Fringe Benefits Tax - Essay Example

Advanced Tax Law (Fringe Benefits Tax) Techno Supplies Pty Limited Associate car use A car fringe benefit occurs when a car is provided by the employer for the private use of the employee. A car is meant to be 'held' by the employee when the car is provided on lease to the employee. In order to attract the FBT the car may be actually used by the employee for private purposes or is made available for the private use of the employees.(Australian Tax Office) Thus in the case of the employees of Techno Supplies even when the employees are away on the field work, the use of the cars by the family members would amount to private use of the car by an associate and therefore would attract FBT liability. FBT and Lease of the Car The car leased by the employee under a lease scheme also attracts fringe benefits tax (FBT). The FBT payable is calculated on the basis of the gross value of the benefits. The grossed-up rule determines the value of the fringe benefit in such a way that it is equivalent to the after-tax salary amount. This value is taxed on the top marginal tax rate. The employer has to pay FBT subject however to the basis prescribed by the Australian Tax Office. There are two ways in which the applicable FBT can be calculated in respect of the leased vehicles. Statutory Percentage Method A statutory formula is prescribed for the payment of the FBT based on the value of the car and the distance travelled during the year irrespective of whether the vehicle was used for business or personal purposes. The lease payments or the running costs do not matter for the calculation of the FBT. If the car is made available for the personal use of the employees only for a certain period of the year then the FBT payable is calculated on a proportionate basis with the employer paying the FBT for the period for which the vehicle was actually used by the employee for his/her personal use instead of the whole year. Under the statutory percentage method FBT is calculated at the capital cost of the car multiplied by the statutory percentage. The percentages are based on the total distance travelled by the vehicle. Less than 15,000km travelled a year - 26% FBT liability = 0.26 is the statutory % 15,000 - 24,999km - 20% FBT liability = 0.2 is the statutory % 25,000 - 40,000 - 11% FBT liability = 0.11 is the statutory % Over 40,000km travelled in a year - 7% FBT liability = 0.07 is the statutory % (Novated Lease) Post Tax Contribution Method - Employee Contribution Under this method the employee is allowed to reduce the FBT liability by making their own contributions towards the running expenses of the car. These contributions are to be deducted from their after tax salary. The amount of running expenses spent by the employee goes to reduce the same amount of FBT liability subject however to the maximum limit of the capital cost multiplied by the statutory fraction as specified by the Tax Office plus 10% GST. This implies that the personal taxation liability of the employee on the post-tax contribution is likely to be substantially less than the applicable FBT rate which is the maximum marginal rate of taxation. Robert Smith Cost of the Vehicle $ 44,000 Distance Travelled 20,000 Kms Lease Rent $ 12000 Running Cost and Maintenance $ 3300 Statutory percentage 20 percent of the FBV Amount of FBT payable $ 44000 x 0.2 = $ 8800 This amount of FBT of $ 8800 can be reduced by the running cost paid by Robert Smith and the net FBT liability would be $ 8800 - $ 3300 = $ 5,500 William Brown In this case, FBT is calculated by reference to the extent that the car is available for the employee's private use or is actually used privately by the employee. Hence the FBT liability would be limited to 80 percent of the total FBT liability since the vehicle was used 20 percent for business purposes. Cost of the Vehicle $ 66,000 Distance Travelled 30,000 Kms Running Cost and Maintenance $ 3300 Statutory percentage 11 percent of the FBV Amount of FBT payable $ 66000 x 011 = $ 7260 80 percent of the FBT $ 7260 x 0.8 = $ 5,808 This amount of FBT of $ 5808 can be reduced by the running cost paid by Robert Smith to the extent of the FBT payable and the net FBT liability would be $ 5,808- $ 5,808 = $ Nil Therefore no FBT would be payable on the car fringe benefit of William Brown. Making contributions towards the running costs may be more tax effective for both Robert Smith and William Brown as the contribution reduces the FBT payable and also reduces the amount of salary they have to sacrifice (Annette Sampson, 2005). Loan Fringe Benefit According to Australian Taxation Office report on employees' fringe benefits, a loan fringe benefit arises when an employer gives a loan to an employee interest free, or at an interest rate that is less than the statutory interest rates. The statutory interest rate is usually announced in April each year. Thus a loan fringe benefit is said to accrue when the employer provides a loan interest free or at a concessional rate of inertest which is less than the statutory percentage that is being announced by the government every year. Section 16 of the Fringe Benefits Tax Assessment Act (FBTAA) deasl with the loan fringe benefit and this section covers the loan provided by the employer or an