Reportable fringe benefits: What employers and employees should know?
Introduction:
Are you an employer wondering why you must report fringe benefits on your employee's income tax returns? Or is a current employee trying to determine the implications of having certain benefits? Either way, we have the answers.
Whether it's a company car, free meals, or travel and accommodation benefits, there are certain types of fringe benefits that employers are required to report on the employee's tax returns.
This article will outline the different types of fringe benefits that must be reported on an individual's income tax returns. We will also explain why employers should report them and what consequences employees may face if they fail.
Key takeaways
Reportable fringe benefits are a type of non-wage compensation that must be reported on an employee’s tax return.
Employers should accurately calculate the RFBA amount to ensure compliance with Australia’s FBT regulations.
Failure to declare the RFBA amount timely to ATO could result in a fine.
Employees can reduce the amount of tax they need to pay on reportable fringe benefits by reimbursing cash benefits, claiming an FBT exemption, using salary sacrifice or making employee contributions.
What are fringe benefits?
Fringe benefits are non-cash payments or rewards that employers offer to their employees in addition to their salary. These benefits can take many forms; examples include free movie tickets, reimbursing school fees, work vehicles for personal use, and more.
These benefits are considered taxable income, and the Australian Taxation Office provides comprehensive guidelines on how to report them on tax returns.
It's crucial that both employers and employees stay informed about this legislation to ensure they fulfill their respective responsibilities related to the provision and taxation of these benefits.
What are reportable fringe benefits?
If the total taxable value of the certain fringe benefits you receive from your employer exceeds the FBT threshold of $2,000 in a FBT tax year ( April 1 to 31 March), then your employer is obligated to report the taxable value of those benefits to ATO. These benefits are commonly referred to as reportable fringe benefits.
What does the reportable fringe benefits amount (RFBA)mean?
Reportable fringe benefits amount (RFBA) is the 'grossed-up value of the reportable fringe benefits and is shown on an employee's payment summary or on an income statement. Although RFBA is not taxed, it is included in income tests and can be used to gain certain government benefits and fulfill obligations.
What are excluded fringe benefits?
Excluded fringe benefits are the benefits that are not included into the calculation of RFBA, and are also not reported on an employee's income statement or summary. Here are few examples of excluded fringe benefits:
- Car parking expense
- Remote area housing assistance, home ownership schemes, and repurchase schemes
- Meal entertainment benefits, related travel and accommodation, and entertainment facility leasing benefits, provided these are not covered under a salary sacrifice arrangement
- Benefits that employees receive to ensure their security and personal safety because of their job
- Emergency or other essential health care benefits received by an employee as an Australian citizen or permanent resident while working outside Australia or for which they can't claim a Medicare benefit
- Cost of occasional travel to major Australian population center, provided you live in a remote area
How to calculate the RFBA?
Calculating RFBA ensures accuracy in any individual or business's tax filing. To do this calculation, you will need to gather accurate records of the value of the reportable fringe benefits received by an employee. After obtaining these records, you can calculate the RFBA amount using the following steps:
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Step 1:
Determine the total taxable value of the reportable fringe benefits that the employee receives.
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Step 2:
Multiply the total taxable value of the reportable fringe benefits by the lower (type 2) gross-up rate. For the year ending March 31, 2024, this rate is 1.8868.
Note, the higher (type 1) gross-up rate isn't used in this calculation, regardless of whether it was used for figuring out how much FBT to pay on the fringe benefit.
Now, Let's consider an example of RFBA calculation:
During the time from April 1, 2023, to March 31, 2024, a company named XYZ Corp planned to give some benefits to an employee named Jordan. These benefits and their taxable values are:
- Company parking space: $600
- Company car: $4,000
- Home office equipment (an expense payment fringe benefit): $700
Adding these values, the total taxable value of the fringe benefits is $5,300. However, the parking space is not a reportable benefit. So, the total taxable value of the reportable fringe benefits provided to Jordan is $4,700.
XYZ Corp calculates the RFBA for Jordan by multiplying the total taxable value of the reportable fringe benefits by the lower gross-up rate:
$4,700 × 1.8868 = $8,877.96
Thus, the RFBA for Jordan is $8,877.96. XYZ Corp will report this amount through Single Touch Payroll for the year ending June 30, 2024.
The RFBA for each employee must be reported either through Single Touch Payroll or on their payment summary. The report is for the income year that ends right after the FBT year ends. For instance, any benefits provided during the FBT year ending March 31, 2024, should be reported for the income year ending June 30, 2024.
Even though the RFBA is not part of the employee's taxable income, it is important to report it, as it is used in calculating certain government benefits and obligations.
How can employees reduce their reportable fringe benefits tax?
Employees can reduce their reportable fringe benefits tax by:
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Reimbursing cash benefits:
You can ask your employer to replace your benefits with a cash salary. This will reduce or eliminate the tax you must pay on the fringe benefit.
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Claiming an FBT exemption:
Certain employees may be eligible for an FBT exemption, this helps them reduce or eliminate the tax they have to pay on their reportable fringe benefits.
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Using salary sacrifice:
Salary sacrificing is a way to reduce an employee’s tax on their income by agreeing with their employer to receive fringe benefits as part of their salary rather than as a separate benefit. This can be used with cash reimbursement or FBT exemption to reduce further the amount of tax that needs to be paid.
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Employee contributions:
Employees can also contribute from their after-tax income towards the cost of benefits. For example, you can make an employee contribution towards a car fringe benefit by paying some of the operating expenses.
What are the implications for employers?
For employers, providing fringe benefits may have certain tax implications. They may be required to pay FBT on some of the benefits they offer and will need to accurately calculate and report the amount of these benefits for their employees to correctly declare them on their taxes.
Additionally, employers should ensure they comply with all current ATO regulations when providing fringe benefits to employees and have accurate records of any benefits provided. This will help them avoid any potential penalties due to non-compliance.
What if the employer fails to declare reportable fringe benefits?
If an employer fails to declare fringe benefit amount to the ATO, they may be penalized and fined. The penalty or fine will depend on the type of benefit not reported and could range from 20% - 90% of the benefit's value.
Conclusion
Reportable fringe benefits are an important concept to understand when it comes to tax filing. Employers need to ensure that they accurately calculate and report any benefits provided, while employees need to ensure that any benefits they receive are accurately reported on their tax return.
By understanding what constitutes reportable fringe benefits, as well as the tax implications of receiving such benefits, both employers and employees can stay compliant with their respective tax obligations as well as ensure that they are not overpaying or underreporting taxes.
To make sure you're up to date with any news or changes in relation to reportable fringe benefits, reach out to our team of skilled accountants. At CleanSlate, we’re here to ensure you’re fully informed and prepared for the tax season. Contact us today and get your taxes sorted.
