Fringe Benefits Tax - the opportunities for high income earners
04 Jul 2014
By Shadforth Financial Group
As part of the recent Budget measures announced by the Federal Government, the Fringe Benefits Tax (FBT) rate will increase from 47% to 49% from 1 April 2015 until 31 March 2017, that is, for the 2016 and 2017 FBT years. The intention behind the increase is to prevent high income earners and their employers from shifting the emphasis to non-cash package elements and, in so doing, avoid paying the Temporary Budget Repair Levy (TBRL) of 2%.
Due to the different periods of time covered by the FBT year and the income tax year, there will be two periods when the top marginal tax rate will actually differ from the FBT rate. The first occurs between 1 July 2014 and 1 April 2015, when the FBT rate will be 47% compared to the top marginal tax rate (excluding Medicare levy surcharge) of 49%. The second occurrence will be a shorter period of time, from 1 April 2017 to 1 July 2017 (see diagram below). This circumstance, if approached carefully and early enough, can potentially give rise to some financial opportunities.
During the two time periods shown, lower tax rates will apply to fringe benefits which may be received by some high income earners as part of their salary package. Fringe benefits can take a number of forms with some of the more common items including cars, property and expense payments. Clearly, the associated costs and complexity of administration relating to some benefits within these forms make them unsuitable for adoption in this circumstance.
Some fringe benefit opportunities that may be both relevant and practical are goods or securities, expense payments, health-related benefits and recreation benefits. Payments of cash, other than salary or wages, made by an employer to the trustee of a trust fund, for example to a family trust, may also fall into this category.
The Australian Taxation Office (ATO) will generally accept salary sacrifice arrangements into non-cash benefits ('non-cash' in the sense of not received by an employee as cash remuneration for services rendered as an employee) such as cars, recreation, superannuation contributions, expense payments such as school fees, travel etc, provided certain ground rules are met. Of course not all of these salary sacrifice examples are fringe benefits. Superannuation contributions are specifically excluded from the term 'fringe benefit' but are often included in salary sacrifice arrangements. Some of these sacrifice alternatives can be used to good advantage when the FBT rate is lower than the Income Tax threshold. However, it is extremely important to observe the ground rules which, if not strictly followed, could lead to a challenge by the ATO on the basis the benefit obtained is in fact ordinary income or alternatively the benefit is derived from a tax avoidance "scheme".
The key to all of this is to seek professional advice as early as possible. As an end-to-end wealth management firm your Private Client Adviser can refer you to one of Shadforth's tax advice specialists who can undertake a full cost/benefit analysis of your individual situation, help you in exploring an opportunity with your employer and then assist in putting in place timely arrangements which will enable you to take full advantage of the potential FBT opportunities.