• 15 Training/ retraining expenses for excess employees

    Question:

    Whether the payments made to training providers or to reimburse employees for training/retraining courses/sessions for employees, where those employees’ assigned duties/positions are abolished to enable those employees to be assigned to other duties/positions which are not abolished, are subject to FBT?

    Background:

    To achieve government savings measures in this tight economic environment, certain duties/positions assigned to employees have been abolished.

    It is quite common for Government employers to run a training/retraining program for its employees where those employees that have assigned duties/positions that have been abolished do not wish to accept a voluntary redundancy package.

    The training/retraining program is designed to provide employees with new skills or upgrading or refreshing skills and experience to satisfactorily perform other duties at that same classification level.

    A typical arrangement involves the Government employer making payments to training providers or reimbursing employees for the cost of training/retraining programs to enable those employees to do other duties at that same classification level. 

    That is, the training/retraining is not for the employees’ duties per say as these have been abolished, but rather the training forms part of the employees’ current duties in preparation for the employees’ future duties.

    Law:

    Subsection 136(1) defines a fringe benefit. A benefit provided in respect of employment effectively means a benefit provided to somebody because he or she is an employee.  The payment to training providers or reimbursement to employees that participate in the training/retraining program is considered to be a benefit as defined in subsection 136(1) of the FBTAA.

    Work related counselling

    Section 58M provides an exemption for work-related counselling.  The training program is not considered to fall within section 58M as the program is aimed at providing new, upgrading or refreshing skills not guidance or advice on acquiring or upgrading skills.

    Expense payment

    Section 20 of the FBTAA defines an expense payment benefit.  The reimbursement of training costs to employees is considered to meet the definition of section 20 of the FBTAA.   Where payments are made to a training provider directly and that payment is made on behalf of the employees (i.e. discharging the employees’ obligation) this is considered to meet the definition of section 20 of the FBTAA.

    Taxable value of an expense payment fringe benefit is either the amount of payment made by the employer on behalf of the employee or the amount of reimbursement made.

    The taxable value of an expense payment fringe benefit can be reduced due to the otherwise deductible rule under section 24 of the FBTAA.  This permits a reduction of the taxable value of an expense payment fringe benefit where the employee would hypothetically been entitled to claim an income tax deduction if the employer had not paid a third party or reimbursed the employee in satisfaction of an expense.

    The otherwise deductible rule only applies where employee would have been entitled to a once only deduction.

    For an employer to reduce the taxable value of a fringe benefit under the otherwise deductible rule an employee would have had to incur the expense solely relating to the performance of their employment related duties and that expense would have to be wholly deductible to that employee for income tax purposes.

    To meet section 8-1 of the ITAA 1997 (i.e. for deductions) it is necessary to demonstrate that there is a real and direct connection between the outgoing and the gaining of assessable income.  The Commissioner of Taxations’ view on self-education expenses is in Taxation Ruling TR 98/9.  TR 98/9 basically says that provided there is sufficient connection between the course of self-education and current income earning activity, there is an entitlement to claim a deduction for self-education.

    TR 98/9 says where income earning activities are based on the exercise of a skill or specific knowledge and the subject of self-education enables the employee to maintain or improve that skill the self-education expenses are allowable as a deduction.

    TR 98/9 states self-education expenses will not be allowable if study is intended to enable you to get employment; enable you to obtain new employment; open up a new income earning activity.

    It is our view that once the employees’ assigned duties are abolished, the employees’ current duties become that which is to learn new skills/ upgrade skills/ refresh skills in readiness for future duties to be assigned to the employee by the employer.  The employer runs the training/retraining program and the employer wants the employee to participate in the program to enable them to perform the ‘to be’ assigned duties at the same classification.  I.e. the income earning activity is to be retrained

    Most if not all job and person specifications state that an employee can be assigned to another position at the same classification. 

    Residual Benefit

    The payment to training providers directly, where the training program is organised between training provider and the Government employer, for attendance by a certain number of employees is considered to be a residual benefit.  For example, a Government employer organising a training provider to run a session on Masterpiece software or eprocurement software.

    The taxable value of a residual fringe benefit in this instance is the amount of payment made by the employer.

    Section 52 of the FBTAA allows the application of the otherwise deductible rule to reduce the taxable value of the fringe benefits, where the recipient (employee) of the residual benefit would have been able to claim a once-only deduction (gross deduction) had the recipient incurred the expenditure (gross expenditure).

