Bills Digest No. 151  1999-2000A New Tax System (Fringe Benefits) Bill 2000

Numerical Index | Alphabetical Index

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.


Passage History
Main Provisions
Contact Officer & Copyright Details

Passage History

A New Tax System (Fringe Benefits) Bill 2000

Date Introduced: 9 March 2000

House: House of Representatives

Portfolio: Treasury

Commencement: Royal Assent. However, the measures described in this Digest will have effect for the 2000-01 and later fringe benefits tax years.



  • place a limit on the value of fringe benefits that may be provided exempt from tax by public benevolent institutions and a range of other bodies
  • insert a new formula for the calculation of fringe benefits tax payable by employers where the employer may claim input tax credits in respect of the benefit
  • extend the exemption available for remote area housing fringe benefits to all employers, and
  • exempt certain meal benefits provided to employees by primary producers.



As there is no central theme to the Bill the background to the various measures will be discussed below.

Main Provisions

Fringe Benefits Tax (FBT) - Exempt Benefits

Current Tax Treatment

The Fringe Benefits Tax Act 1986 (FBT Act) provides that benefits that would otherwise be taxable will be exempt benefits when provided by certain employers and so are not subject to tax for either the employee or employer. Exempt benefits are dealt with in Division 13 of the FBT Act which cover a range of benefits and employers. The most relevant for the purposes of this Bill are contained in section 57A which provides:

57A(1) Where the employer of an employee is a public benevolent institution, a benefit provided in respect of the employment of the employee is an exempt benefit.

(2) Where:

(a) the employer of an employee is a government body; and

(b) the duties of the employment of the employee are exclusively performed in, or in connection with, a public hospital that is a public benevolent institution:

a benefit provided in respect of the employment of the employee is an exempt benefit.

'Public benevolent institution' has been given a wide meaning and Taxation Determination TD92/197 states:

An institution is considered benevolent where its dominant objective and activity is the immediate and direct relief of poverty, sickness, distress, misfortune, destitution or helplessness and it directly provides relief to persons requiring it. An organisation must satisfy certain tests to qualify as a public benevolent institution; including, being non-profit making, being established for the benefit of a section or class of the public, and providing relief without discrimination to every member of the public which it aims to benefit.

The exemption therefore covers benefits provided by a wide range of institutions, ranging from charities to volunteer bush fire brigades.

The FBT Act also contains other relevant exemptions although they cover a much narrower range of employees, including benefits provided to employees employed by organisations exempt from tax under the International Organisations (Privileges and Immunities) Act 1963 (section 55 of the FBT Act) and employees of religious institutions who are religious practitioners where the benefit provided relates to pastoral duties or other religious activities (section 57).

As a result of the exemptions available for fringe benefits, public benevolent organisations have developed salary packages where the employee receives a percentage of their salary as fringe benefits and a reduced amount as taxable income. As a result, neither the employer nor the employee is required to pay tax on the benefits provided and the rate and amount of tax paid by the employee on the income component of their package is less than would apply if the whole value of the package was paid in income.

Section 65J of the FBT Act provides a rebate at the rate of 48% for certain employers who will fall outside the categories of employers who can provide exempt benefits as described above. The main categories of rebatable employers are:

  • non-profit scientific research organisations established under a Commonwealth, State or Territory law but not conducted on behalf of such a government
  • scientific, charitable or public educational institutions
  • certain non-profit private schools
  • public non-government hospitals
  • trade unions and employer associations, and
  • a range of non-profit societies, associations and clubs.

As the current rate of FBT is 48.5%, the 48% rebate available to the employer under section 65J also provides an incentive for both the employer and the employee to receive fringe benefits rather than fully taxable income as once the rebate is claimed the fringe benefits are effectively tax free.

In addition to the specific exemptions and rebate referred to above, car parking fringe benefits provided by public benevolent institutions, religious, charitable and public educational institutions (but not public hospitals) are generally exempt (section 58G).

