9. Otherwise deductible rule - business travel (LCA)
Issue
What is the application of the otherwise deductible rule ('ODR') in the following scenarios.
- Scenario 1: an employee is reimbursed for the full cost of accommodation in relation to business travel, where the cost for the employee only is $250 and there is no additional cost for the accompanying spouse?
- Scenario 2: an employee is provided with accommodation in relation to business travel, where the cost for the employee only is $250 and there is no additional cost for the accompanying spouse?
- Scenario 3: an employee is provided with accommodation in relation to business travel, where the cost for the employee only is $250 and there is an additional $50 charge for the accompanying spouse?
- Scenario 4: an employee is provided with transport for business purposes, where the cost to transport the employee only is $25 and there is no additional cost for the accompanying spouse?
- Scenario 5: an employee is provided with transport for business purposes, where the cost to transport the employee only is $25 and there is an additional $5 cost to transport the accompanying spouse?
Background
We refer to the NTLG FBT sub-committee minutes dated 18 May 2006 when the following issues were raised:
Where an employee travels on business and has a spouse accompany him/her, is there any FBT on accommodation for the spouse in the following circumstances?
1. The cost of accommodation for the employee only would be $100, but the cost including the spouse as well is $120.
2. The cost of accommodation for the employee only would be $100 and there is no additional cost for the accompanying spouse.
The ATO responded that in the first scenario above, the incremental cost of $20 would be subject to FBT, whereas no amount would be subject to FBT in the second scenario.
As a result of the 2008 Budget, a number of FBT changes were announced including an amendment to the law in relation to jointly held investment assets.
These changes were intended as an integrity measure 'to ensure that FBT applies appropriately to employee arrangements involving jointly held investment assets', for example, a low interest loan or reimbursement of expenses related to a rental property or shares.
The explanatory memorandum to the amendments provides the example of an employee and her husband who are provided with a loan fringe benefit with a taxable value of $10,000. They use the loan to purchase $100,000 of jointly held shares. Originally, the Fringe Benefits Tax Assessment Act 1986 ('FBTAA') would deem the benefit to have been provided to the employee only and the entire $10,000 would be otherwise deductible. The amendments result in only 50% being deductible as this is the amount that relates to the employee's own percentage of interest in the jointly held investment asset.
We seek confirmation from the ATO that these changes should only be limited to non-employer non-business expenses, and not applied to usual, ordinary business expenditure directly related to the employer's business.
We would like the ATO to reconfirm its position as outlined above in relation to the following five scenarios, taking into account the 2008 budget changes in respect of the ODR:
Scenario 1: Accommodation (as an expense payment fringe benefit) with accompanying spouse - no incremental cost
An employee travels interstate for two days, wholly for work purposes. The employee's hotel accommodation is booked in the employee's name. The cost is $250 and the account is settled with the employee's credit card for which he has personal liability. The employee's spouse accompanies him during the travel. The employee's spouse has paid for their own air fares, and there is no additional cost to the accommodation rate per night for the employee's spouse to stay at the hotel. Upon return to his usual place of work, the employee completes an expense reimbursement form and is duly reimbursed for the cost of the hotel accommodation. The employee has completed an ODR declaration indicating that 100% of the expense was incurred in earning assessable income.
Scenario 2: Accommodation (as a residual fringe benefit) with accompanying spouse - no incremental cost
An employee travels interstate for two days, wholly for work purposes. The employee's hotel accommodation is booked in the employer's name. The cost is $250 and the account is settled with the employer's corporate credit card. The employee's spouse accompanies the employee during the travel. The employee's spouse has paid for their own air fares and there is no additional cost to the accommodation rate per night for the employee's spouse to stay at the hotel with the employee.
Scenario 3: Accommodation (as a residual fringe benefit) with accompanying spouse - incremental cost
The facts are as provided in scenario 2, however the accommodation rate per night is $300 (ie an additional $50 per night) to accommodate the employee's spouse.
Scenario 4: Commercial vehicle transport - no incremental cost
An employer owns a commercial vehicle that has 10 seats. The vehicle is used to transport employees from their place of employment to the airport and vice versa. The driver of the vehicle is employed by the employer.
An employee is transported from their place of employment to the airport for the purpose of business travel, and is accompanied by their spouse. No additional travel is undertaken to pick up the employee's spouse. The cost to the employer to transport an employee is $25 and there is no incremental cost to transport the employee's spouse with the employee.
Scenario 5: Commercial vehicle transport - incremental cost
The facts are as provided in scenario 4; however the additional cost to transport the employee's spouse is $5.
Industry view/suggested treatment
With respect to scenario 1, the benefit provided is the reimbursement of a liability incurred on the employee's personal credit card: an expense payment fringe benefit (sub-section 20(b)). The benefit has been provided to the employee only.
