Reducing FBT with the otherwise deductible rule

Non-cash benefits given to an employee by their employer are known as fringe benefits. These benefits are generally subject to Fringe Benefits Tax (FBT) which the employer pays but will often factor into the employee’s package. However there are exemptions and concessions that can reduce or eliminate the amount of FBT payable. An example of one of these concessions is known as the otherwise deductible rule.

The otherwise deductible rule allows the FBT to be reduced to the extent that the employee would have been entitled to claim a tax deduction for the benefit, had the employer not paid for it.

Examples of benefits that the otherwise deductible rule might apply to include expense payments, loan interest, airline transport, board, property, and residual fringe benefits. For instance, your employer might pay for the interest on a loan that relates to your rental property.

In most cases, to be able to utilise the otherwise deductible rule a logbook or some other declaration is required to be maintained and provided to the employer for lodgment of the annual FBT return.

The true benefit of using the otherwise deductible rule can come about in a situation where an employee has a high amount of negatively geared property or investments. Investment losses are added back by the ATO for the purposes of Div 293 tax, health insurance rebates and a number of other income thresholds, which can result in a higher tax assessment.

In some circumstances an employee may be able to save tax by salary sacrificing wages and asking their employer to pay interest on an investment loan. This results in no change to your taxable income, but eliminates the “add-backs” for the adjusted income used for the various thresholds.

PRO TIP:
A crucial part of the application of the otherwise deductible rule is that the tax deduction must be a once only deduction – meaning a deduction spread over a number of years won’t qualify. Therefore if an employee would have claimed a deduction for depreciation for a benefit provided by their employer, the otherwise deductible concession won’t be available for that benefit.

Author: Tessa Jachmann
Email: tessa@faj.com.au