Tightening fringe benefit tax on not-for-profit organisations

Budget Review 2015–16 Index

Les Nielson

In the 2015–16 Budget the Government announced a limit of $5,000 per year, per employee, for the value of fringe benefits exempt from fringe benefits tax (FBT) purposes for:

  • salary sacrificed meal entertainment expenses and
  • salary sacrificed entertainment facility leasing expenses.

The description of this measure specifically identifies employees of public benevolent institutions and health promotion charities as currently having annual limits for FBT exempt benefits well above $5,000 ($30,000) and employees of public and not-for-profit hospitals and public ambulance services as having an annual limit of $17,000 per year.[1] Currently there are no limits on meal entertainment expenses; they are all exempt from FBT for employees of these organisations.  Under the proposed measure all use of meal entertainment benefits will be reportable.

The measure is to commence from 1 April 2016, to coincide with the start of the FBT year and is projected to produce a revenue gain of $295 million between 2015–16 and 2018–19, as the following table shows:

Table 1: Revenue gain of proposed FBT changes for non-profit health related bodies, $m

Year
2015–16
2016–17
2017–18
2018–19
Revenue gain
20
85
90
100

Source: Budget paper no. 2: 2015–16[2]

What is the current situation for employees of ‘for profit’ organisations?

All entertainment fringe benefits provided by a for-profit employer, including meals, are subject to FBT. So there is no FBT exemption limit for benefits provided to employees of profit making entities.

Why are these rules in place?

The limits on FBT exemptions for employees of health related not-for-profit institutions arises under subsection 5B(1E) of the Fringe Benefits Tax Assessment Act 1986.[3] Initially these employees had been exempt from FBT. This subsection was inserted by the A New Tax System (Fringe Benefits) Act 2000.[4] The Explanatory Memorandum to the A New Tax System (Fringe Benefits) Bill 2000 noted that:

The FBT capping measure will stop the overuse of the FBT exemption for PBIs [public benevolent institutions] and the concessional FBT treatment for certain non-profit, non-government organisations, which are currently open-ended, by capping the exempt or concessional treatment to $25,000 of the tax-inclusive value of an employee's fringe benefits. However, the threshold is $17,000 where the employee of the s57A employer or rebatable employer works in a hospital. This measure goes some way towards the ideal position where employees earning the same remuneration are taxed the same, while ensuring that PBIs and certain non-profit organisations retain a cost advantage over other employers.[5]

The annual limit of $25,000 was later increased to $30,000 as the result of a Government Senate amendment, arising from negotiations between the then Government and the Democrats.[6]  These limits have not changed since 2000, so their real value has decreased. The FBT concessions available to the non-profit sector at that time were aimed at helping these organisations attract and retain staff.[7]

Are these concessions still effective?

While the FBT concessions were implemented to allow health related not-for-profit organisations to offer competitive salaries to attract staff, two questions remain. Are these FBT incentives still effective? Do they place ‘for-profit’ organisations at a disadvantage? In a 2010 study the Productivity Commission found that:

... in a small number of areas, notably hospitals, FBT arrangements confer advantage to both not for profits (NFP) and public hospitals. The concession allows them to offer staff, often considerable, FBT benefits that commercial hospitals cannot, despite facing the same funding arrangements. In relation to hospitals, the FBT benefits do impact on competitive neutrality. More generally, these arrangements are not an ideal method of providing support to those NFPs that the government wishes to assist as FBT rates have been frozen, eroding the benefit conferred; and FBT exemptions are complex and costly to administer for both the [Australian Taxation Office] and NFPs.[8]

The Commission concluded that:

[g]iven the distortions, the significant transactions costs associated with salary packaging, and the lack of a clear   public benefit justification, the FBT concession does not appear to be very effective, efficient or equitable. In the case of public hospitals, it also provides a non-transparent Commonwealth subsidy to state and territory public hospitals.[9]

A 2013 study by a Treasury Working Group reported that the FBT concession was:

... primarily used by PBIs, health promotion charities, public and NFP hospitals, and public ambulance services ... to   provide salary packaging benefits in order to attract and retain employees. FBT concessions are also used to compensate for funding shortfalls in the NFP sector.[10]

This study also found that:

The uncapped access to meal entertainment and entertainment facility leasing benefits has raised concerns about the legitimacy of such concessions, especially since the rest of the community are not able to access such concessions or claim a deduction for such expenses. The benefit of this concession is also not evenly spread among NFP employees, tending to be more highly utilised by eligible employees on higher salaries.[11]

Reform or removal?

The Productivity Commission preferred that assistance to not-for-profits be provided in a more transparent manner, such as direct government funding, and the gradual phase out of these concessions.[12] The Henry Tax Review recommended that the FBT concessions be phased out and replaced with direct government funding. [13] The Treasury Working Group recommended that the FBT concessions be removed and proposed ‘an alternative support payment to employers, possibly through the tax system, to replace the FBT concessions provided through salary packaging’.[14]



[1].          Australian Government, Budget measures: budget paper no. 2: 2015–16, pp. 22–23. Slightly higher limits apply in the first year due to the Temporary Budget Repair Levy. Further, these values are ‘grossed up’, meaning that the value of the limit is calculated to take into account benefits provided with a taxable value that included the FBT paid by the employer.

[2].          Ibid.

[3].          Fringe Benefits Tax Assessment Act 1986 (Cth).

[4].          A New Tax System (Fringe Benefits) Act 2000 (Cth).

[5].          Explanatory Memorandum, A New Tax System (Fringe Benefits) Bill 2000 and A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Amendment Bill 2000, p. 24.

[6].          R Kemp, A New Tax System (Fringe Benefits) Bill 2000, A New Tax System (Medicare Levy Surcharge—Fringe Benefits) Amendment Bill 2000, In Committee, Senate, Debates, 10 May 2000,p. 14,267 and p. 14,277;  J Woodley, A New Tax System (Fringe Benefits) Bill 2000, A New Tax System (Medicare Levy  Surcharge—Fringe Benefits) Amendment Bill 2000, In Committee, Senate, Debates, 10 May 2000, pp. 14, 268.

[7].          J Singer, Battle looming over FBT in health industry, The 7.30 Report transcript, Australian Broadcasting Commission, 17 December 1999.

[8].          Productivity Commission, Contribution of the Not-for-Profit Sector, January 2010, p. XXXI.

[9].          Ibid., p. 216.

[10].       Treasury, Not-For-Profit Sector Tax Concessions Working Group, Final Report, May 2013, p. 7.

[11].       Ibid.

[12].       Contribution of the Not-for Profit Sector, op. cit., pp. XLVIII–XLIX and p. 213.

[13].       K Henry (Chair), Australia’s future tax system, Part 2 Detailed analysis, December  2009, Vol. 1, p. 211.  

[14].       Not-For-Profit Sector Tax Concessions Working Group, Final Report, op. cit.

 

All online articles accessed May 2015. 

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