The taxable value of the fringe benefit is calculated as:
- Prior to application of the ODR, the taxable value is $250 being the amount that, but for the ODR, would have been the taxable value of the expense payment fringe benefit.
- Section 24 reduces the taxable value to nil where the employee provides an ODR declaration recording 100% of the expenses were incurred in earning the employee's assessable income.
The expenditure has been incurred for the sole purpose of producing assessable income of the employee.
Sub-section 138(3) provides that where a benefit is provided jointly to the employee and one or more associates of the employee, the benefit is deemed to have been provided to the employee only. It is our view that, although sub-section 138(3) applies to deem jointly received benefits as having been received by the employee only, the 2008 budget change as enacted in sub-section 24(9) does not apply as there is no asset or thing that relates to the matter in respect of which the expense payment fringe benefit is provided.
As such, we submit there is no additional FBT liability.
The benefit provided in scenario 2 is an external period residual fringe benefit (section 51(a)).
The benefit has been applied or used for the purpose of producing assessable income of the employee.
The taxable value of the fringe benefit is calculated as:
- Prior to application of the ODR, the taxable value is $250 being the amount that, but for the ODR, would have been the taxable value of the residual fringe benefit.
- Section 52 reduces the taxable value to nil where the employee provides an ODR declaration which records that 100% of the expense was incurred in earning the employee's assessable income.
It is recognised that budget changes in 2008 modified the application of the ODR, introducing the concept of the 'employee's percentage of interest'. However, as stated above, it is our view that as there is no asset or other thing to which the residual fringe benefit relates (section 52(5) (a)). Therefore, the 2008 budget changes have no application.
As such, we submit there is no additional FBT liability.
The benefit provided in scenario 3 is an external period residual fringe benefit.
The benefit has been applied or used for the purpose of producing assessable income of the employee.
Sub-section 138(3) deems any benefit to have been provided jointly to the employee and their associate to have been provided to the employee only. As submitted above, it is our view that as there is no asset or other thing to which the residual fringe benefit relates (section 52(5)(a)), the 2008 budget changes have no application.
As sub-section 138(3) deems the benefit to have been provided to the employee only, we submit that the entire $300 is otherwise deductible.
As such, we submit there is no additional FBT liability.
With respect to scenario 4, following from the reasons provided in scenario 2, the benefit provided is an external period residual fringe benefit and the entire $25 is otherwise deductible.
As such, we submit there is no additional FBT liability.
With respect to scenario 5, following from the reasons provided in scenario 3, the benefit provided is an external period residual fringe benefit and the entire cost relating to employees is otherwise deductible. In addition, the $5 relation to the spouse would also be otherwise deductible.
As such, we submit there is no additional FBT liability.
Technical references
Fringe Benefits Tax Assessment Act 1986 (Cth)
NTLG FBT Sub-committee minutes for 18 May 2006, agenda item 14
The Hon Wayne Swan MP, 'Fringe Benefits Tax (FBT) - Integrity Measures' (Media Release, No.048, 13/05/2008).
Explanatory Memorandum, Tax Laws Amendment (2008 Measures No. 5) Bill 2008 4.10.
Impact on clients
Priority
Medium priority.
Has previous advice been sought from the ATO?
Not to our knowledge
Has this issue been discussed at any other consultative forum?
Not to our knowledge
Meeting discussion
The interaction and application of the otherwise deductible rule following the changes brought about by Tax Laws Amendment (2008 Measures No.5) Act 2008 in relation to 'jointly held assets' was discussed at length. In particular whether those amendments relating to 'jointly held assets' extended to include arrangements such as those put forward in relation to the 5 scenarios set out in the agenda item.
Technical points discussed included the meaning of the phrase 'interest in…', '… an asset or thing', meaning of a joint benefit and possible application of the minor benefit exemption.
Members acknowledged that the scenarios raise some difficult technical issues and ultimately the outcome would depend on the actual facts, in particular in determining whether or not there was a joint benefit under sub-section 138(3).
Obviously in the absence of a joint benefit, the changes to the otherwise deductible rule brought about by Tax Laws Amendment (2008 Measures No.5) Act 2008 are not triggered.
It was also acknowledged that the agenda item had been lodged late and insufficient time was available for the ATO to provide a fully considered view at the meeting. The ATO agreed to consider further the scenarios put forward after the meeting and provide a general response to same.
ATO response
As stated in the 18 May 2006 minutes of the NTLG FBT sub-committee meeting, the application of the otherwise deductible rule will ultimately depend on the deductibility outcomes that hypothetically would be available to the employee if he/she was to claim an income tax deduction and whether sub-section 138(3) can be relied upon will be a question of fact.