There are also general exemptions and reductions in taxable value available to all employers under the FBT Act. These include:

  • in-house health care
  • minor benefits valued at $100 or less, and
  • certain work related items, such as mobile phones, tools of trade, protective clothing and laptop or similar computers.

Current Practice

Reports suggest that many bodies that can take advantage of concessional tax treatment for fringe benefits have a self-imposed maximum of 30% of remuneration being in the form of fringe benefits. ACROD, the National Industry Association for Disabilities, noted that industry guidelines that have been in place since 1993 place a 30% limit on the use of fringe benefits and suggested that this limit be enforced by legislation.(1) The executive director of the Australian Catholic Health Care Association is reported as stating that that organisation did not allow more than 30% of remuneration to be provided as fringe benefits.(2) Similarly, a spokesman for the WA Department of Health is reported as stating that employees may receive up to 30% of their remuneration as fringe benefits.(3) While the diverse range of organisations covered by the concessions prevents a thorough canvassing of the use of fringe benefits, the above reports strongly suggest that mainstream groups abide by the '30% rule' which may be regarded as desirable industry practice, although there can be little doubt that some organisations are exploiting the concessions to provide a higher level of remuneration in fringe benefits, as they are currently legally entitled to do.

Proposed Changes

Proposals to change the FBT treatment for public benevolent institutions and other employers in a similar position as described above was announced in the August 1998 statement Tax Reform, not a new tax a new tax system. The proposal was that concessional treatment be available only for $17 000 of grossed-up taxable value (grossing-up is used to increase the value of a fringe benefit received by an employee to give it the same value as the pre-tax salary needed to provide the benefit assuming the taxpayer is paying the highest marginal tax rate - also see below). The proposal is based on the desire to prevent overuse of the ability to provide exempt fringe benefits.(4)

The Review of Business Taxation (Ralph Report) recommended that fringe benefits, other than certain entertainment and car parking benefits, be taxed in the hands of the employee receiving the benefits so that the status of the employer would be irrelevant.(5) However, this approach was rejected by the Government.(6)

Under the proposal to place a maximum value on the amount of fringe benefits that could be provided with concessional tax treatment, the salary cost to employers currently using exempt or rebatable fringe benefits will increase as either the employer pays FBT or a higher salary has to be paid to employees to place them in the same after tax position as they are currently in. For non-profit organisations which devote after-cost income to the provision of services, an increase in salary costs is likely to lead to a reduction in services. The CEO of the Alcohol and other Drugs Council of Australia is reported as stating: 'Limiting FBT exemptions to $17 000 will result in either staff cutbacks or increased staff costs with no compensation - either way, services will have to be cut.'(7)

While the increase in costs associated with then proposed $17 000 limit compared with the current 30% practice will depend on the salaries offered and the number of employees receiving the various salaries, ACROD has issued three examples based on 20 employees on a range of salaries and calculate the increase in costs to be 8.2%, 12.17% and 13.5%.(8) The increase in costs will be reduced if a higher limit applies.

When this Bill was introduced, it was announced that the limit would be increased to $25 000 per employee for organisations other than public hospitals and private not-for-profit hospitals, which would retain the $17 000 limit. Both limits reflect a grossed-up value.

The additional revenue to be gained from this measure is estimated in the explanatory memorandum to the Bill to be $170 million in 2000-01; $175 million in 2001-02; $185 million in 2002-3; and $190 million in 2003-04.


