Financial Management Practice Manual 731 – Fringe Benefits Tax (FBT)

Scope

This Finance Procedure sets out the requirements for the responsibility for recognition of, recording of and payment of Fringe Benefits Tax (FBT).

Definitions

Fringe Benefits

Benefits

Employees

Procedures

Introduction

James Cook University is by virtue of Section 50-5 of the Income Tax Assessment Act 1997, exempted from the liability to pay income tax.   However, the Fringe Benefits Tax Assessment Act 1986 imposes the liability to pay FBT.

FBT is assessed annually with the year of tax commencing on 1 April and ending on 31 March.

FBT is administered on the basis of self-assessment.   Where a FBT liability exists, the employer must lodge an annual return together with the tax payable by 21 May.

FBT is payable by the University on the taxable value of all fringe benefits provided.    The taxable value may be reduced where the employee contributes to the cost of the benefit.   A reduction in the taxable value may also be available where the employee would have obtained a tax deduction had the expense been incurred privately.   This is known as the “otherwise deductible” rule.

For example, the University may reimburse an employee for the cost of work related telephone calls.   A tax deduction would have been available to the employee had the expense not been reimbursed.   In order to support this reduction the employee must substantiate the expense and provide a declaration to the effect that the item is work related.

FBT effectively doubles the cost of any fringe benefits that are provided to staff.    Since the introduction of the Goods and Services Tax (GST) the rate at which FBT is calculated has changed and is dependent on whether the supply has an input tax.

Where there is no GST input tax on the supply the FBT rate is 0.9417 and the benefit is multiplied by this rate to calculate the fringe benefits payable (e.g. $100 @ 0.9417 to give $94.17 FBT).

To factor in the effects of GST, (the ability of an organization to provide benefits, GST inclusive, and later receive an input tax credit refund), the ATO have introduced a new FBT rate (1.0327).  This rate is used where input tax credits are available.   For example, with entertainment, restaurants will generally charge GST on the entire bill.   This would be a situation where credits are available and the GST inclusive rate would be used.

The table below depicts the additional cost to the University when providing fringe benefits.   The total cost of the benefit should always be considered before providing the benefit.

Limitations

This procedure covers the following types of fringe benefits:

1. Entertainment

2. Other types of Expense Benefits

3. Car Benefit

4. Housing Benefit

5. Excluded Benefits

This list does not include all types of fringe benefits but includes the most common benefits for which the University has paid FBT.

1. Entertainment

What is entertainment expenditure?

The definition of entertainment for the purposes of FBT is basically expenditure in respect of entertainment by way of food, drink or recreation.  It also includes accommodation and travel that arise when providing such entertainment.

This does not mean that entertainment occurs every time food and drink is provided, but only when the food and drink provides entertainment. The major factors to be considered are:

• Why is the food or drink being provided?  For example food or drink provided for refreshments or sustenance would not have the character of entertainment.  However food or drink provided at a social function would have the character of entertainment.

• What food or drink is being provided?  Light meals, morning and afternoon teas are generally not considered to be entertainment.  As meals become more elaborate they tend to take on more characteristics of entertainment.

When determining whether entertainment forms part of the provision of food and drink an objective analysis of all the circumstances is required.  Each transaction must be looked at individually in terms of its nature and substance.

Additionally, for FBT purposes, the ATO treats entertainment provided by a non-taxable entity (i.e. JCU) differently to taxable entities.

What types of entertainment expenditure are taxable?

The examples below are types of expenditure that are subject to FBT:

• food or drink consumed off the employer’s premises at a social function (e.g. staff function at a restaurant)

• food or drink consumed on the employer’s premises at a social function (e.g. staff thank you get together)

• where alcohol accompanies a meal

What types of entertainment expenditure are non-taxable?

The examples below are types of expenditure that are not subject to FBT:

• morning/afternoon teas, light meals/lunches on a working day when no alcohol is consumed

• food or drink provided to an employee on work related travel

• food or drink provided to clients

How is the tax on entertainment benefits calculated?

The tax on entertainment is calculated by applying the appropriate FBT rate (i.e. either Type 1 or Type 2) to the taxable value of the fringe benefit provided.  The taxable value of the benefit is generally calculated as the expenditure incurred, which is attributable to the entertainment.

Once calculated the amount of the fringe benefit is posted to the following codes:

What are the obligations of the Organisational Unit?

There is a statutory responsibility to ensure that proper accounts and records are kept of the transactions of the University.

The Organisational Units are responsible for:

• gathering the information required to determine whether expenditure is subject to FBT;

• ensuring that adequate supporting documentation accompanies all transactions processed as entertainment; and

• ensuring payments relating to food and drink expenditure are to be accompanied by an “Entertainment – Fringe Benefits Tax (FBT)” expense claim form.  The form has been designed to satisfy the substantiation requirements of the ATO and simultaneously, assist in the calculation of the tax payable.