It was also noted in the previous minutes that where a spouse accompanies an employee, for example interstate or overseas, section 26-30 of the Income Tax Assessment Act 1997 may apply to deny any deduction to an employee. Section 26-30 states that deductions are not allowed for expenses attributable to the travel of a relative where the relative simply accompanies the employee and does not perform substantial duties as an employee and it is reasonable to conclude that they will still accompany the employee even if they did not have a personal relationship with that person.
The ATO's response to the first circumstance put forward on 18 May 2006 was that where there is an additional cost for the spouse over and above the cost that the employee would otherwise incur and it was agreed that there would generally be a separate fringe benefit.
The ATO's response to the second circumstance put forward on 18 May 2006 was that where there is no additional cost for the spouse, as the room rate covers both single and dual occupancy, there would generally not be a taxable fringe benefit in relation to the spouse.
The outcome in both those examples was provided on the acceptance that there were separate benefits to the employee and the spouse in both the first and second circumstances, and relevant valuation methodologies applied to each. In relation to a separate benefit provided to the spouse, it may require the employer to consider the 'notional value' rule under paragraph 51(c).
The general issue raised in the current LCA submission is to what extent the changes made to the otherwise deductible rule in respect of 'jointly held assets' impacts on the previous discussion at this forum.
The ATO indicated whether sub-section 138(3) and the consequential otherwise deductible rule impacts are triggered will be a question of fact depending on whether a joint benefit has been provided and that both the employee and spouse held an 'interest' in the 'asset or thing'.
In comparing the key features of the new law to the current law, the Explanatory Memorandum to Tax Laws Amendment (2008 Measures No. 5) Bill 2008, sets out the following in relation to the operation of the new law:
An employer must adjust the taxable value of a fringe benefit (loan fringe benefit, expense payment fringe benefit, property fringe benefit and residual fringe benefit) provided jointly in relation to an income earning asset jointly owned by an employee and their associate, so that the taxable value of the fringe benefit is reduced only by the employee's percentage of interest in the asset.
As discussed in the NTLG FBT sub-committee minutes of 18 May 2006, it will be a question of fact as to whether or not sub-section 138(3) is applicable.
In relation to scenario 1, the ATO agreed that in the circumstances put forward, a single expense payment fringe benefit was provided to the employee. In such circumstances, the taxable value is reduced to nil.
In relation to scenario 2, the ATO considered that in the circumstances put forward, separate residual fringe benefits were provided to the employee and the spouse.
The employer would be entitled to apply the otherwise deductible rule to the residual fringe benefit provided to the employee resulting in a nil taxable value.
For the spouse, the taxable value of the residual fringe benefit ascertained in accordance with the 'notional value' rule under paragraph 51(c), would also be nil as there was no additional cost incurred for the hotel accommodation over and above the cost to accommodate the employee. It is accepted in this circumstance that the spouse would not reasonably be expected to pay for their benefit under an arm's length transaction from the hotel.
In relation to scenario 3, the ATO also considered that in the circumstances put forward a separate benefit was provided to the employee and the spouse. In both cases these were residual fringe benefits and as suggested in response to scenarios 1 & 2, the taxable value for the employee's benefit would be nil.
However for the spouse, the taxable value of the residual fringe benefit ascertained in accordance with the 'notional value' rule under paragraph 51(c) would be $50 as there was an additional cost incurred for the hotel accommodation over and above the cost to accommodate the employee. In this case the employer could consider whether the minor benefit exemption applies (refer section 58P and Taxation Ruling TR 2007/12; fringe benefits: minor benefits).
Accordingly, in scenarios 1, 2 and 3 the views previously advised at the forum (18 May 2006) were confirmed as the circumstances put forward in these scenarios were not considered to be situations where there was in fact 'joint benefits' for the purposes of sub-section 138(3).
In relation to scenario 4, the employer owns a 10 seat commercial vehicle which is used to transport employees to and from their home to the airport. The cost to transport the employee to the airport is stated as being $25 and in this scenario, it is stated there is no incremental cost to transport the employee's spouse to the airport.
The ATO considered that in the circumstances put forward, separate residual fringe benefits were provided to both the employee and the spouse. In subsequently considering this scenario, and based on the limited facts provided, the exemption provided by sub-section 47(6) could be available.
On a presumption that the employee is exclusively undertaking 'work related travel' (as defined in sub-section 136(1)) and the associate is undertaking private travel which is minor, infrequent and irregular, the employee's benefit would be exempt.
For the spouse benefit, the transport provided by the employer in such circumstance could also be treated as an exempt benefit in accordance with sub-section 47(6) as that associate's private use of the motor vehicle was minor, infrequent and irregular and the employee's use was exclusively work related.
In relation to scenario 5, the ATO suggested that given the scenario put forward, the outcome would be the same as that provided in response to scenario 4.
Sections within Agenda items
Last Modified: Monday, 30 April 2012