In a nutshell... Article published in Issue 1, of The Taxpayer, dated 5 July the full article follows

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1 Article published in Issue 1, of The Taxpayer, dated 5 July 2010 In a nutshell... Reportable fringe benefits and superannuation Payment summaries, detailing an employee s remuneration and taxes withheld, allowances and reportable fringe benefits are required to be issued to employees by 14 July of each year. A reportable fringe benefit amount is required to be disclosed on an employee s payment summary where the taxable value of the benefits provided (ie, the pre-gross up values) during the FBT year exceeds $2,000 (ie. from 1 April to 31 March), notwithstanding that the disclosure relates to the year ended 30 June. Benefits provided that do not give rise to a taxable value and hence FBT, do not need to be disclosed in an employee s payment summary. These include benefits which satisfy the otherwise deductible rule such as work related expenses, situations where the employee has made a contribution which reduces the taxable value to nil, or benefits that do not fall within the meaning of a fringe benefit, such as certain superannuation contributions. While the grossed-up amount of reportable fringe benefits included on a payment summary does not represent assessable income, the amount will be taken into account for the purposes of determining access to various government benefits, calculating certain liabilities and the availability of particular tax deductions. With effect from 1 July 2009, reportable employer superannuation contributions (RESCs), while not included in the reportable fringe benefits amount of an employee, will be taken into account when determining an individual s entitlement to various government provided benefits, and forms part of the adjusted taxable income calculation....the full article follows All information provided in this publication is of a general nature only and is not personal financial or investment advice. It does not take into account your particular objectives and circumstances. No person should act on the basis of this information without first obtaining and following the advice of a suitably qualified professional advisor. To the fullest extent permitted by law, no person involved in producing, distributing or providing the information in this publication (including Taxpayers Australia Incorporated, each of its directors, councillors, employees and contractors and the editors or authors of the information) will be liable in any way for any loss or damage suffered by any person through the use of or access to this information. The Copyright is owned exclusively by Taxpayers Australia Inc (ABN ). NOTICE FORBIDDING UNAUTHORISED REPRODUCTION No item in this publication covered by copyright may be reproduced or copied in any form (graphic, electronic or mechanical, or recorded on film or magnetic media) or placed in any computer or information transmission or retrieval system unless permission in writing is obtained from Taxpayers Australia Inc. info@taxpayer.com.au, call or download an application form from

2 The Taxpayer 5 July Issue /2011 Reportable fringe benefits and superannuation By Andy Nguyen It is that time of year again where employers are required to issue payment summaries to their employees for the year ended 30 June. One of the items required to be recorded on a payment summary are any reportable fringe benefits which may arise from the provision of fringe benefits to employees during the year. This article considers what a reportable fringe benefit is and outlines situations where certain fringe benefit amounts, while not reportable, may still have other implications. Determining reportable fringe benefits Payment summaries, detailing an employee s remuneration and taxes withheld, allowances and reportable fringe benefits are required to be issued to employees by 14 July of each year. A reportable fringe benefit amount is required to be disclosed on an employee s payment summary where the taxable value of the benefits provided (ie, the pregross up values) during the FBT year exceeds $2,000 (ie. from 1 April to 31 March), notwithstanding that the disclosure relates to the year ended 30 June. The reportable fringe benefit amount is determined by grossing-up the taxable value of the benefits for that individual employee by the type 2 gross-up rate of This applies irrespective of whether the amount is required to be grossed up by a type 1 or 2 rate when the employer determines their FBT liability. Note: The minimum reportable fringe benefit amount will be $3,738 ($2,000 x ). Any amount below this value is not required to be disclosed. In addition, if an employee leaves their employment between 31 March and 30 June (say 2010), any reportable fringe benefits provided during that time would need to be reported on a payment summary for the following income year (ie. 2011). Excluded benefits Benefits provided which do not give rise to a taxable value and hence FBT, do not need to be disclosed in an employee s payment summary. These include benefits which satisfy the otherwise deductible rule such as work related expenses, situations where the employee has made a contribution which reduces the taxable value to nil, or benefits that do not fall within the meaning of a fringe benefit, such as certain superannuation contributions (discussed in detail below). Further, there are some benefits which are not required to be included in the reportable fringe benefit amount. Referred to as excluded benefits, these include but are not limited to: the provision of meal entertainment (irrespective of whether the 50/50 split method or 12 week register method is used) car parking fringe benefits (not car parking expenses paid for or reimbursed) fringe benefits relating to entertainment facility leasing expenses (eg. hiring of corporate boxes) car benefits for employees using a shared or pooled vehicle which is employer provided and shared at the directive of the employer certain benefits provided to employees residing in a remote area such as fuel, cost of travel to a major Australian population and remote housing assistance, and certain benefits provided to Defence Force members such as housing assistance, reunion travel and removal and storage costs. Benefits cannot be excluded merely because they are provided to a number of employees, rather than a single employee (typically referred to as shared benefits ). If a benefit provided to multiple employees is a reportable benefit, the employer must determine a reasonable basis upon which to allocate a proportion of the value to all employees who have shared the fringe benefit. Consequences of reportable fringe benefits While the grossed-up amount of reportable fringe benefits included on a payment summary does not represent assessable income, the amount will be taken into account for the purposes of determining access to various government benefits, calculating certain

