Fringe benefits tax: A quick guide for SME employers

Many businesses look to reward their staff by providing certain benefits and perks over and above their normal salary and wages. These are known as fringe benefits.

Whilst that can be a great way to incentivise staff, there are potential tax consequences that need to be kept in mind for both employers and employees 

What is fringe benefits tax (FBT)?

If you provide benefits to your employees, you could find that your business is liable to pay fringe benefits tax (FBT). This is a tax paid by the employer – not the employee – on the taxable value of certain benefits paid to employees. When we refer to employees, this also covers benefits provided to the family of employees or to associates (such as friends) of employees.

Examples of fringe benefits

Amongst the most commonly provided benefits that can give rise to FBT are:

• Providing a car for your employee that can also be used for private purposes
• Providing free or subsidised car parking for your employees
• Providing your staff with “entertainment”, such as meals, drinks, sporting or leisure pursuits (e.g. a round of golf or tickets to a sporting event), theatre tickets and holidays
• Either reimbursing an employee for private expenses or paying for such expenses directly to a third party (for instance, paying your employee’s domestic utility bills)
• Giving your employee a loan and charging no interest or a reduced rate of interest
• Providing accommodation to an employee rent-free or at a reduced rent

How is fringe benefits tax calculated?

FBT is payable based on the grossed-up ‘taxable value’ of the benefit provided. This grossing up process is intended to reflect the gross salary employees would have to earn to buy the benefits you’re providing after paying tax. Fringe benefits are split into Type 1 and Type 2 benefits. The actual calculation can be complex and is best done by your accountant, but the process can be summarised as follows:

1. Identify the total taxable value of Fringe Benefits you provide for your employees for which you can claim a GST credit, such as cars, car parking, entertainment and gifts (Type 1 benefits).
2. Work out the grossed-up taxable value of these Type 1 benefits by multiplying the total taxable value by the type 1 gross-up rate (currently 2.0802).
3. Identify the total taxable value of benefits provided for your employees for which you cannot claim a GST credit, for example, supplies you made that were GST-free, such as loans, health insurance and gift vouchers(Type 2 benefits).
4. Work out the grossed-up taxable value of these Type 2 benefits by multiplying the total taxable by the type 2 gross-up rate (currently 1.8868).
5. Add the grossed-up amounts from steps 2 and 4. This is your total Fringe Benefits Taxable amount.
6. Multiply the total Fringe Benefits Taxable amount (from step 5) by the FBT rate (currently 47%). This is the total FBT amount you are liable to pay.

Note: if you are not sure if a benefit you provide is a Type 1 or Type 2 benefit, check with your accountant.

Hypothetical example:

Let’s assume you provide a car to a member of staff which they can use privately. The taxable value of the benefit is $10,000 during the 2024/25 FBT year. FBT payable by the employer is worked out as follows: 

Can an employer reduce its FBT liability?

It’s possible to reduce your FBT liability, or even eliminate it altogether, by asking your employee to make a cash contribution towards the cost of the benefit provided to them. Each dollar that they pay towards the provision of the benefit reduces the taxable value of the benefit by the same amount.

There are also various FBT concessions and exemptions available that can reduce or eliminate FBT. For example, no FBT is payable on certain work related benefits that are used mainly for work purposes such as mobile phones, a laptop or tablet. Some minor benefits that are provided to employees are also exempt, such as costs associated with the annual Christmas party. There are also generous FBT concessions for some charities and not-for-profit (NFP) organisations that often use the provision of benefits as a way to make work in the traditionally low-paying NFP sector more attractive. 

How does an employer report and pay FBT?

The FBT year runs from 1 April to 31 March so now is the time to determine if your business needs to register for and pay FBT. 

If you provide benefits to your employees and think you might have an FBT liability, the first step you need to take is to register for FBT with the ATO. Your tax agent or accountant can help you with that process.

Any impact on employees?

As noted above, FBT is a tax levied on employers. However, if the total taxable value of the fringe benefits provided to you and/or your family in a FBT year exceeds $2,000, you’ll have a reportable fringe benefits amount (RFBA) which will be disclosed in your end of financial year income statement (formerly called a payment summary), and needs to be reported on your tax return. Some fringe benefits, like meals, entertainment and employer-provided car parking, aren’t included in the reportable amount.

While an RFBA isn’t subject to income tax, depending on your personal circumstances, it will be used to determine whether you’re entitled to, or liable for, a number of other government benefits and obligations. These include Family Tax Benefits, Medicare levy surcharge, private health insurance rebate, child support payments, superannuation co-contributions, Higher Education Loan Program (HELP), tax offsets and Financial Supplement repayments.

Record keeping

You must keep records that:

• show how you calculated the taxable value of benefits
• support any fringe benefits tax (FBT) exemptions or concessions you used.

Some exemptions and concessions require employers to obtain certain records from employees. These include:

• declarations
• invoices and receipts
• travel diaries
• copies of logbooks and odometer records.

From the FBT year ending 31 March 2025, you have a choice, for certain benefits, to use existing business records in place of some employee declarations. 

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