• Any penalties, as a result of infringement of the FBT legislation.

2. Other Types of Expense Benefits

[NB: This list is not exhaustive]

a) Travel

What is a travel benefit?

A travel benefit arises if an employee is compensated for travel that is not exclusively related to their employment activities with the University.

The University does not pay for private travel and accordingly, does not pay FBT on private travel.  Any private components of travel must be reimbursed by the individual.

The value of the fringe benefit is calculated as the amount paid /or reimbursed by the University for travel.  Less any business use or any employee contributions which reduce the taxable value.

General guidelines

• If the expense would be otherwise deductible under Taxation Law, FBT does not apply.

• If the main purpose of the travel is official University business then the existence of an incidental private non-business purpose will not attract FBT.  Examples of an incidental private element would be: the presence of private non-business days during work related business while on travel.  Weekend days may be an example of a private non-business day whilst travelling; private non-business days as a consequence of travel arrangements or scheduling.

• If travel is undertaken for a private non-business purpose, as well as for an official University business purpose, then FBT may apply to the private element.  FBT is calculated with reference to the expenditure that relates to the private element.  These costs will either be separate and discrete from other expenses or will form part of a single outlay (e.g. airfare).  If the private element is to be apportioned, from a single outlay, the division will be based on the facts of each instance.

• A travel diary must be completed in respect of all international travel and domestic travel where the staff member is away from home for more than 5 nights and where the travel is not exclusively for official University business.

b) HECS

The payment of HECS for staff (an expense fringe benefit) will always incur FBT.  Depending on the circumstances, expense benefits can usually be reduced by the otherwise deductible rule.  As HECS has been specifically made not deductible under the Income Tax Assessment Act the otherwise deductible rule is not applicable.

c) Recreation

A benefit arises where entertainment is provided to a staff by way of access to sporting or theatrical events on a regular basis.  As the University does not provide these types of expense benefits, a liability to pay FBT should never arise for recreational expenditure for staff.

d) Telephone

A telephone expense benefit will arise where the University pays for any private use of an employee’s telephone account. Employee telephone accounts are only paid (directly or via reimbursement) for staff who are required to be on-call for University purposes.

3. Car Benefit

A car fringe benefit will arise on any day where a University car is used by an employee for private purposes or is available for private use.  Private use means use other than official University business.  A car is available for private use when:

• the car is garaged by the employee; or

• the car is in the employee’s custody or control and is being used for official University business

The University uses the statutory formula method to calculate the taxable value of car fringe benefits.  This method values the benefit by applying a statutory fraction to the base value of the car.  The fraction varies depending on the annual kilometres the car travels.

The taxable value is reduced for days when the car is not available for private use or when the employee makes a contribution for the benefit provided.

Where a University car is subject to private usage, an odometer reading should be taken when the car is purchased, every 31 March and when the car is disposed of.

4. Housing Benefit

A housing fringe benefit will arise where the University provides an employee with a unit of accommodation as a usual place of residence.  A unit of accommodation may cover any type of accommodation and includes a house, unit, motel, guesthouse, bunkhouse, ship, caravan or mobile home.

The taxable value of a housing benefit depends on whether the accommodation is outside Australia, or in a non-remote part of Australia.  In all cases the market rental value of accommodation is required.  Where the market value is not available a valuation by an independent professional valuer is appropriate.  The ATO provides indexation factors by which the previous year’s market value is to be multiplied.  If the indexation method is used the market value must be redetermined at least each tenth year.

The taxable value is reduced by any rent contributed by the employee.

5. Excluded Benefits

[NB: This list is not exhaustive]

• notebook computer, laptop computer or similar portable computer (this exemption is limited to one per year per employee);

• protective clothing - e.g. overalls, laboratory coats;

• briefcase, calculator, electronic diary;

• computer software if same as used in employment;

• an employee’s subscription to a trade or professional journal;

• taxi travel for any given employee if less than 48 times per year or, on a monthly basis, less than four per month;

• costs of removal and storage or household effects of employees who are required by the University to change job locations; and

• travel and accommodation related to employee interviews or selection tests.

• Remote area accommodation (from 1 April 2000).

Records

The University must keep records to identify and explain all transactions and acts to calculate the University’s FBT liability.

Records are to be kept for in accordance with FMPM 930 – Document Retention.

For reductions in taxable value for FBT due to the otherwise deductible rule, the University must obtain relevant declarations, receipts and other similar documents from the employee.

Specimen Forms

Travel Plan/ Diary

Related documents, legislation or JCU Statutes

Fringe Benefits Tax Assessment Act 1986

For enquiries in relation to this FMPM Procedure please contact Taxation@jcu.edu.au

Administration

NOTE: Printed copies of this procedure are uncontrolled, and currency can only be assured at the time of printing.

Approval Details

Revision History