associate of the employer or by a third party under an express agreement with the employer to the employee or his/her associate or to some one else at the request of the employee or his/her associate. A loan for the purpose of FBT as defined by Section 136 (1) of FBTAA for being considered as a fringe benefit includes: An advance of money A provision of credit or The payment of an amount for or on account of, on behalf of or at the request of a persons where there is an obligation on the part of the other persons to repay the amount and A transaction which effects a loan of money The loan fringe benefits deem to arise in the case of unpaid debts of an employee as well as deferred interest loans provided by the employer. The basic condition to determine whether a fringe benefit arises or not is to check whether the loan is granted at a rate less than the 'statutory interest rate' and whether the loan in full or part of the amount there of is being used by the employee for non-income producing purposes. The taxable value of a loan fringe benefit is arrived at by reference to the entire part of the period of the FBT year during which the loan was existing. It is not calculated just for those parts of the periods of the FBT year for which the interest rate applicable to the loan was less than the statutory percentage. (Department of Human Services) The taxable value of the fringe benefit is calculated on the basis of the difference between the rate of interest charged on the loan and the benchmark interest rate provided statutorily. The statutory interest rate is fixed by the Australian taxation office each FBT year. Section 136 (1) of the FBTAA defines the benchmark interest rate. According to this section 'benchmark interest rate' is the standard variable rate for owner-occupied housing loans of the major banks as determined by the Reserve Bank of Australia. The provisions of the 'Fringe Benefits Tax Assessment Act 1986 (FBTAA) apply for the calculation of fringe benefits provided to an employee for the purpose of including the value of the loan fringe benefit in the payment summary of the employee. However it should be noted that the amount of the fringe benefit value included in the payment salary of the employee may not result in an income tax liability or fringe benefit tax liability on the employee it will be taken into account for the calculation of the surcharges or rebates usually based on the taxable income level including for the purpose of Higher Education Contribution Scheme (HECS) repayments. The grossed up taxable value is to be included in the payment summary of the employee only when the taxable value exceeds $ 1000. This threshold limit has been increased to $ 2000 from the accounting year 01st April 2008. For grossing up the value of the fringe benefits the gross up rate of 1.8692 under Type 2 is to be applied for the purpose of reportable fringe benefits. The benefits that are provided during the period from 1st April to 31st March are to be included in the payment summaries for the income tax assessments of the subsequent year ending 30th June. (Taxation Manual) Ms. Bronwyn Rainbow In order to calculate the fringe benefits the following amounts are relevant: 1. Interest Free Loan of $ 50000 for the purpose of making repayment the HECS loan already taken by her 2. The statutory interest rate for the FBT year 2007 of 7.30% and 3. The bonus payment of $ 1500 received on 30th June 2007 The amount of fringe benefit is for the purpose of FBT taxation is calculated as below: Value of Interest Free Loan $ 50,000 Interest difference 7.30% (Statutory percentage for FBT year 2007- 0%) FBT amount 7.30 % on $ 50,000 = 3,650 Grossed up FBV $ 3650 x 1.8692 = 6822.58 Less: Bonus paid on 30th June $ 1,500 Net FBV $ 5322.58 FBT amount 46.5 % on $ 5322.58 = $ 2475 FBT payable by the company is to be calculated at 46.5 percent of the amount of the FBV. The bonus amount although received by the employee on the 30th June 2007 it is assumed that tht bonus payment relates to the services of the employee for the year 1st April to 31st March 2007. Group Insurance The payment of premium for the group life assurance policy for field staff with death and permanent disability benefits in recognition of the discomfort and inconvenience often undertaken by the field staff in travel to remote places would amount to a fringe benefit and would become taxable to FBT. Since it cannot be categorized in any other fringe benefits expressly provided for by the legislation it is to be considered as a 'residual fringe benefit'. The term fringe benefit has a wider meaning which includes any right, privilege, service or facility provided by the employer in respect of employment. Any benefit that is not covered in the specified categories would be called a 'residual fringe benefit'. A residual fringe benefit could include the services being provided by the employer like travel, use of property or the payment of insurance premium for health insurance cover for the employees taken under a group policy. Time of Receipt of the Benefit The residual fringe benefit will be construed to be received at the time the benefit is received or over the period during which the benefit is provided. For example in the case of a license to use a particular