PAYE vs. FBT

PAYE generally applies to cash paid by an employer to an employee, while FBT applies to non-cash benefits provided by the employer to the employee. However, it is not always clear whether PAYE, FBT or neither applies.

The basis upon which an employee receives a benefit will determine how it should be treated. For example, to reward an employee for their efforts an employer pays for an employee to attend an educational course of their choice, and the employee chooses to attend a cooking course for their own personal interest. In doing so, any one of the following scenarios could apply:

  1. The employee organises to attend the course, receives the invoice and pays the cost, but is reimbursed by the employer.
  2. The employee organises to attend the course and receives the invoice, but the employer pays the invoice on the employee’s behalf.
  3. The employer organises the course, receives the invoice and pays for the cost of the course.

The reimbursement payment under the first scenario will be subject to PAYE as it is akin to an additional salary/wages payment. In the second scenario, as the expense has been incurred by the employee (i.e. the invoice is in the employee’s name), upon payment by the employer it is specifically captured as ‘expenditure on account of an employee’ and also subject to PAYE. The third scenario is distinguished from the first two scenarios, on the basis that the employer contracts to procure the right for the employee to attend the course directly and provides that right to the employee, i.e. a non-cash benefit, and is therefore subject to FBT.

However, if instead of a cooking course the employer required the employee to attend a leadership development course, under each scenario above, no FBT or PAYE would be payable.

In the first scenario, a reimbursement payment is not subject to PAYE if the reimbursement qualifies as a non-taxable reimbursement. To qualify as a non-taxable reimbursement, the course would have to be deemed to have developed the employee’s capacity to perform their job. On this basis, the payment would qualify as a tax-free reimbursement not subject to PAYE.

In the second scenario, the payment for the course is not captured as expenditure on account of an employee as it is for the benefit of the employer’s business and therefore is not subject to PAYE. In the third scenario, because the benefit removes the need for the employer to pay a non-taxable reimbursement, FBT does not apply.

It is important to consider all the facts when determining if PAYE or FBT apply. It must be established whether the employer or the employee is incurring the underlying expense, and whether the employer benefits from the expense or if it is of personal benefit to the employee.

Published Spring 2011.

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