As may be expected, organisations that currently take advantage of the concessional treatment of fringe benefits have objected to the proposed limit. These include organisations dealing with people with disabilities, public and non-profit health care providers, non-profit aged-care providers, anti-alcohol and drug abuse groups, groups representing employees who may be affected by the change such as the AMA and the Australian Nursing Federation, the Australian Cancer Society and other charities.(9)

The Australian Democrats are opposed to the proposed $17 000 limit. In their Summary of Democrat Recommendations for the Senate Affairs Committee Inquiry into the New Tax System, it was recommended that 'The proposed $17 000 cap on FBT concessions which will cost charities $200 million a year to be replaced with a cap of 30 per cent of remuneration.'(10) Opposition to the Government's proposal was restated in an Australian Democrats' statement dated 24 February 2000 which stated: 'The Democrats would not support the Federal Government's plan to impose an additional Fringe Benefits Tax (FBT) burden on charities and the not-for-profit sector....'. In the statement, The Australian Democrats restated their call for a two stage inquiry into charities, which was announced in a Media Release dated 9 December 1999, with the first stage dealing with the definition of charities and the second, their tax treatment.

In its statement A fairer tax system, dated 27 August 1998, the ALP appeared to agree with the government's proposal, stating that it would reform FBT to limit: 'the value of FBT benefits that can be provided by certain institutions which enjoy concessional FBT treatment to $17 000 of grossed-up benefits per employee;'. Since this statement, the ALP appears to have changed policy. On 19 October 1999 a Joint Media Release called for an independent review of the tax arrangements for the charitable and non-profit sectors because of the impact of GST package on these sectors. The call for such an inquiry was repeated in a Media Release by the Shadow Treasurer dated 9 December 1999. While the FBT changes are technically not connected with the GST, both form part of the same original statement and in relation to this Bill the Shadow Treasurer stated in a Media Statement dated 9 March 2000:

Labor remains of the view that an independent inquiry is urgently needed to consider the full impact of the changes to the tax system on the charitable and non-profit sectors.

Even though the Government has rejected such an inquiry, Labor will ensure that there is a Senate inquiry before Labor and the Parliament determines its position on the Bill.

In relation to public hospitals, following a meeting of State Health Ministers on 17 March 2000 a Media release from the Victorian Minister for Health warned that the proposed FBT changes 'could lead to mass resignations by doctors from public hospitals' and further stated:

The National President of the AMA, Dr David Brand advised the meeting the changes could lead to resignations and the withdrawal of services by doctors.

The Media Release further recommended that:

The Federal Government should immediately withdraw the FBT legislation or provide adequate compensation.

Item 2 of Schedule 1 of the Bill will insert a new section 5B into the FBT Act which will be used to calculate the amount on which an employer has to pay FBT for FBT years commencing on 1 April 2000 and later years (FBT years commence on 1 April rather than 1 July).

The proposed FBT limits will be inserted in the method statement to be used in calculation of an employer's aggregate non-exempt amount (proposed sections 5B(1D) and 5B(1E)). Proposed section 5B(1D) provides that if the benefits provided by the employer are currently exempt under section 57A, then the method statement contained in proposed section 5B(1E) is to be used. Under that proposed section, the first step is to calculate the total grossed-up value of the benefits provided in respect of each individual (see below). Then, if the employer is:

  • a public hospital that is a public benevolent institution, or
  • a government body and the employee exclusively performs duties in, or in connection with, a public hospital that is a public benevolent institution

$17 000 is to be subtracted from the value of the benefits provided to the individual or if their benefits are less than this amount, the individual will be taken not to have been provided with any benefits (ie there can be no negative amount to use in aggregate employer calculations).

In other cases, the amount to be subtracted will be $25 000 and, again, if their benefits are less than this amount, the individual will be taken not to have been provided with any benefits.

Amendments to achieve the same effect in respect of the rebate allowed under section 65J will be introduced by item 16. The different amounts to be excluded for hospital and other employees are contained in steps 2 and 3 of the method statement contained in proposed subsection 65J(2B).


