From 1 April 2021, a new 39% personal tax rate applies on income above $180,000. To ensure a consistent taxation of non-cash benefits, FBT rates have also significantly increased.
The single rate alone has increased from 49.25% to 63.93%, and the top mixed rates have similarly increased. For most employers, if no additional action is taken, their FBT cost of providing non-cash benefits could be expected to increase by up to 30% in the 2021 year.
The good news - particularly for employers who provide non-cash benefits to employees earning less than $180,000 - is that these increased costs may well be avoided with good (and early) planning, and with some changes to the FBT filing options selected.
Due to the relatively low top PAYE/FBT thresholds, approximately 90% of employers have paid their FBT using either the single rate or short form alternate rate FBT calculation methods.
Single rate method
This process provides the simplest method of calculation. FBT is calculated and returned quarterly on non-cash benefits at the single rate which is now 63.93%; previously it was 49.25%. The rate is set to result in the same tax cost as if an equivalent taxable payment were made to an employee on the top marginal tax rate; this enables the employee to purchase the non-cash benefit.
Short-form alternate rate method
Under this method, employers pay FBT on non-cash benefits at the ‘alternate rate’ in quarters one to three - 49.25% or 63.93% for benefits to major shareholder employees (previously this was 43% and 49.25%). In quarter four, employers ‘square-up’ the tax on all attributed benefits paid during the year to 63.93% (previously 49.25%). Non-attributed benefits are pooled and taxed at the ‘alternate rate’ - 49.25% or 63.93% for benefits provided to major shareholder employees (previously 42.86% and 49.25%).
Full alternate method
Use of this method has been less common.
Employers pay at the ‘alternate rate’ in quarters one to three (49.25% or 63.93% for benefits to shareholder employees, previously 49.25% and 42.86%). The quarter four calculation is then a ‘square-up’, calculating the FBT on allocated benefits for the year at a rate which correlates with each employee’s marginal tax rate. These rates are set to result in the same tax cost as if an equivalent payment were made to an employee at their marginal tax rate (enabling them to purchase the non-cash benefit). Non-allocated benefits are taxed at a standard rate of 49.25%, or 63.93% for shareholder employees.
Employers paying under the ‘single rate’ or ‘short form alternate’ methods will have usually concluded there is either no tax advantage to performing a ‘full alternate’ method calculation in quarter four (as the receiving employees earn in the top marginal tax rate), or they may have simply accepted the less favourable FBT cost on fringe benefits to avoid the additional time and complexity to calculate the ‘full alternate’ method.
With the significant increase in the FBT rates, and when employees receiving non-cash benefits may no longer earn the top marginal tax bracket, this rationale may well no longer be valid.
The benefits of changing to the ‘full alternate’ method
While this method has a reputation for some complexity, a ‘full alternate’ calculation can be carried out by a business with relative ease once business processes are setup for this.
At its easiest, relevant benefits simply need to be valued and attributed in the calculation to the employee receiving the benefit. Specific categories of benefit, and those below certain thresholds of value, are not required to be attributed and tax is calculated on these at the non-attributed rate.
‘Full alternate’ process setup
Some businesses already calculating FBT under one of the other methods may wish to implement this change by simply carrying on with their existing FBT compliance during the year either at the single rate or alternate rate, while collecting sufficient information to allow for a ‘full alternate’ square-up calculation in the quarter 4 FBT return; this can be carried out by the company or an accountant.
Employers with cash flow restrictions or with large FBT bills may wish to obtain the cash flow advantage of a change to the ‘alternate’ method early in the year and would get benefit from a quarter one move to an ‘alternate’ basis.
Employers looking apply the ‘full attribution’ method will often benefit from adopting a purpose designed spreadsheet/web tool to assist with collecting necessary information and performing the FBT calculations. These tools are usually designed to apply FBT rules to assist in calculating the FBT liability from the data provided, and may have functionality to assist in storing data, notes and other records relevant to supporting the filing position. The best tools calculate the most favourable FBT filing position by taking account of available options under tax legislation (including pooling benefits) and can provide all the figures for the preferred option with guidance on how to input these in the FBT return.
How we can help
Your Grant Thornton advisor can help you understand the likely value of any FBT savings from adopting a full alternate rate calculation based on your planned 2021 fringe benefits.