If you answered yes to either of those questions, you really need to consider the possible fringe benefits tax (FBT) implications for your business, because you could be facing an FBT bill of 47% for your business!
How does FBT work? In order to close a loophole that allowed businesses to provide non-cash benefits to their employees – thereby avoiding income tax obligations for the employee – the Federal Government introduced FBT in 1997. While non-cash benefits to employees still don’t attract income tax obligations for the employee, they do attract a flat tax equivalent to the highest tax bracket for the employer. In the 2015/16 tax year (the FBT year runs from April 1 to March 31), that rate is 49%. So if you spend $10,000 on a lavish function for your employees, it will actually cost you $14,900 once the FBT obligation is included!
When does an FBT liability arise? The Australian Tax Handbook definition of FBT is:
“…a tax imposed on employers if they provide certain non-cash benefits to employees or associates of employees.”
However, employees can include past, present and future employees, while a fringe benefit also occurs if it is provided by an associate of the employer or by a third party under an arrangement with the employer. As you can see, the definition covers a broad range of people and you will need to consider carefully before committing to non-cash rewards in your business.
When is a fringe benefit not a fringe benefit?
There are a large number of variables to consider when assessing whether an event will attract FBT. Is the event for employees only, or are partners, clients, suppliers and potential clients also attending? If the event is held on a work day during work hours at the place of employment, FBT won’t apply. If partners and associates attend, as long as it isn’t a lavish affair (costs stay under $300 per head) FBT shouldn’t apply. And if clients attend then FBT shouldn’t apply at all. If the party is being held away from work, then you need to be more aware of maintaining costs under $300 a head and having a mix of employees, clients and suppliers (a 50/50 mix will help you to avoid FBT).
And if you want to provide taxis home, that is a whole new consideration!
As you can see, FBT can be quite complex – and costly! So if you plan of providing a large, lavish party to reward your employees for their hard work, you would be well advised to discuss your plans with a professional first.
By Jennifer Lowe