Calculating Fringe Benefits Tax

8/3/2019 Calculating Fringe Benefits Tax

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Calculating fringe benefits tax

We do not usually notify employers of how much fringe benefits tax (FBT) they have to pay.

You must self-assess your own FBT liability each FBT year (which runs from 1 April to

31 March).

The FBT rate may vary from year to year. The current rate is 46.5%.

You may find the following steps useful in working out how much FBT you have to pay:

Step 1: Determine what type of fringe benefits you provide.

Step 2: Work out the taxable value of each fringe benefit you provide to each

employee. The rules for calculating the taxable value of a fringe benefit vary

according to the type of benefit.

Step 3: Work out the total taxable value of all the fringe benefits you provide for

which you can claim a GST credit.

Step 4: Work out the total taxable value of all those benefits for which you cannot

claim a GST credit, for example, supplies you made that were either GST

free or input taxed.

Step 5: Work out the grossed-up taxable value of the benefits by multiplying the

total taxable value of all the fringe benefits you can claim a GST credit for

(from step 3) by 2.0647.

'Grossing-up' means increasing the taxable value of benefits you provide to

reflect the gross salary employees would have to earn at the highest

marginal tax rate (including Medicare levy) to buy the benefits after payingtax.

Step 6: Work out the grossed-up taxable amount by multiplying the total taxable

value of all the fringe benefits you cannot claim a GST credit for (from

step 4) by 1.8692.

Step 7: Add the grossed-up amounts from steps 5 and 6. This is your total fringe

benefits taxable amount.

Step 8: Multiply the total fringe benefits taxable amount (from step 7) by the FBT

rate to get the total FBT amount you are liable to pay.

Organizations provide a variety of fringe benefits. The fringe benefits areclassified under four heads as given here under:


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1.For Employment Security :

Benefits under this head include unemployment, insurance,technological adjustment pay, leave travel pay, overtime pay,level for negotiation, leave for maternity, leave for grievances,holidays, cost of living bonus, call-back pay, lay-off, retiring

rooms, jobs to the sons/daughters of the employees and the like.2.For Health Protection:

Benefits under this head include accident insurance, disabilityinsurance, health insurance, hospitalization, life insurance,medical care, sick benefits, sick leave, etc.3.For Old Age and Retirement:

Benefits under this category include: deferred income plans,pension, gratuity, provident fund, old age assistance, old agecounseling , medical benefits for retired employees, travelingconcession to retired employees, jobs to sons/daughters of the

deceased employee and the like.4.For Personnel Identification, Participation and Stimulation:

This category covers the following benefits: anniversary awards,attendance bonus, canteen, cooperative credit societies,educational facilities, beauty parlor services, housing, income taxaid, counseling, quality bonus, recreational programs, stresscounseling, safety measures etc.

The fringe benefits are categorized as follows:

a)Payment for Time Not worked: Benefits under this category include: sick leavewith pay, vacation pay, paid rest and relief time, paid lunch periods, grievancetime, bargaining time, travel time etc.b)Extra Pay for time Worked: This category covers the benefits such as: premiumpay, incentive bonus, shift premium, old age insurance, profit sharing,unemployment compensation, Christmas bonus, Deewali or Pooja bonus, foodcost subsidy, housing subsidy, recreation.

Employee SecurityPhysical and job security to the employee should also be provided with a view topromoting security to the employee and his family members. The benefit ofconfirmation of the employee on the job creates a sense of job security. Further aminimum and continuous wage or salary gives a sense of security to the life.

Retrenchment Compensation:The Industrial Disputes Act, 1947 provides for the payment of compensation incase of lay-off and retrenchment. The non-seasonal industrial establishmentsemploying 50 or more workers have to give one months notice or one monthswages to all the workers who are retrenched after one years continuous service.

The compensation is paid at the rate of 15 days wage for every completed year ofservice with a maximum of 45 days wage in a year. Workers are eligible for


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compensation as stated above even in case of closing down of undertakings.

Lay-off Compensation:In case of lay-off, employees are entitled to lay-off compensation at the rate to 50%

of the total of the basic wage and dearness allowance for the period of their lay-offexcept for weekly holidays. Lay-off compensation can normally be paid up to 45days in a year.

Safety and HealthEmployees safety and health should be taken care of in order to protect theemployee against accidents, unhealthy working conditions and to protect workerscapacity. In India, the Factories Act, 1948, stipulated certain requirementsregarding working conditions with a view to provide safe working environment.

These provisions relate to cleanliness, disposal of waste and effluents, ventilationand temperature, dust and fume, artificial humidification, over-crowding,lighting, drinking water, latrine urinals, and spittoons. Provisions relating tosafety measures include fencing of machinery, work on or near machinery inmotion, employment of young persons on dangerous machines, striking gear anddevices for cutting off power, self-acting machines, easing of new machinery,probation of employment of women and children near cotton openers, hoists andlifts, lifting machines, chains ropes and lifting tackles, revolving machinery,pressure plant, floors, excessive weights, protection of eyes, precautions againstdangerous fumes, explosive or inflammable dust, gas etc. Precautions in case offire, power to require specifications of defective parts of test of stability, safety ofbuildings and machinery etc.

OBJECTIVES OF FRINGE BENEFITS

The view point of employers is that fringe benefits form an important part of

employee incentives to obtain their loyalty and retaining them. The important

objectives of fringe benefits are:

1.To create and improve sound industrial relations

2.To boost up employee morale.3.To motivate the employees by identifying and satisfying their unsatisfied needs.

4.To provide qualitative work environment and work life.

5.To provide security to the employees against social risks like old age benefits

and maternity benefits.

6.To protect the health of the employees and to provide safety to the employees

against accidents.

7.To promote employees welfare by providing welfare measures like recreation

facilities.

8.To create a sense of belongingness among employees and to retain them. Hence,fringe benefits are called golden hand-cuffs.


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9.To meet requirements of various legislations relating to fringe benefits.

Need for Extending Benefits to Employees

(i)Rising prices and cost of living has brought about incessant demand forprovision of extra benefit to the employees.

(ii)Employers too have found that fringe benefits present attractive areas of

negotiation when large wage and salary increases are not feasible.

(iii)As organizations have developed ore elaborate fringe benefits programs for

their employees, greater pressure has been placed upon competing organizations

to match these benefits in order to attract and keep employees.

(iv)Recognition that fringe benefits are non-taxable rewards has been major

stimulus to their expansion.

(v)Rapid industrialization, increasingly heavy urbanization and the growth of acapitalistic economy have made it difficult for most employees to protect

themselves against the adverse impact of these developments. Since it was

workers who are responsible for production, it was held that employers should

accept responsibility for meeting some of the needs of their employees. As a

result, some benefits-and-services programs were adopted by employers

(vi)The growing volume of labor legislation, particularly social security

legislation, made it imperative for employers to share equally with their

employees the cost of old age, survivor and disability benefits.

(vii)The growth and strength of trade unions has substantially influenced thegrowth of company benefits and services.

(viii)Labor scarcity and competition for qualified personnel has led to the

initiation, evolution and implementation of a number of compensation plans.

(ix)The management has increasingly realized its responsibility towards its

employees and has come to the conclusion that the benefits of increase in

productivity resulting from increasing industrialization should go, at least partly,

to the employees who are responsible for it, so that they may be protected against

the insecurity arising from unemployment, sickness, injury and old age. Company

benefits-and-services programs are among some of the mechanisms whichmanagers use to supply this security.

Documents

Calculating Fringe Benefits Tax