Did you know that depending on the size and handling of an overpayment, an FBT liability may apply? Read on to learn what you need to consider when deciding how to handle an overpayment, in order to avoid an FBT bill.
Firstly, it must be determined whether the employee is ‘obliged’ to repay the amount or not. For example, a clause in an award detailing the manner in which an overpayment is to be recouped will create an obligation. If there is no obligation for the employee to repay the overpayment or the employee has a legal right to the overpayment, then FBT will not apply.
Whether or not there is an obligation to repay the amount can sometimes be tricky, so if you are unsure, it would be best to get FBT/legal advice on this one!
Once obligation has been established, there are two scenarios in which FBT may be applicable:
- If the employer allows the employee time to repay the overpaid amount
- In this instance the actual overpayment is not a fringe benefit, but the time given to repay it is
- If the employer decides to waive the employees obligation to repay the amount
- The amount that has been waived is deemed to be the Fringe Benefit
Loan Benefit FBT
If the overpaid amount is to be repaid within 6 months, no FBT will apply. But if the employee is being given the option to stretch repayments out over a period longer than 6 months, a Loan Benefit FBT amount may apply.
While the employer isn’t going to actually be charging the employee any interest on the overpaid amount, it is the calculation of ‘notional interest’ that will determine whether FBT will apply or not. It is, therefore, necessary to calculate the notional interest at the benchmark rate of 5.25% (for the 2017-18 FBT year) on the overpaid amount.
If the notional interest calculation results in a figure higher than $300, FBT will apply.
However, if the notional interest calculates to less than $300, even if the employer allows the employee to repay over 6+ months, it may be considered a ‘minor benefit’ and no FBT will apply.
Debt Waiver FBT
If an employer decides to waive the repayment of an overpaid amount, the way to determine whether FBT will apply or not is to calculate the ‘notional value’ (i.e. the grossed up value) of the overpayment.
For the 2017-18 FBT year, the gross up rates are 2.0802 for those employers entitled to a GST credit and 1.8868 when the employer is not entitled to a GST credit.
If the notional value of the overpaid amount is less than $300, it may be considered a ‘minor benefit’ and no FBT will apply. But if the amount is in excess of $300, this constitutes a ‘Debt
Waiver Benefit’ and FBT will apply.
So next time you have an employee overpayment to deal with, remember to include FBT as one of the considerations before you decide how to proceed with recovery – or non-recovery – of the funds.