    Meeting discussion
    In discussion, several members advised the treatment of payments made to excess employees is an issue within their jurisdiction.
    However, although the issue has arisen in several jurisdictions there were factual differences between the different arrangements including:
    some employees continuing to be Government employees, but others ceasing their Government employment;
    some benefits being provided as an expense payment benefit, but others provided as a residual benefit.
    Further differences arose in relation to the employees who continued to be Government employees as a result of the disaggregation provisions. For example, the excess employees in a State or Territory that had disaggregated had a change of employers (i.e. their employment for the purposes of the FBTAA with one nominated State or Territory body was terminated with the employee being transferred to another nominated State or Territory), but the excess employees in a State or Territory that had not disaggregated did not change employer when transferred between agencies.

    ATO Response

    As discussed, there are a number of different factual scenarios that can arise in relation to excess employees including:

    • the excess employee transferring to a different employer that is an associate of the original employer (disaggregated State or Territory);
    • the excess employee transferring to another part of the same employer (State or Territory not disaggregated); or
    • the excess employee ceasing to be a Government employee.

    Within each of these alternatives, the benefit can be provided as either an expense payment benefit, or a residual benefit.

    Given this range of different scenarios, members who require advice about the taxation outcomes for their particular situation should apply for a private ruling where the facts of their situation can be fully considered.

    Although it was not possible to provide a standard response, the following general guidance was provided.

    The agenda item is based on the presumption that the benefits will come within the provisions of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). However, this may not always be the outcome as paragraphs (la) to (le) of the definition of ‘fringe benefit’ in subsection 136(1) of the FBTAA specifically exclude certain benefits provided as a consequence of the termination of employment from being a fringe benefit.

    Paragraphs (la) to (le) of the ‘fringe benefit’ definition state:

    …, but does not include:

    (la) an early retirement scheme payment (within the meaning of the Income Tax Assessment Act 1997); or
    (lb) a genuine redundancy payment (within the meaning of the Income Tax Assessment Act 1997); or
    (lc) an employment termination payment (within the meaning of the Income Tax Assessment Act 1997); or
    (ld) a payment that would be an employment termination payment (within the meaning of the Income Tax Assessment Act 1997) apart from paragraph 82-130(1)(b) of that Act; or
    (le) any of the following payments, if they would be employment termination payments (within the meaning of the Income Tax Assessment Act 1997) apart from paragraph 82-130(1)(b) and section 82-135 of that Act:
    (i) an unused annual leave payment (within the meaning of that Act);
    (ii) an unused long service leave payment (within the meaning of that Act);
    (iii) a payment covered by Subdivision 83-D (Foreign termination payments) of that Act;
    (iv) a payment covered by paragraph 82-135(g) of that Act;
    (v) a payment of an annuity, or a supplement, covered by section 27H of the Income Tax Assessment Act 1936;

    An early retirement scheme is defined in section 83-180 of the Income Tax Assessment Act 1997 (ITAA 1997) as follows:

    83-180(1)  An early retirement scheme payment is so much of a payment received by an employee because the employee retires under an *early retirement scheme as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the retirement.
    83-180(2)  An early retirement scheme payment must satisfy the following conditions:
    (a) the employee retires before the earlier of the following:
    (i) the day he or she turned 65;
    (ii) if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service - the day he or she would reach the age or complete the period of service (as the case may be);
    (b) if the retirement is not at *arm's length - the payment does not exceed the amount that could reasonably be expected to be made if the retirement were at arm's length;
    (c) at the time of the retirement, there was no *arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the retirement.
    83-180(3)  A scheme is an early retirement scheme if:
    (a) all the employer's employees who comprise such a class of employees as the Commissioner approves may participate in the scheme; and
    (b) the employer's purpose in implementing the scheme is to rationalise or re-organise the employer's operations by making any change to the employer's operations, or the nature of the work force, that the Commissioner approves; and
    (c) before the scheme is implemented, the Commissioner, by written instrument, approves the scheme as an early retirement scheme for the purposes of this section.
    83-180(4)  A scheme is also an early retirement scheme if:
    (a) paragraph (3)(a) or (b) does not apply; and
    (b) the Commissioner is satisfied that special circumstances exist in relation to the scheme that make it reasonable to approve the scheme; and
    (c) before the scheme is implemented, the Commissioner, by written instrument, approves the scheme as an early retirement scheme for the purposes of this section.
    83-180(5)  However, an early retirement scheme payment does not include any part of the payment that was paid to the employee in lieu of *superannuation benefits to which the employee may have become entitled at the time the payment was made or at a later time.

