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Trade-off between accuracy and lower compliance costs
Availability for use versus actual use
Value of benefit to employee
3.1 The current fringe benefit tax rules contained in subpart CI of the Income Tax Act 1994 take a wide approach. Although they list specific significant benefits, such as motor vehicles, subsidised travel and loans, they also contain a catch-all provision (section CI 1(h)) that covers "any benefit of any other kind whatever, received or enjoyed by the employee ...whether directly, or indirectly, in relation to, in the course of, or by virtue of the employment of the employee and which is provided or granted by the employer of the employee...".
3.2 The rules then exclude certain benefits, such as a benefit from an employer that is a charitable organisation provided the benefit is not received in the course of carrying on a business, or benefits provided on an employer's premises.
3.3 Minimum value thresholds apply to remove low-value benefits from any FBT impost. Unclassified benefits (those falling within section CI 1(h)) of $75 or less per quarter ($300 per year) per employee are excluded and an employer or associated person can provide aggregate unclassified benefits of up to $450 per quarter before FBT applies.[3] Also, discounts of 5% or less are ignored when the goods are of low value.
Trade-off between accuracy and lower compliance costs
3.4 The trade-off between accuracy and lower compliance costs has been a major influence on the design of the current rules. Back in 1985 it was noted to be an issue, particularly in relation to the valuation of benefits. Because the value of a benefit is often difficult to determine and may vary considerably among different cases, a system based on case-by-case assessment can involve heavy compliance and administrative costs. It may, however, be more equitable than the alternative of a system of prescribed benefit values which do not permit much case-by-case variation.
3.5 No system was considered capable of meeting simultaneously equity and compliance and administrative cost objectives. Hence, the rules developed at that time attempted to achieve a reasonable trade-off between these conflicting objectives. Although their deficiencies were recognised, they were considered to be less than the problems associated with the loss of revenue created by not taxing fringe benefits.
Availability for use versus actual use
3.6 If an asset is provided by an employer to an employee, its fringe benefit value is determined by whether it is available for private use. In the case of motor vehicles, the availability test is applied on a daily basis. Whether a vehicle is available for private use can be determined by keeping a log book for a three-month test period (see section CI 11). If the vehicle is available for private use at any time during the day, such as for home-to-work travel, availability for such use is considered to exist for the whole day.
3.7 If the benefit relates to a service rather than the provision of an asset, the benefit is valued according to the actual use of that service, with no value being attributed to having access to the subsidised service. Discounted goods are similarly treated - even though the discount may be available to the employee at all times, goods have to be purchased to trigger the taxable benefit.
3.8 Arguably, the availability of a discount or access to services has some value, but it is very difficult to determine and will vary from employee to employee, depending on whether they intend to purchase the goods or services. Given these difficulties, it is sensible to treat the availability aspect as irrelevant and apply "use" as the appropriate test.
Value of benefit to employee
3.9 Under the Act, benefits are, in general terms, valued as follows:
- when the employer makes a contribution on behalf of an employee, at the actual amount paid by the employer;
- when the employer provides a good or service, at the lower of cost or market value; or
- when the employer provides a good or service for which there is a part charge, such as a low-interest rate on a loan, at the difference between the price to the employee and the market value or market value proxy (for example, a prescribed rate of interest).
3.10 Because of the need to strike a balance between accuracy and lower compliance costs, standard rules apply to those types of assets for which identifying and allocating actual individual benefits would be compliance cost intensive.
3.11 The prime examples are motor vehicles and subsidised transport. In the latter case the cost is the higher of 25 percent of the highest price that would be charged to the public or non-employees or the price paid by the employer. This proxy is used because of the difficulty in establishing the appropriate cost, since price varies according to the attached conditions. In the absence of this rule, the value of the benefit should be the average cost or the marginal cost, highlighted by the example used previously regarding airline tickets.
3.12 Another example of the difficulty in balancing accuracy and compliance costs arises when ensuring that FBT is accurate by applying the marginal tax rate of the employee. Currently, the rates are 17.65%, 26.58%, 49.25% and 63.93%, to reflect the personal marginal tax rates of 15%, 21%, 33% and 39%. As discussed later in this document, taxpayers are concerned about the complexity that this multi-rate approach entails. Previously, only one rate applied, but taxpayers were concerned that this meant some employee benefits were overtaxed.
[3] There are no equivalent minimum values for those benefits, such as motor vehicles, that are separately listed as benefits in section CI 1.