We run a lot of Recognition & Reward programmes for clients, whether for long service awards, thank you awards or other team or individual incentives.
Clients setting up their new SmartAwards™ reward programme often ask about the tax treatment of the gifts, prizes or awards that are given to employees.
When a business begins to consider their options around implementing a Recognition & Reward program in Australia the tax legislation they will need to refer to is Fringe Benefits Tax.
What is Fringe Benefits Tax?
A fringe benefit is a 'payment' to an employee, but in a different form to salary or wages.
According to the fringe benefits tax (FBT) legislation, a fringe benefit is a benefit provided in respect of employment. This effectively means a benefit is provided to somebody because they are an employee. The 'employee' may even be a former or future employee.
An employee is a person who is, was, or will be entitled, to receive salary or wages, or benefits in lieu of salary and wages. Benefits provided in respect of someone who has died are not fringe benefits as a deceased person does not meet the definition of 'employee' in the FBT legislation. The terms benefit and fringe benefit have broad meanings for FBT purposes. Benefits include rights, privileges or services.
Fringe Benefits Tax (FBT) in the context of reward and recognition programs
Our understanding of Recognition and Reward Programs is that they are FBT exempt as they fall under what is considered Minor Benefits.
What are Minor Benefits?
Minor Benefits fall under Legislative Reference: Section 58P of the FBTAA.
Minor benefits are exempt benefits. A minor benefit is a benefit which is both:
- less than $300 in value (before 1 April 2007 the amount was less than $100), and
- unreasonable to treat as a fringe benefit.
A minor benefit is a benefit which has a ‘notional taxable value’ of less than $300. The notional taxable value of a minor benefit is, broadly, the amount that would be the taxable value if the benefit was a fringe benefit.
Where an employee is provided with separate benefits that are in connection with each other (for example, a meal, a night’s accommodation and taxi travel), then each individual benefit needs to be looked at to see if the notional taxable value of each benefit is less than $300.
When determining if the notional taxable value of the benefit is less than $300, benefits provided to associates are not included.
If the notional taxable value of a benefit is less than $300, the employer then needs to determine if it would be unreasonable to treat the benefit as a fringe benefit.
The following five criteria need to be considered when deciding if it would be unreasonable to treat the minor benefit as a fringe benefit:
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The infrequency and irregularity with which associated benefits, being benefits that are identical or similar to the minor benefit, and benefits given in connection with the minor benefit, are provided. The more frequently and regularly associated benefits are provided, the less likely that the minor benefit will qualify as an exempt benefit. |
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2. |
The total of the notional taxable values of the minor benefit and identical or similar benefits to the minor benefit. The greater the total value of the minor benefit and identical or similar benefits, the less likely it is the minor benefit will qualify as an exempt benefit. |
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The likely total of the notional taxable values of other associated benefits – that is, those provided in connection with the minor benefit. For example, where a meal, which is a minor benefit, is provided in connection with a night’s accommodation and taxi travel, which themselves may or may not be a minor benefit, the total of their taxable values must be considered. The greater the total value of other associated benefits, in this case being the accommodation and the taxi travel, the less likely it is that the minor benefit will qualify as an exempt benefit. |
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The practical difficulty in determining what would be the notional taxable value of the minor benefit and any associated benefits. This would include consideration of the difficulty for the employer in keeping the necessary records in relation to the benefits. |
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The circumstances in which the minor benefit and any associated benefits were provided. This would include consideration as to whether the benefit was provided as a result of an unexpected event, and whether or not it could be considered principally as being in the nature of remuneration. |
Rewards given to employees as part of an R&R programme classify as a Minor Benefit (FBT exempt)
This is because:
- The reward is infrequent and irregular
- The reward is typically under $300 per instance
- The reward is typically an unexpected event and could not be considered principally as being in the nature of remuneration
Structuring a Reward & Recognition programme aligned to best practice
Best practice strategy supports a framework which allows for:
- Frequent instances of informal recognition enabled through the use of non-monetary eCards - avoiding tax implications altogether.
- More frequent, lower-value rewards to drive engagement increase (e.g. allocating a $300-per-person-per-year budget to strategic recognition and reward would deliver 6 instances of financial recognition valued at $50 per year, rather than 1 instance valued at $300)
- Unplanned/unexpected and aligned to extraordinary behaviour/impact
Whichever option is chosen, Reward Gateway provides reports on everyone who has been awarded in a year so clients can reconcile and FBT to be paid.
If clients want to avoid the cost of awards and tax altogether, our eCard peer-to-peer recognition product encourages saying a simple thank you with no money involved - so it's even simpler.
Read more about The power of eCards for driving continuous recognition
Please note, Reward Gateway are not tax advisors. Find out more about this particular topic on the Australian Taxation Office webpages and further information about employee benefits taxation in general should be sought from the Taxation Office or a tax advisor directly.
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