    Find out more

    History

    S 83-180(5) amended by No 15 of 2007, s 3 and Sch 4 items 1 and 2, by substituting "payment" for "*employment termination payment" and substituting "payment" for "employment termination payment", effective 15 March 2007.

    End of find out more
    Payments not covered
    83-180(6)  A payment is not an early retirement scheme payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

    A genuine redundancy payment is defined in section 83-175 of the ITAA 1997 as follows:

    83-175(1)  A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee's position is genuinely redundant as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the dismissal.
    83-175(2)  A genuine redundancy payment must satisfy the following conditions:
    (a) the employee is dismissed before the earlier of the following:
    (i) the day he or she turned 65;
    (ii) if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service - the day he or she would reach the age or complete the period of service (as the case may be);
    (b) if the dismissal was not at *arm's length - the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm's length;
    (c) at the time of the dismissal, there was no *arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal.
    83-175(3) However, a genuine redundancy payment does not include any part of a payment that was received by the employee in lieu of *superannuation benefits to which the employee may have become entitled at the time the payment was received or at a later time.
    Payments not covered
    83-175(4) A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

    Subsection 82-130(1) of the Income Tax Assessment Act 1997 defines an employment termination payment as follows:

    82-130(1)  A payment is an employment termination payment if:
    (a) it is received by you:
    (i) in consequence of the termination of your employment; or
    (ii) after another person's death, in consequence of the termination of the other person's employment; and
    (b) it is received no later than 12 months after that termination (but see subsection (4)); and
    (c) it is not a payment mentioned in section 82-135.

    Each of these provisions requires a payment to be received. Under subsection 80-15(1) of the ITAA 1997 this ‘can be or include a transfer of property’.

    Some guidance in relation to the interaction between the FBT and ETP provisions is provided in:

    • the withdrawn ATO Interpretative Decision ATO ID 2001/8 Income Tax Superannuation: Eligible termination Payments (Payout of Novated Lease);
    • Class Ruling CR 2010/10 Income tax and fringe benefits tax: lump sum payments under the ANZ New Career Training Fund and the Past Employee Care Fund;
    • Taxation Ruling TR 2012/8 Income tax and fringe benefits tax: assessability of amounts received to reimburse legal costs incurred in disputes concerning termination of employment; and
    • the decision in Purvis & Ors v FC of T [2013] AATA 58; 2013 ATC 10-296 (Purvis).

    The issue considered in ATO ID 2001/8 was whether ‘the payout of a novated lease which was paid as part of the taxpayer employee’s redundancy package will be assessable in the hands of the taxpayer as an eligible termination payment (ETP), or whether it is to be treated as an expense fringe benefit?’ The decision was that the payout was assessable in the hands of the employee as an eligible termination payment. ATO ID 2001/8 was withdrawn as it was ‘a simple restatement of the law’.

    The training Fund payments in CR 2010/10 were payments made to either an educational institution, or to an eligible former employee as a reimbursement of costs. CR 2010/10 concluded these payments were not an employment termination payment as there was an intervening event between the termination of employment and the relevant payment which made the payment too removed from the termination for the payments to be in consequence of termination. However, it also concluded the payments could not be a fringe benefit as they were not made in connection with employment.

    Similarly, TR 2012/8 concludes that the reimbursement of legal costs incurred in disputes concerning termination of employment is not an ETP as it is not paid in consequence of termination and is not a fringe benefit as it is not paid in respect of employment.

    The decision in Purvis concerned a payment received by three former Qantas pilots who lost their pilot license for medical reasons. Senior member Dunne in the Administrative Appeals Tribunal decided the payment was received in consequence of the termination of their employment with Qantas and was therefore an ETP. As the payment was an ETP it could not be a fringe benefit.

    Meeting discussion
    In discussion, members requested the ATO to consider providing an ATO view in relation to the interaction between the FBT and ETP provisions where a reimbursement is paid in consequence of the termination of the employee's employment and in respect of the employee's employment. In so doing, members noted the two existing ATO views referred to in the ATO response were for situations where the reimbursement was not received in consequence of the termination of employment and was not received in respect of employment.
    Members also sought clarification of the outcome where a benefit that would be an exempt benefit is provided. As an example, members referred to Taxation Determination TD 93/153 Fringe benefits tax: are outplacement services provided to current and former employees in the nature of work related counselling and thus exempt from fringe benefits tax under section 58M of the Fringe Benefits Tax Assessment Act 1986? And asked whether a reimbursement that was paid in consequence of the termination of an employee's employment in a situation that came within TD 93/153 would be an ETP or an exempt benefit?
    An alternative variation of this question is whether the payout of the novated lease discussed in ATO ID 2001/8 would be an ETP or an exempt benefit if the employer is a public hospital?
    A further question was whether the application of TD 93/153 would be affected if there was a termination of employment for the purposes of the FBTAA but not for the purposes of the ETP provisions. That is, if an employee receives assistance in writing a resume and training for employment interviews and selection tests in order to obtain a position in another Government agency as a result of being declared excess to the needs of a Government agency, will the assistance be considered to relate to one of the matters listed in paragraph (d) of the work related counselling definition?