As noted above, when calculating the value of a fringe benefit in determining the amount of FBT that an employer is liable to pay, the value of the benefit is grossed-up. The grossing-up aims to place the fringe benefit in the same position, regarding the amount of tax paid, as if the employee had received taxable income and purchased the benefit after tax had been deducted. To achieve this, the value on which the employer will be liable to pay FBT is increased in accordance with the formula contained in section 5B of the FBT Act, under which the value of the benefit is increased by 1 divided by the 1 minus the rate of FBT. Currently, with the rate of FBT being 48% the result is that the value of the benefit is multiplied by 1.92, or approximately doubled. A grossed-up benefit limit of $17 000 equates to a benefit cost to the employer pre-FBT of approximately $8 854 (the formula is based on the assumption that the employee is on the highest marginal rate).

The grossing-up of benefits has been complicated by the GST. In situations where an employer is able to receive input tax credits, the total amount of tax paid on a taxable benefit provided to an employee will be the FBT on the benefit less the input credit on the benefit that the employer may claim. If the benefit was purchased by the employee in after-tax income, the amount of tax paid would be the income tax paid by the employee (usually at the highest tax rate equivalent to the FBT rate for the benefit not to involve greater tax) plus the amount of GST payable on the benefit. To recoup the difference where the employer can claim input credits, the Bill introduces a separate formula for such circumstances. The proposed formula is based on including the full GST rate in the calculation.

While the need for a change in the grossing-up rules to take account of the GST and input credits has been generally accepted, the method chosen to implement the change has been criticised on a number of grounds. Comments on the proposed formula have concentrated on the impact on employers which are able to claim only partial input credits, principally organisations providing financial supplies. Division 70 of the A New Tax System (Goods and Services Tax) Act 1999 provides that such organisations will only be eligible for a reduced tax credit, with the rate available calculated in accordance with the regulations. As the formula proposed in the Bill is based on the full GST rate and applies where an employer is entitled to input tax credits, an employer which is only able to claim a reduced input credit will have their FBT liability increased to reflect the full rate of GST while they can only claim a lesser amount as an input credit.(11) Noting this and other effects, such as that total, potential GST receipts will be reduced as the amount reflecting input credits is paid in increased FBT rather than GST and that if fringe benefits are paid as part of a salary sacrifice arrangement the increased FBT will effectively be paid by the employee, the Taxation Institute of Australia concluded:

There are many other deficiencies in this legislation which were pointed out to officials during consultation and which remain to be addressed. The only sensible course is for Government to withdraw the legislation in its current form and go back to the drawing board.(12)

The proposed grouping of fringe benefits into two categories depending on whether input credits can be claimed in respect of the benefit or not will increase compliance costs for employers providing fringe benefits, although this may be dependant on the nature of the accounting package used, if any.

The changes to the grossing-up formula are estimated in the explanatory memorandum to the Bill to raise $210 million in 2000-01; $225 million in 2001-02; $235 million in 2002-03; and $240 million in 2003-04.

The changes to the grossing-up rules are contained in the method statements and formulas contained in Schedule 1 of the Bill. The proposed method statements to be inserted into section 5C of the FBT Act by item 7 provide that an employer is to separate benefits provided to an employee into two categories depending on whether input credits can be claimed in respect of the benefit and then add up these amounts for all employees. The appropriate formula is then to be applied to these aggregate amounts. The category into which a benefit will fall will depend on whether the employer is 'entitled to input tax credits', and not on whether the input credits are actually claimed or the rate of the credit. Amendments to the same effect are contained in item 16 of Schedule 1, which is to be used if a section 65J rebate (see above) is claimed

Application: For the 2000-01 and later fringe benefit tax years (FBT years begin on 1 April) (items 1, 2 and 15).

Remote Area Benefits

The Bill contains amendments to the FBT treatment for certain housing and meals provided in remote areas. Concessions currently available for remote areas treat an area as remote if it is not located in or adjacent to an 'eligible urban area'. Generally this will be a place that is 40 km or more, by the shortest practicable land route, from an urban centre with a population of more than 14 000 and is 100km or more from an urban centre with a population of 130 000 or more. If an area is within an isolated zone (there are two such zones, Zone A and Zone B, for which other tax concessions are available due to their isolation and higher costs), the 14 000 population requirement is replaced by 28 000.


