Administration of Fringe Benefits Tax
The objectives of the audit were to:determine whether entities had established effective internal control frameworks and processes to mitigate the risks associated with FBT obligations and transactions;assess whether the internal control frameworks and processes supported the payment of FBT and the reporting of reportable fringe benefit amounts (RFBAs) on employee payment summaries in accordance with the legislation;identify sound and better practices in the administration, management and operation of systems for collecting, collating, calculating, reporting and remitting FBT; and as necessary, recommend improvements in the controls and practices relating to the administration of FBT in the audited entities.
Fringe benefits tax (FBT) was introduced on 1 July 1986 in order to tax benefits provided in place of, or as well as, salary and wages. FBT was designed to address previous deficiencies in the income tax law, which meant that fringe benefits were in effect, a form of tax-free income. FBT is levied on the grossed-up1 taxable value of the fringe benefits provided and the FBT liability is the responsibility of the employer. The FBT is self assessed and employers are required to calculate the liability and pay the tax within legislative timeframes.
The FBT legislation was enacted in a package of four Acts, they include2 :
- The Fringe Benefits Tax Assessment Act 1986;
- The Fringe Benefits Tax Act 1986;
- The Fringe Benefits Tax (Application to the Commonwealth) Act 1986; and
- The Fringe Benefits Tax (Miscellaneous Provisions) Act 1986.
There have been several changes to the FBT law since its inception. For example:
- from 1 April 1999, the requirement by employers to record the grossed-up taxable value of fringe benefits on the payment summary of employees receiving total relevant fringe benefits exceeding
$1 000; and
- the introduction of the Goods and Services Tax (GST) in July 2000 impacted on the calculation of an employer's FBT liability.
The total aggregated FBT liability for all Australian Government public sector entities for the 2003 FBT year was approximately $365 million and $380 million for 2004.3 The ANAO audit was undertaken in four entities whose combined total FBT liability for 2003 was approximately $300 million or 82 per cent of the total liability for Australian Government public sector entities for that year.
The objectives of the audit were to:
- determine whether entities had established effective internal control frameworks and processes to mitigate the risks associated with FBT obligations and transactions;
- assess whether the internal control frameworks and processes supported the payment of FBT and the reporting of reportable fringe benefit amounts (RFBAs) on employee payment summaries in accordance with the legislation;
- identify sound and better practices in the administration, management and operation of systems for collecting, collating, calculating, reporting and remitting FBT; and
- as necessary, recommend improvements in the controls and practices relating to the administration of FBT in the audited entities.
Scope of the audit
The scope of the audit encompassed:
- assessing whether FBT was paid in accordance with legislation;
- identifying the range of FBT administrative arrangements in place, including those where the administration of salary packaging had been outsourced;
- assessing the controls in place in respect of systems for the administration of FBT;
- testing a sample of transactions processed within each entity to assess whether transactions were assessed appropriately and in accordance with legislative and procedural requirements;
- assessing the processes and controls in place to ensure that RFBAs were correctly reported on employee payment summaries;
- assessing the processes and controls in place designed to ensure that FBT balances were accounted for correctly in the FBT return; and
- the identification of sound and better practice principles, where appropriate.
- The Commonwealth Scientific and Industrial Research Organisation;
- The Department of Defence;
- The Department of Foreign Affairs and Trade; and
- The Reserve Bank of Australia.
Complying with the requirements of FBT legislation can be relatively complex and resource intensive for many employers including Australian Government public sector entities. Overall the ANAO considers that most of the audited entities had committed sufficient resources and effort to meet their FBT obligations and some had established a range of sound and better practices in relation to the administration of FBT.
The ANAO concluded there would be benefit in some of the audited entities re examining their risk assessments with a view to addressing in a comprehensive manner the risks related to the administration of FBT. The ANAO also concluded that in some entities the guidance used to assist with the administration of FBT needed to be improved, as in some cases it was incomplete, incorrect, out of date and/or insufficiently detailed. As a result there was an increased risk that entities would not fully meet their FBT obligations.
The audit identified that all of the audited entities had provided benefits to employees that had not been subject to FBT. In particular, two of the audited entities had continued to rely on advice issued by the Australian Taxation Office (ATO) in 1986 relating to the application of FBT on overseas conditions and allowances which the ANAO considers, based on ATO advice, to be no longer applicable. As a result the ANAO considers that these two entities may have significantly understated their FBT liability and the resultant reportable fringe benefits amounts for their employees. Based on the audit findings, the ANAO considers that there would be benefit in entities undertaking a comprehensive review of those benefits provided to staff that are not currently subject to FBT with a view to improving the completeness of benefit calculations. In particular, the ANAO considers it would be appropriate for private tax rulings to be sought from the ATO in respect of a number of benefits that entities considered were not subject to FBT.
The audit also identified a number of incorrect calculations supporting the determination of FBT payable. The incorrect calculations were due to inaccurate, inconsistent or inappropriate methods used to calculate the value of benefits provided and a lack of appropriate supporting documentation. The ANAO also found there were a number of arrangements and processes associated with the administration of FBT that could be improved in some entities. In particular, the ANAO considers entities need to be satisfied that review functions undertaken in relation to FBT administration are conducted by people with sufficient FBT knowledge to fully understand the requirements for complying with FBT legislation.
Thirteen recommendations have been made aimed at improving the administration of FBT in the audited entities. A number of these recommendations are likely to have relevance to all Australian Government entities that provide fringe benefits to their employees.
Entities' responses to the audit report
The audited entities, together with the ATO, have indicated agreement with the audit recommendations. Entities' responses to the recommendations are provided following each recommendation in the main body of the report. General comments provided by the audited entities and the ATO have been included at Appendix 1 of the report.
1 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 paying tax.
2 Australian Taxation Office Fringe Benefits Tax (FBT) - A guide for employers, February 2005, p.ii.
3 Figures based on assessment data as provided by the ATO to ANAO on 8 February 2005.