    Assuming the benefit is not an ETP, the relevant issues to consider are:

    • Is the benefit an exempt benefit?
    • If the benefit is a fringe benefit will the otherwise deductible rule apply?

    As set out in the agenda item, section 58M of the FBTAA provides an exemption for an expense payment benefit where the recipients expenditure is in respect of work-related counselling of the employee or of an associate of the employee and a residual benefit where the recipients benefit consists of the provision of work-related counselling of an employee or an associate of the employee.

    In discussing the application of section 58M, the agenda item puts forward the proposition that the training will not be counselling as it is aimed at providing or updating skills, rather than providing guidance or advice on acquiring or upgrading skills. This is a narrower interpretation of the word ‘counselling’ than that contained in several class rulings including Class Ruling CR 2011/41 Fringe benefits tax: health services provided by BUPA Wellness Pty Ltd.

    In discussing what is counselling; paragraphs 112 to 115 of CR 2011/41 state:

    What is counselling?
    112. In understanding the meaning of this term it is helpful to refer to the ordinary dictionary meanings.
    113. The Macquarie Dictionary 6 defines the word 'counsel' as 'advice; opinion or instruction given in directing the judgment or conduct of another'. The Australian Concise Oxford Dictionary 7 defines 'counselling' as the act or process of giving counsel' and relevantly the noun 'counsel' as 'advice, esp. formally given', and the verb as ' 1 ... advise (a person) 2a give advice to (a person) on social or personal problems, esp. professionally' and ' b assist or guide (a person) in resolving personal difficulties'.
    114. The wording of the definitions in paragraphs 112 and 113 indicates 'counselling' involves a suitably qualified person providing advice or guidance to someone else in relation to their established area of expertise.
    115. The Explanatory Memorandum to Taxation Laws Amendment (Fringe Benefits and Substantiation) Bill 1987 indicates the advice or information can be given either on an individual basis, or in a group situation such as a seminar. This is reflected in the definition of 'counselling' in subsection 136(1) which states that 'counselling' 'includes the giving of advice or information in a seminar'.

    However, although the training may be counselling, paragraph (d) of the work-related counselling definition requires the counselling to relate to one of the listed matters. This may vary depending upon the facts of the situation. For example, if the training is provided by the employer that has declared the employee to be an excess employee, the counselling is likely to relate to one of the matters listed in paragraph (d). However, where the training is provided by a new employer it is less likely to relate to one of the matters listed in paragraph (d).

    Where the benefit does not come within section 58M it may be an exempt minor benefit under section 58P if the notional taxable value of the benefit is less than $300 and a consideration of the factors listed in paragraph 58P(1)(f) leads to the conclusion that it would be unreasonable to treat the benefit as a fringe benefit.

    If section 58P does not apply and the benefit is a fringe benefit, it is necessary to consider the application of the otherwise deductible rule. Guidance for so doing is provided by Taxation Ruling TR 98/9 Income tax: deductibility of self-education expenses incurred by an employee or a person in business.

    The basic principles for determining whether the employee would have been able to claim an income tax deduction for the cost of the training are provided in paragraphs 12 to 15 of TR 98/9 which state:

    12. Self-education expenses are deductible under section 8-1 where they have a relevant connection to the taxpayer's current income-earning activities.
    13. If a taxpayer's income-earning activities are based on the exercise of a skill or some specific knowledge and the subject of self-education enables the taxpayer to maintain or improve that skill or knowledge, the self-education expenses are allowable as a deduction.
    14. If the study of a subject of self-education objectively leads to, or is likely to lead to, an increase in a taxpayer's income from his or her current income-earning activities in the future, the self-education expenses are allowable as a deduction.
    15. The fact that the study will enable a taxpayer to get employment, to obtain new employment or to open up a new income-earning activity (whether in business or in the taxpayer's current employment) is not a sufficient basis in itself for self-education expenses to be deductible. This includes studies relating to a particular profession, occupation or field of employment in which the taxpayer is not yet engaged. The expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

    In applying these principles the agenda item puts forward two alternative propositions.