property for a period of six months then the fringe benefit is said to be received during the six months period. Similarly when there are periodic payments covering the service provided or benefits extended like the provision of electricity on a concessional rate and when the billing is done on quarterly or bimonthly basis then the benefit can be said to accrue during the quarter. Taxable Value There are two ways of finding the value of the residual fringe benefits; one is in-house residual fringe benefit and the other is external residual fringe benefit. Each one of them is valued according to specific valuation rules. The taxable value of a residual fringe benefit is represented by the GST inclusive value of the residual benefit calculated according to the relevant valuation rules. This value is to be deducted by the employee contribution if any. In-house Residual Fringe Benefits A residual fringe benefit becomes an in-house residual fringe benefit if the employer or his associate provides the benefit which can be identified with the rights, services or facilities that is being provided to the public in the ordinary course of the business of the employer. Example of in-house residual fringe benefit is the professional consultation that is provided free of cost or at a concessional rate by an attorney's firm to its employees. External Residual Fringe Benefits Any residual fringe benefit that cannot be classified as in-house residual fringe benefit is known as external residual fringe benefit. An external residual fringe benefit arises in the following situations: When the residual fringe benefit provided by the employer is a kind of benefit that is being provided to the public in the ordinary course of business of the employer. Example for this case is the group insurance policy taken by a hairdresser for his employees When the employer arranges the provision of a service representing a residual fringe benefit by a third party. Example here is an arrangement made by a solicitor with an accountant for the provision of the latter's service at a discounted rate to the former's employees. The taxable value of the external residual fringe benefit is the cost at which the service, right, privilege etc is bought by the employer for providing to his employees. This value is to be reduced by the contribution by the employees if any. If this rule does not apply to the provision of any residual fringe benefit then the taxable value can be determined on the basis of the amount that would have been expended by the employee to get the service etc under an arm's length transaction as reduced by the cost borne by the employee if any. Where the residual fringe benefit provided extends past the end of the FBT year then the total value of the fringe benefit can be apportioned proportionately between the two FBT years. Group Life Insurance Policy Premium Paid by Techno Supplies Based on the above discussions of the residual fringe benefits, the group life insurance premium paid by Techno Supplies Pty Limited can be categorized as an 'external residual fringe benefit' provided by the company to its employees as the provision of such insurance satisfied the basic criteria for classifying it as an 'external residual fringe benefit'. Here the insurance coverage is a kind of benefit that is not being provided by Techno Supplies to the public in the ordinary course of its business. The value of the external fringe benefit is to be taken as the total amount of premium paid by the company for the insurance cover for the employees. FBT would become payable by Techno Supplies on this total amount of premium as external residual fringe benefit. In the normal course the premiums paid by the company are to be brought under the purview of FBT. However the proceeds received by the company by way of claims are not to be treated as taxable income in the hands of the company so long as the proceeds are not transferred to the account of the employees. In the case of Mr. William Green since the company has made a claim and transferred the proceeds to the benefit of the employee the amount of $ 250, 000 being the insurance claim will be treated as an external residual fringe benefit paid to the employee and would therefore become taxable in the hands of the company. However the company would be entitled to deduct the administration expenses of $ 15000 retained by it from the taxable value of the FBT. The company would become taxable to FBT for a value of $ 250,000 - % 15,000 = $ 235,000. References Annette Sampson (2005) 'Drive Your Car: The Strategy to Salary Package a Car' http://www.smh.com.au/news/Planning/Drive-your-car/2005/03/22/1111254021518.htmlfrom=moreStories Australian Tax Office 'Car Fringe Benefits' http://www.ato.gov.au/businesses/content.aspdoc=/content/52015.htm Department of Human Services 'Fringe Benefits Tax Information Kit March 1999: Loan and Debt Waiver Fringe Benefits' Acute Health Division Victoria Australia http://www.dhs.vic.gov.au/ahs/archive/fbt/infokit/4.htm Novated Lease 'Novated Lease FBT' http://www.novatedleasechief.com.au/novated-lease/fbt.html Taxation Manual 'Fringe Benefits Tax and Reportable Fringe Benefits' http://finance.curtin.edu.au/taxmanual/4.13%20-%20FBT%20-%20Reportable%20Benefits.pdf R Read More