3 liabilities and the availability of particular tax deductions. These include: assessing liability for the Medicare Levy Surcharge the availability of the mature age tax offset and/or senior Australian s tax offset determining entitlement to a deduction for personal superannuation contributions If the person is engaged in an employment activity during the year, they must satisfy the maximum earnings test (ie. 10% rule) in order to be entitled to a deduction for a personal contribution. Broadly, the rule requires the person s employment income, reportable fringe benefits and reportable employer superannuation contributions in relation to their employment activities, to be less than 10% of the aggregate of their total assessable income, reportable fringe benefits and reportable employer superannuation contributions. determining entitlement to a superannuation co-contribution determining entitlement to a tax offset for a spouse superannuation contribution calculating a taxpayer s Higher Education Loan Program liability repayment child support obligations income-tested government benefits (such as family tax benefit), and calculating adjusted taxable income in order to ascertain whether deductions subject to the noncommercial loss provisions will be quarantined. The following example illustrates a typical scenario involving various benefits which are both included and excluded from the reportable fringe benefit amount. Example: Reportable Fringe Benefits During the FBT year ended 31 March 2010, Janet, a sales manager, received the following benefits from her employer (a full-fbt employer): A car park beneath her employer s premises the car park benefit is valued at $2,400 for the year (using the statutory formula method). On days where Janet had forgotten her car parking pass, her employer would reimburse her for car parking costs she incurred in parking at a nearby commercial car park. The total reimbursement for the FBT year was $200. A corporate credit card arrangement under which Janet is reimbursed for meal entertainment of $2,000 incurred taking potential clients to lunch and travelling and accommodation costs of $4,000 when she makes sales calls. The company uses a 50/50 split method for meal entertainment costs. A m o t o r vehicle under a novated lease a r r a n g e m e n t. This is provided to Janet under a salary sacrifice arrangement. The provision of the vehicle satisfies the definition of a car fringe benefit. The employee c o n t r i b u t i o n s method is used by the company in providing the vehicle such that the taxable value from the provision of the vehicle is nil. A mobile phone for which her costs are paid. The phone is used strictly for business purposes. The total cost is $700. As a bonus, she was provided with an all-expensespaid holiday to the Northern Territory which included flights and accommodation costs totalling $4,000. (All amounts quoted above are GST-inclusive amounts.) What is the reportable fringe benefit amount required to be disclosed by Janet s employer in her payment summary? Step 1: Determine the taxable value of the benefits provided Car parking fringe benefit = $2,400 (based on the statutory formula method) Car parking reimbursement = $200 (expense payment fringe benefit). Meal entertainment = $1,000 (based on 50/50 split method). Travelling and accommodation costs = nil ( otherwise deductible rule). Car fringe benefit = nil (using employee contributions method). Mobile phone = nil (expense payment fringe benefit otherwise deductible rule). Holiday (flights and accommodation) = $4,000 (property fringe benefit). Step 2: Determine the reportable fringe benefits amount The total reportable fringe benefit amount to be disclosed in Janet s payment summary for the year ended 30 June 2010 is:

4 Car parking reimbursement $ Property fringe benefit (holiday)... $4, Total $4, x (type 2 gross-up) Reportable fringe benefit amount.. $7, Notes: As the total taxable value of fringe benefits provided exceeds $2,000, Janet s employer is required to disclose the reportable fringe benefit amount in her payment summary for the income year. The provision of a car parking fringe benefit is not required to be included in the reportable fringe benefits, however the car parking reimbursement is included as this is an expense payment fringe benefit and not the provision of a car parking fringe benefit. The meal entertainment provided is not required to be included in the reportable fringe benefits amount. Notwithstanding that the benefits being provided would have been recorded as a type 1 benefit and grossed-up using a rate of (as the amounts are GST inclusive), the type 2 gross-up rate of is applied to all benefits for reportable fringe benefit purposes. Reportable employer superannuation contributions With effect from 1 July 2009, reportable employer superannuation contributions (RESCs), while not included in the reportable fringe benefits amount of an employee, will be taken into account when determining an individual s entitlement to various government provided benefits, and forms part of the adjusted taxable income calculation. An RESC is a contribution for an individual: a) by an employer (or associate) for the benefit of the employee, and b) either of the following applies: i. the individual has, or might be reasonably expected to have, the capacity to influence the amount of the contribution ii. the individual has, or might be reasonably expected to have, the capacity to influence the way the amount is contributed so that his or her assessable income is reduced. Contributions that an employer is required to make under: the terms of a federal or state law (eg. superannuation guarantee contributions) an individual agreement or award, or the trust deed governing the fund would not constitute RESCs. In all other situations where an employer contributes more than the statutory superannuation guarantee requirement, it will be necessary to examine the relevant circumstances to ascertain whether any part of the contribution is an RESC. It should not be assumed, however, that all employer contributions in excess of the statutory superannuation guarantee levels will be RESCs. For example, if an employer maintained a standard employment contract that provided for employer contributions of, say, 14% for each employee, it should follow that the amount in excess of 9% would not be an RESC due to the absence of the necessary employee influence. Where employer contributions exceed 14%, a different outcome is likely in respect of the excess. Example: Salary sacrifice superannuation and reportable fringe benefits Mr and Mrs Jones own all of the shares in ABC Co Pty Ltd. They are also employees of the company. During the income year ended 30 June 2010, Mr Jones is not paid a salary but instead the company has made of contribution of $50,000 into his self managed superannuation fund under a salary sacrifice arrangement. Mr Jones received no other fringe benefits during the income year. Is ABC Co Pty Ltd required to disclose reportable fringe benefit amounts with respect to the superannuation contribution to Mr Jones payment summary? No. The salary sacrificed superannuation contribution is not required to be included in Mr Jones payment summary as it is not considered to be a fringe benefit under FBT law. However, there may be other implications for Mr Jones: The superannuation contribution exceeds the superannuation guarantee amount which would be required to be paid in respect of a salary of $50,000. In the circumstances it would be concluded that the level of contribution was influenced by Mr Jones and therefore the excess would be classed as an RESC pursuant to s of the Taxation Administration Act. RESCs are included for income test purposes under the new definition of adjusted taxable income, and therefore taken into account for the various purposes described above. The salary sacrifice arrangement must be an effective salary sacrifice arrangement, that is, the arrangement must be undertaken prospectively in relation to future earnings. Mr Jones should be mindful of the contribution

5 cap, which for the income year is $25,000 unless the transitional cap of $50,000 applies due to him being at least 50 years of age during the 2010 year. Example: Increase in superannuation contributions by employer Ian is an employee for DEF Co Pty Ltd. His employer makes additional annual contributions of $3,000 to his nominated fund to cover the cost of insurance premiums for group life and total and permanent disability cover deducted from Ian s superannuation account. If Ian chose a different fund, the additional employer contributions to cover the insurance premium costs would not be made. The contribution is in addition to the superannuation guarantee requirements of 9%. Ian s salary is not reduced as a result of the additional contributions being made by his employer nor is his salary increased if he cancels the cover. Is this additional superannuation contribution a fringe benefit, capable of being a reportable fringe benefit? No. The amount paid by DEF Co as an employer contribution of $3,000 into Ian s superannuation fund is considered to fall within the meaning of a contribution as it is considered to have increased the capital of the fund and is made for the benefit of Ian as employee (refer to TR 2010/1). On this basis, the contribution is not considered to be a fringe benefit and therefore, no reportable fringe benefit amount should arise. These facts are similar to those considered in ATO ID 2010/12. The amount of $3,000 would satisfy the meaning of an RESC in accordance with s TAA if the decision by Ian to nominate a particular fund resulted in the additional employer contribution. Comment While the amount of reportable fringe benefit should be readily ascertainable, the same may not be true of RESCs. Employees should take care to identify the circumstances in which an RESC may arise because of the potential impact on other aspects of their tax affairs.