Another way you can reduce your FBT liability is under what’s called ‘the otherwise deductible rule’. The taxable value of an expense payment fringe benefit may be reduced under this rule, but only if the recipient of the benefit is your employee, not an associate of your employee. 

As the name of the rule implies, you may be able to reduce the taxable value if you’ve paid for or reimbursed the employee for something which they could have otherwise claimed as a deduction in their personal income tax return. The amount that the taxable value may be decreased by, is the amount they would have hypothetically been able to claim had you not reimbursed them. If you do reimburse them, they are no longer able to claim the expense as a tax deduction.

This rule may apply for expense payments that are solely employment-related or those which are only partly employment-related.

One example is where the employee incurred an expense that was part employment-related and part private. Whatever proportion of employment-related use the employee would have been entitled to claim in their income tax return, that’s how much can be used to reduce the taxable value.

Example – Home telephone and internet expenses
 

• 70% private use
• 30% employment-related use

If you reimburse the employee for 100% of the cost, the otherwise deductible rule will only apply to 30%. That is the employment-related use portion that your employee could have otherwise claimed in their income tax return had you not reimbursed them. 

If an employee incurred an expense solely in performing employment-related duties, they would be able to claim that whole expense in their income tax return. Under the otherwise deductible rule, if you reimbursed the employee for all of this expense, the taxable value of the expense payment fringe benefit would be nil. 

Example – Train fares

For example, your employee incurs $50 train fares for 100% employment-related purposes. The employee could claim the entire cost as a deduction in their income tax return.

If you reimburse that cost you are paying an expense payment fringe benefit. The employee can no longer claim it in their return. You can reduce the taxable value by 100% under the ‘otherwise deductible’ rule. 

This means the fringe benefits tax would be nil. If the taxable value is nil, there is no fringe benefit tax obligation.