Understanding the fringe benefit tax

Fringe benefits tax (FBT) was a form of tax that companies paid instead of benefits they offered their employees in addition to the compensation paid to them. It was introduced by the Finance Act 2005 with effect from April 1, 2006. The fringe benefits tax was set at 30 percent of the cost of benefits the company paid and it was aimed to bring under the tax net those benefits that were not included previously. This tax was paid in addition to income tax, irrespective of whether the company had income-tax liability or not.

What do you mean by fringe benefits?

Companies give some fringe benefits to all their employees and some benefits are for only those who are at the executive level for costs related to their work. Some others may also be extended for improving general job satisfaction. Some of the ordinary fringe benefits are telephone repayments, employer’s assistance to the superannuation fund, and permit to creche services. These could also include perks like tuition allowance, health insurance, childcare reimbursements, sponsored cafeteria, free bus assistance for commute, employee discounts, and employee stock options.

Why do companies offer fringe benefits to employees?

Most employers proffer their employees’ competitive compensations and salaries. But to hire and keep the best talent, they usually include other different perks in their agreements. While these fringe benefits will not improve your bank account balance, they can make your compensation package appealing. Companies use fringe benefits to encourage, recruit and keep high-quality employees at the organization. Companies that compete for the best talent in their field often offer exceptional honors.

Fringe benefits that are offered today include:

• Life, disability, and health insurance heaps
• Tuition rebate or education allowance
• Fitness center access or deals
• Employee feasts and cafeteria plans
• Dependent care allowance
• Retirement plan assistance
• Flexible savings accounts (FSAs) or Health savings plans (HSAs)
• Profit-sharing or stock opportunities
• Remote work or work-from-home arrangements

How Is a Fringe Benefit Taxed?

Fringe benefits that are deemed as taxable income, such as bonuses, are taxed as regular income. Taxes are subtracted from your paycheck and the income must be reported on your annual tax return. But some of the other fringe benefits may be deemed nontaxable because they’re deducted on a pretax basis. Certain assistance made to a retirement plan isn’t taxed until you choose to withdraw them from the plan. You may have to pay for reimbursements such as education and memberships for off-site gyms. It’s always a fair idea to check with your human resources department or the IRS.

The Bottom Line

Getting employed for a new job can be very exciting. But keep in mind not to be blindsided by how much you’ll get paid. While your take-home pay is a very important concern, you should also keep in mind any other bonuses that your employer offers you. Although you may not get a high salary—which may put you in a higher tax frame—additional fringe benefits like health care, bonuses, vacation time, and a great retirement plan can balance it out.