• 9.4 Reduction in taxable value where expenditure would have been deductible to the employee

    The taxable value of an expense payment fringe benefit may be reduced in accordance with the otherwise deductible rule, but only if the recipient of the benefit is the employee. Broadly, this means that the taxable value may be reduced by the amount the employee would have been entitled to claim as an income tax deduction if you had not reimbursed them.

    For example, if an employee incurred an expense solely in performing employment-related duties, the expenditure would be wholly deductible for income tax purposes. Under the otherwise deductible rule, if you reimbursed the employee for all or part of this expense, the taxable value of the expense payment fringe benefit would be nil.

    The otherwise deductible rule does not apply to deductions for the decline in value of depreciating assets, except when the cost is less than $301.

    Special rules operate where the expenditure that would have been deductible to the employee is incurred in relation to a car (refer to section 9.6).

    Applying the otherwise deductible rule produces different results, depending on whether the reimbursement you made was intended to be for the business element of the expense payment fringe benefit. This is because the employee is entitled to an income tax deduction for that portion of the expenditure incurred to derive their assessable income, but not for that portion of the expenditure incurred for private or domestic purposes.

    You can apply the otherwise deductible rule using the following steps.

     

    Step Action

    1

    Write down the amount of the employee's gross expenditure - that is, the amount spent before any reimbursement from you.

    2

    Now suppose that the employee had not been reimbursed for any of the expenditure in step 1. In this hypothetical situation, how much of this expenditure would have been income tax deductible to the employee?

    3

    Now look at the actual fringe benefit situation. How much of the employee's expenditure are they entitled to claim as an income tax deduction? There are two possibilities:

    • If you reimbursed all or part of the business component of the employee's expenditure, their income tax deduction is calculated as follows
      • the amount of the employee's expenditure is multiplied by the business percentage. This result is then reduced by the amount of the reimbursement. The resulting amount is their income tax deduction.
       

     

    • Alternatively, if the amount you reimbursed was not calculated by reference to the business component of the expenditure, their income tax deduction is calculated as follows
      • the amount of the employee's expenditure is reduced by the amount of the reimbursement. This result is then multiplied by the business percentage. The resulting amount is their income tax deduction.
       

     

    4

    Subtract the actual deductible amount (step 3) from the hypothetical deductible amount (step 2). The resulting figure is the amount by which the taxable value of the fringe benefit may be reduced.

    Therefore, where the otherwise deductible rule applies, the taxable value of an expense payment fringe benefit is:

    • the amount of your reimbursement or payment, reduced by
    • the amount obtained at step 4 of the otherwise deductible rule.

    Example:
    An employee incurred expenditure of $500, 80% of which was employment-related (and income tax deductible) and 20% private.

    The employer reimbursed the employee for $250, without regard to whether the employee's expenditure was for business or private purposes.

    The taxable value of the expense payment fringe benefit (without the otherwise deductible rule) is $250.

    Apply the otherwise deductible rule as follows.

     

    Step Action Result

    1

    Write down the amount of the employee's gross expenditure - that is, the amount spent before any reimbursement from you.

    $500

    2

    Now suppose that the employee had not been reimbursed for any of the expenditure in step 1. In this hypothetical situation, how much of this expenditure would have been income tax deductible to the employee?

    $500 x 80%

    = $400

    3

    Now look at the actual fringe benefit situation. How much of the employee's expenditure are they entitled to claim as an income tax deduction?

    The amount of the employee's expenditure is reduced by the amount of the reimbursement. This result is then multiplied by the business percentage. The resulting amount is their income tax deduction.

    ($500 - $250) x 80%

    = $250 x 80%

    = $200

    4

    Subtract the actual deductible amount (step 3) from the hypothetical deductible amount (step 2). The resulting figure is the amount by which the taxable value of the fringe benefit may be reduced.

    $400 - $200

    = $200

    5

    Finally, the taxable value of $250 may be reduced by $200.

    $250 - $200

    = $50

    Example:
    An employee incurred expenditure of $500, 80% of which was employment-related (and income tax deductible) and 20% private.

    The employer reimbursed the employee for $350, after considering the extent to which the employee's expenditure was employment-related and income tax deductible. (That is, the employer knew that under the otherwise deductible rule there would be no FBT liability for that part of the fringe benefit used to produce income, so they avoided reimbursing the private or domestic part of the employee's expenditure).

    The taxable value of the expense payment fringe benefit (without the otherwise deductible rule) is $350.

    Apply the otherwise deductible rule as follows:

     

    Step Action Result

    1

    Write down the amount of the employee's gross expenditure - that is, the amount spent before any reimbursement from you.

    $500

    2

    Now suppose that the employee had not been reimbursed for any of the expenditure in step 1. In this hypothetical situation, how much of this expenditure would have been income tax deductible to the employee?

    $500 x 80% 

    = $400

    3

    Now look at the actual fringe benefit situation. How much of the employee's expenditure are they entitled to claim as an income tax deduction?

    The amount of the employee's expenditure is multiplied by the business percentage. This result is then reduced by the amount of the reimbursement. The resulting amount is their income tax deduction.

    ($500 x 80%) - $350

    = $400 - $350

    = $50

    4

    Subtract the actual deductible amount (step 3) from the hypothetical deductible amount (step 2). The resulting figure is the amount by which the taxable value of the fringe benefit may be reduced.

    $400 - $50

    = $350

    5

    Finally, the taxable value of $350 may be reduced by $350.

    $350 - $350

    = 0

      Last modified: 20 Jan 2014QC 17823