Our fringe benefits tax (FBT) was introduced almost 30 years ago. Clearly it is ripe for modification.
Four features stand out in this regard. The first relates to the fact that the legal incidence of the tax is on employers and is at the top marginal rate of tax. Essentially this makes the FBT inequitable.
The second feature is the concessionary nature of its valuation methodologies. A third is its complex array of exemptions – acquired, piece by piece, over the past three decades.
Last but not least, FBT amounts to an additional compliance burden on employers who must submit a separate fringe benefits tax return.
There is a potential solution. However, it involves replacing the tax with an entirely new system.
Based on our proposal to Treasury, this new system would divide fringe benefits into three categories: personal benefits, entertainment and non-personal benefits.
Personal benefits would arise where they were directly related to an individual and reached a certain threshold – somewhere between $2,000 and $4,000 it is suggested. The tax would be withheld at an employee's marginal rate (based on salary) and the value of the fringe benefit would be included in the employee's assessable income.
Entertainment benefits, on the other hand, would be taxed at a rate of, say, 40 percent to the employer – unless they were reimbursed, 'salary-sacrificed' personal benefits. No distinction would be drawn between client and employee entertainment.
There is a simple reason for the separate classification of entertainment benefits: allocating it to a personal benefit is difficult. Further, we suggest that this new entertainment tax be paid to the states.
Lastly, non-personal fringe benefits – also known as 'all the remaining benefits' – would either be exempt or would be non-deductible to the employer, depending on their nature. Certainly if they were minor they would be exempt.
Childcare top-up benefits could also be exempt, but only if they were paid to a registered provider of child care for the difference between the cost of the child care and the amount paid by the government as a transfer payment.
One beauty of this scheme is that it significantly reduces compliance costs for employers. Not-for-profit organisations could also benefit from the fact they would not suffer the 'detriment' of non-deductibility for non-personal benefits given their exempt tax status. Meanwhile, employees that work for not-for-profits would be left on a relatively equal footing with the broader group of employees.
So far as valuation methodologies are concerned, these would be reassessed on an ongoing basis. Above all it would be necessary to ensure they were realistic.