Highlights

  • When an employer pays or reimburses an expense for an employee, that is generally an expense payment fringe benefit.
  • The "otherwise deductible" rule reduces the taxable value of that benefit by the amount the employee could have claimed as a tax deduction if they had paid the cost themselves.
  • If a packaged expense would have been fully deductible to the employee, the taxable value can fall to nil.
  • The change comes from Schedule 4 of the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, Act No. 49 of 2026.

Home internet and study fees face a new tax treatment from April 2027, changing the calculations behind salary sacrifice arrangements.

How the 'otherwise deductible' rule works now

When an employer pays or reimburses an expense for an employee, that is generally an expense payment fringe benefit. The "otherwise deductible" rule reduces the taxable value of that benefit by the amount the employee could have claimed as a tax deduction if they had paid the cost themselves. If a packaged expense would have been fully deductible to the employee, the taxable value can fall to nil. That is why packaging work-related costs such as home internet used for work or job-related study fees has been popular: the employee uses pre-tax salary and little or no FBT applies. The reduction has always been proportional. For illustration, if a packaged $1,200 home internet bill was 40% for work, the taxable value was reduced by the $480 that would have been deductible, leaving $720 subject to FBT. From April 2027, a packaged bill of that kind would have no reduction at all.

What changes from 1 April 2027

The change comes from Schedule 4 of the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, Act No. 49 of 2026. Schedule 4 introduces the $1,000 standard deduction for work-related expenses, and Part 2 amends the Fringe Benefits Tax Assessment Act 1986. from 1 April 2027 employers can no longer use the otherwise deductible rule to reduce FBT on salary-sacrificed expense payments covered by the standard deduction, regardless of value.

The ATO's examples include

The rule is not abolished. it still applies to expense payments that are not covered by the standard deduction. It also still applies to covered expenses that are not provided through salary sacrifice, such as an ordinary reimbursement by the employer. So the dividing line is the same as for laptops and phones. A cost the employer genuinely bears can still get the benefit of the rule. A cost funded by giving up pre-tax salary, for an expense covered by the standard deduction, cannot. The ATO's standard deduction guidance also lists deductions that sit outside it, including union fees, professional association memberships, income protection premiums and tax agent costs.

Why the change is linked to the $1,000 deduction

The standard deduction for work-related expenses applies from the 2026–27 income year, which began on 1 July 2026. It will first be claimed in tax returns lodged from July 2027. The FBT change was legislated in the same schedule as the standard deduction, and it applies only to expense types the standard deduction covers. In effect, those costs are meant to be recognised through the employee's own tax return rather than through packaging.

Hypothetical example: $1,500 of study fees

Hypothetical example: an employee packages $1,500 of self-education fees in the 2027–28 FBT year. The example assumes the fees would otherwise be fully deductible, that the current 47% FBT rate continues, and that the Type 2 gross-up factor of 1.8868 applies because no GST credit is available on education. Under the old rule: the otherwise deductible rule reduces the taxable value to nil, so no FBT is payable. Under the new rule: there is no reduction. The taxable value is $1,500. Grossed up, it becomes $2,830.20. At 47%, FBT is $1,330.19. If the employer passes the FBT on, the arrangement would use about $2,830.19 of pre-tax salary to fund $1,500 of fees.