Currently, where a number of conditions are satisfied (see below) housing benefits provided by an employer in a remote area, other than an employer engaged in primary production (see below), qualifies for a minimum 50% reduction in the value of the benefit on which tax is imposed. Under the FBT Act employers may choose to use either a statutory amount or a 50% reduction in calculating their FBT liability. It can be presumed that the statutory amount would only be used where the concession available is greater than 50%. The conditions that have to be satisfied for the concession are contained in subsection 29(4) of the FBT Act and include:

  • during the entire tenancy period the recipient was an employee and their usual place of employment was in a remote area
  • it is customary for employers in the employer's industry to provide accommodation for employees either without charge or for less than market value
  • it is necessary for the employer to provide such accommodation as:
  • due to the employer's industry, employees are likely to frequently change their place of residence
  • there is not sufficient other accommodation at or near the place of employment, or
  • it is customary for employers in the industry to provide such accommodation, and
  • the accommodation was not provided as part of an arms length transaction or to receive a tax advantage.

Where the employer is engaged in primary production for the purposes of the Income Tax Assessment Act 1936, section 58ZA provides that the benefit is exempt.

Items 10, 11 and 12 of Schedule 1 of the Bill will repeal the current provisions dealing with the FBT payable on remote area housing and insert a new section 58ZC which will extend the exemption currently available to primary producers to all employers. The conditions for the exemption to be available are the same as currently apply. The explanatory memorandum to the Bill estimates that the measure will cost $35 million in 2000-01; $30 million in 2001-02; and $35 million in each of 2002-03 and 2003-04.


Proposed section 58ZD will exempt from FBT meals provided on working days to an employee by a primary producer where the employment is principally in a remote area. More specifically, the meal will:

  • have to be provided by an employer engaged in primary production for the purposes of the Income Tax Assessment Act 1936
  • be provided ready for consumption on a working day
  • not constitute 'meal entertainment' as defined in the FBT Act (basically a meal provided as entertainment or as part of an entertainment package)
  • have to constitute a fringe benefit for the purposes of the FBT Act
  • have to be provided to an employee who is employed primarily at a remote location or to an associate of the employee where the meal is associated with a board benefit, and
  • have to be provided in respect of the employment.

The explanatory memorandum estimates that this measure will cost $1 million in each of the years 2001-02 to 2003-04.

Application: For the 2000-2001 and later FBT years (item 22).


  1. ACROD, Media Release, 11 September 1998.

  2. The West Australian, 25 August 1998 and The Australian Financial Review, 9 March 2000.

  3. The West Australian, 27 August 1998.

  4. Tax Reform, not a new tax a new tax system, August 1998.

  5. A Tax System Redesigned, Review of Business Taxation, p. 217.

  6. Treasurer, Press Release 21 September 1999.

  7. The Canberra Times, 27 February 2000.

  8. See ACROD, Media Release, 11 September 1998, Attachment A.

  9. ibid and see also The Sydney Morning Herald 25 February 2000 and The Canberra Times 10 March 2000.

  10. Australian Democrats, Media Release, 30 March 1999.

  11. See the following Press Releases: Deloitte Touche Tohmatsu, Financial Institutions Face Increased FBT Costs, 10 March 2000; and taxation Institute of Australia, States shortchanged in FBT/GST legislation, says Taxation Institute, 23 March 2000. In relation to car fringe benefits, see National Tax and Accountants Association, Media Release, 21 March 2000 which raises questions on the application of the proposed new formula to certain car fringe benefits.

  12. ibid.

Contact Officer and Copyright Details

Chris Field
11 April 2000
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

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ISSN 1328-8091
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Published by the Department of the Parliamentary Library, 2000.

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