation to operating cost was provided hence, statutory formula method has been used to calculate taxable value of fringe benefits for the BMW X5 provided to the new marketing director of Montgomery’s Pty Ltd.    

The taxable value of fringe benefits for BMW X5 provided to the new marketing director of the company under statutory formula method is $3,533.15.

Conclusion:

Montgomery’s Pty Ltd will have to pay FBT for the taxable value of fringe benefits in the form of BMW X5 provided to the new marketing director of the company which is $3,533.15.

As per Chapter 11 of Fringe Benefits Tax Assessment Act 1986 an employer is not liable to pay FBT for providing foods to the employees who are living away from home. Since in this case it is clear that the food costs were not for the employee who are staying away from home hence, liability to FBT will arise to the employer, i.e. Montgomery’s Pty Ltd.

New Marketing Director

Hence, the food cost of $5,600 for fresh fruits to staffs will be considered as fringe benefits and accordingly, shall be liable to FBT as per division 9A of the act outlining meal entertainment. 

The cost of party to the extent related to the clients and their spouses will not be subjected to FBT. However, the cost of employee and their spouses will be considered for the purpose of FBT. Hence, the entertainment cost of 10 staffs and their spouses combining to $3,000 (20 x 150) is taxable value of fringe benefits (Type 1 benefit) for the purpose to calculate the FBT liability of the company is respect of the Christmas party held by the company.

The reward of HECS-HELP of $1,825 to each student for achieving highest results in their tertiary studies is a business strategy of the company to motivate its staffs and employees to perform better thus, it is to be considered as business expenditure. Hence, no FBT liability will arise to Montgomery’s Pty Ltd for the above benefits.

The free car parking facility provided by the company to its employees will be subjected to FBT. Chapter 16 of FBTAA provides that in case the car parking facility is within the business premises or within 1 kilometre radius then the car parking facility provided by the employer to its employees shall be subjected to FBT. In this case the taxable value of fringe benefits shall be calculated by taking into consideration the cheapest car parking fee of $24 per day which has also increased to $26.60 per day by the end of 31^st March, 2018. The taxable value of fringe benefits for this assuming 260 working day in the FBT year (24 x 260) = $6,240 (Type 1 benefit).

References: 

Braverman, Daniel, Stephen Marsden, and Kerrie Sadiq. “Assessing Taxpayer Response to Legislative Changes: A Case Study of In-House Fringe Benefits Rules.” J. Austl. Tax’n17 (2015).

Cortis, Natasha, and Christine Eastman. “Salary sacrificing in A ustralia: are patterns of uptake and benefit different in the not?for?profit sector?.” Asia Pacific Journal of Human Resources 53, no. 3 (2015).

Hodgson, Helen, and Prafula Pearce. “TravelSmart or travel tax breaks: is the fringe benefits tax a barrier to active commuting in Australia? 1.” eJournal of Tax Research 13, no. 3 (2015).

Krever, Richard, and Peter Mellor. “Australia, GAARs–A Key Element of Tax Systems in the Post-BEPS World.” (2016).

Soled, Jay A., and Kathleen DeLaney Thomas. “Revisiting the Taxation of Fringe Benefits.” Wash. L. Rev. 91 (2016).

Tang, Reynah, and Julian Wan. “Fringe benefits tax and fly-in fly-out arrangements: John Holland Group Pty Ltd v Commissioner of Taxation.” Australian Resources and Energy Law Journal 34, no. 1 (2015).

White, Judy, and Adele Townsend. “Deductibility of employee travel expenses: The ATO’s guidance.” Taxation in Australia52, no. 11 (2018).

Woellner, Robin, Stephen Barkoczy, Shirley Murphy, Chris Evans, and Dale Pinto. “Australian Taxation Law 2016.” OUP Catalogue (2016).

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