Fringe Benefit Tax, also known as FBT, is a tax paid by employers for providing loan benefits to employees, for example, loans at reduced or low interest rates compared to market rates. These benefits, like low-interest loans, are often given beside an employee’s salary. Since these benefits are not in cash, they could easily go untaxed without FBT. However, calculating this tax can be tricky, and many employers make mistakes that lead to overpayment.
Paying FBT can help your business’ finances. To help you avoid this, we have created a checklist that covers common mistakes employers make when calculating and paying FBT. This checklist will help you see where you might overpay and offer solutions to optimise your fringe benefit tax payments.
Amount of Fringe Benefit Tax
If you are still struggling to determine the correct amount of fringe benefit tax to pay, you are not alone. Many employers accidentally overpay because of mistakes or misunderstandings of the tax rules. The checklist below can help you pinpoint areas where you might be overpaying.
1. Misclassifying Fringe Benefits
Problem: One common mistake employers make is misclassifying the benefits they provide. For example, some benefits may be exempt from FBT, e.g. loans for work-related travels or to buy specific tools needed for the job, e.g. laptops. Misclassifying these benefits could lead to paying more tax than required.
Solution: Make sure you correctly classify each benefit. Review each type of benefit carefully to determine if it qualifies for FBT. Knowing what benefits are fully taxable can save your business from paying unnecessary taxes.
2. Not Accounting for Employee Contributions
Problem: In some cases, employees contribute to the benefits they receive. For instance, an employee might look to pay kshs 500,000 to buy a vehicle. The employee may ask the employer for a loan of kshs 350,000. The employer may ask the employee to deposit kshs 150,000 with the company so the employer can give the vehicle seller a cheque for kshs 500,000. When calculating the FBT, the employer may calculate ii on the kshs 500,000 and forget the kshs 150,000 employee contribution.
Solution: Track any employee contributions and adjust the FBT calculation accordingly. If an employee contributes, subtract that amount from the taxable value of the benefit. Keeping accurate records of contributions will help employers avoid paying extra taxes.
3. Incorrectly Valuing Fringe Benefits
Problem: Another common issue is incorrectly calculating the value of a fringe benefit. FBT is based on the taxable value of each benefit. The tax commissioner provides the prescribed interest rates for a specified period. The interest rate is not constant, but it varies.
If you overestimate the value, you will pay more or less tax. For example, if an employee uses interest for the early part of the year for a loan provided in the later part, the interest rate may have changed, and the taxable value may not reflect the correct value.
Solution: Use the correct interest rate provided for the period by the tax commissioner to determine the actual value of each benefit. A tax professional or advisor can guide you to correctly value the benefits.
4. Failing to Stay Updated with Tax Law Changes
Problem: Tax laws change frequently, including rules around FBT. If you are not up-to-date on these changes, you could be over or under-paying FBT because of outdated interest rates or requirements. Different interest rates might be provided, which can reduce or increase your FBT liability.
Solution: Stay informed about any FBT rules and regulation changes. Always check for updates from the tax commissioner websites regularly. You can also work with a tax professional or advisor who can alert you to the changes and help you adjust your calculations accordingly.
5. Overlooking FBT Exemptions
Problem: Some items are exempt from fringe benefit tax, but many employers must pay attention to these exemptions. For example, an employee is loaned money to buy laptops or mobile phones that employees need for work, and this may be exempt under certain conditions, such as the item being an asset of the company. In this case, the purchase receipts will be in the company’s name. These exemptions are necessary to avoid overpaying FBT.
Solution: Familiarise yourself with the items whose loans are FBT exempted. Review your benefits list and see if any of them qualify for exemptions. Staying current with FBT exemption knowledge can significantly reduce your tax bill.
6. Applying a General FBT Rate to All Benefits Over the Year
Problem: Sometimes, employers apply the standard FBT rate across all the months of the year, even when some benefits qualify for reduced or higher interest rates. The rates vary, may vary throughout the year or not.
Solution: Know the different FBT rates for various months. By applying the correct rate, you can reduce the total FBT amount. Some loan benefits during the year will taxed at lower interest rates, which will lower your tax bill if used correctly.
Conclusion:
Fringe Benefit Tax does not have to be a burden. By avoiding the common mistakes we have listed here and using strategies to optimise your FBT, you can improve your company’s financial health by reducing your tax expenses. Use this checklist to ensure you are paying enough and managing FBT effectively.
