FBT
Gross-up rate
A multiplier used in fringe benefits tax to convert the taxable value of a benefit into the pre-tax salary an employee would have needed to earn to buy it.
Fringe benefits tax is calculated on the taxable value of the benefits an employer provides, but that raw value is not the figure the tax is applied to. First the taxable value is multiplied by a gross-up rate. The idea is to estimate how much salary the employee would have had to earn, before income tax, to afford the same benefit from their after-tax pay. The grossed-up amount is then taxed at the FBT rate.
There are two gross-up rates, commonly called Type 1 and Type 2. The Type 1 rate is higher and applies where the employer is entitled to claim GST credits on the cost of providing the benefit. The Type 2 rate is lower and applies where the employer cannot claim GST credits, for example because the benefit relates to input-taxed or GST-free supplies. The difference exists so that the GST credit the employer receives is reflected in the tax outcome.
The actual numbers are set by legislation and are linked to the GST rate and the top FBT rate, so they can change if either of those inputs changes. For that reason this entry does not quote the current multipliers. The ATO publishes both rates each FBT year, and they appear in its FBT guides and in the calculators built into most payroll and accounting software. Always use the figure for the correct FBT year, which runs from 1 April to 31 March.
In practice the employer works out the taxable value of each benefit, decides which rate applies by checking whether a GST credit was available on the underlying cost, and applies the multiplier. The result is the grossed-up taxable value. Employers also report a grossed-up figure for employees as part of the reportable fringe benefits amount, although the Type 2 rate is generally the one used for that reporting. That figure can affect things such as certain income tests.
A common point of confusion is that the gross-up rate is not a tax rate. It is a conversion step. A business that provides a car to an employee for private use, for example, will see the taxable value rise once the gross-up is applied, and only then does the FBT percentage take effect. Another misunderstanding is assuming one rate fits every benefit. Mixed arrangements may need to be split, with part of the benefit grossed up at each rate.
Because the correct rate depends on GST credit entitlement, good records matter. Keep the tax invoices that support your credits, since the entitlement determines the rate. Getting this wrong can overstate or understate your FBT liability. This entry is general information only, so confirm which rate applies to your benefits with the ATO or a registered tax professional before lodging your FBT return.
Worked example
A business provides an employee with a benefit that has a taxable value of $5,000 and is entitled to claim GST credits on the cost, so the Type 1 rate applies. Suppose, for illustration only, the Type 1 rate were 2.0 (the real rate is set by the ATO and differs). The grossed-up value would be $5,000 x 2.0 = $10,000. FBT is then charged at the FBT rate on $10,000, not on the original $5,000.
Practical tips
- Check the ATO website for the Type 1 and Type 2 rates for the specific FBT year, because the figures are set by legislation and are not fixed.
- Keep tax invoices for every benefit, since GST credit entitlement decides whether the higher or lower rate applies.
- Remember the gross-up is a step before the FBT rate is applied, so do not multiply the taxable value by the FBT rate alone.