    The first is that the cost of the training course will come within paragraph 13 as it is directly relevant to the employee’s duties. This will depend upon the facts of the situation.

    Where the employer who provides the training is the new employer who requires the employee to undertake the training as part of their duties, the training is may be deductible in accordance with paragraphs 39 to 43 of TR 98/9 which state:

    39. In Studdert, the taxpayer, a flight engineer, sought a deduction for expenses incurred on light aircraft flying lessons leading to a private pilot's licence. The Administrative Appeals Tribunal (AAT) (91 ATC 2007; (1991) 22 ATR 3042) at first instance was prepared to accept that it was part of Mr Studdert's duties to understand the overall workings of aircraft flight. The AAT allowed the expenditure on the basis that the lessons improved his proficiency in those duties. It also found that Mr Studdert rightly believed that possession of the pilot's licence would assist him in promotion to higher grades as an engineer, although the AAT did not consider it necessary to base its decision on this finding.
    40. On appeal to the Federal Court, Hill J substantially agreed with the decision of the AAT. His Honour found that the expenses were relevant and incidental to the activities as flight engineer that directly produced Mr Studdert's income. This finding was based on the facts that undertaking the lessons made him better equipped to perform his skilled job and better proficiency was a motivation for undertaking the lessons. If necessary, his Honour would also have supported his decision with the finding that flying proficiency would assist Mr Studdert in promotion to higher grades in his current job (91 ATC 5006 at 5015-5016; (1991) 22 ATR 762 at 772).
    41. Example: Barry, a trainee accountant, is studying commerce part-time at university. He is allowed a deduction for the costs associated with the course because the course enables Barry to maintain or increase the specific knowledge required in his current position and to carry out his duties more effectively.
    42. If a course of study is too general in terms of the taxpayer's current income-earning activities, the necessary connection between the self-education expense and the income-earning activity does not exist. The cost of self-improvement or personal development courses is generally not allowable, although a deduction may be allowed in certain circumstances. In Case Z42 92 ATC 381; AAT Case 8419 (1992) 24 ATR 1183, a senior newspaper journalist, whose duties involved interviewing people for feature articles and making presentations to potential advertisers, was allowed a deduction for the cost of a speech course because it was incurred in maintaining or increasing his ability in his current employment and therefore was necessarily incurred in carrying on that employment.
    43. Example: Brianna, a company director, was having difficulty coping with work due to stress brought about by difficulties with her family situation. She decided to attend a four-week course in stress management to help her deal with the situation. Brianna attended the course after hours and paid for it herself.
    The cost of the course is not allowable because the course was not designed to maintain or increase the skill or specific knowledge required in her current position. The expenses are more correctly characterised as related to a private matter.

    Alternatively, where the employer is the employer that declared the employee to be an excess employee and the training is undertaken to enable the employee to obtain a new position, the expenses incurred in the training are less likely to be deductible. Such a situation is discussed in paragraphs 58 and 59 of TR 98/9 which state:

    58. We believe that Maddalena also supports our view that no deduction is allowable for self-education expenses if the study is designed to enable a taxpayer to open up a new income-earning activity, whether in business or in the taxpayer's current employment. In Case Z1 92 ATC 101; AAT Case 7541 (1991) 22 ATR 3549, a public service clerk studying for a law degree later obtained a legal officer position in the public service. Such expenses of self-education were incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.
    59. Example: Joseph is currently employed as a clerk in a public service department. He would like to transfer to a position in another section of the department and undertakes a course of study designed to equip him with the skills needed in that position. The study is unrelated to the skills required in his current position and is not likely to lead to an increase in income. As the study is designed to enable Joseph to enter a new income-earning activity, no deduction is allowable.

    Therefore, in summary the taxation outcome of the training expenses paid or reimbursed for the excess employees will depend upon the facts of the situation and the application of the ETP provisions. Where the benefit is not an ETP;

    • it may be an exempt benefit under section 58M of the FBTAA as work-related counselling if the benefit is provided by the original employer that declared the employee to be an excess employee;
    • it will be an exempt minor benefit under section 58P of the FBTAA if the notional taxable value of the benefit is less than $300 and a consideration of the factors listed in paragraph 58P(1)(f) leads to the conclusion that it would be unreasonable to treat the benefit as a fringe benefit;
    • if the benefit is not an exempt benefit, the otherwise deductible rule may apply if the training is provided by the new employer who requires the employee to undertake the training as part of his or her employment duties.
      Last modified: 03 Feb 2014QC 38409