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

    The taxable value of a residual 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 you may reduce the taxable value by the amount the employee would have been entitled to claim as an income tax deduction if both of the following conditions are satisfied:

    • the residual benefit has not been provided as a fringe benefit
    • the employee acted as a consumer or member of the public in purchasing the service or privilege that comprises the residual benefit.

    For example, if an employee hired an item of property and used it only to perform employment-related duties, the hire cost would be wholly deductible for income tax purposes. Under the otherwise deductible rule, if you hired the same item and made it available to the employee to use in performing their employment-related duties, the taxable value of this residual fringe benefit would be nil, regardless of the amount of employee contribution you required.

    There are special rules where the expenditure that would have been deductible to the employee is incurred in relation to a car (refer to section 18.9).

    Applying the otherwise deductible rule produces different results depending on whether any employee contribution was intended to be for the private element of the residual fringe benefit. This is because the employee is entitled to an income tax deduction for expenditure incurred on the portion of the residual benefit used to derive their assessable income, but not for expenditure incurred on the portion used for private or domestic purposes.

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

     

    Step Action

    1

    Disregard any employee contribution and calculate the taxable value of the residual fringe benefit as if there was no employee contribution.

    2

    Now suppose that the employee had purchased the service or privilege for an amount equal to the amount of the taxable value calculated in step 1. How much of this hypothetical purchase price would have been income tax deductible to the employee?

    3

    Now look at the actual fringe benefit situation. If the employee made a contribution towards the residual fringe benefit, how much of this contribution is allowable as an income tax deduction to the employee? That is, how much of the employee contribution relates to the business use component of the residual fringe benefit?

    4

    Subtract the actual deductible amount (step 3) from the hypothetical deductible amount (step 2). The result is the amount by which you may reduce the taxable value of the residual fringe benefit.

    Therefore, where the otherwise deductible rule applies, the taxable value of a residual fringe benefit is:

    • the amount that would have been the taxable value if no employee contribution had been made

    less

    • the amount of any actual employee contribution

    less

    • the amount obtained at step 4 of the otherwise deductible rule.

    Example: contribution set without regard to employee's use of property

    An employee is provided with the use of goods (hired by the employer) to the value of $500. The employee contribution of $250 is set without regard to how the employee intends to use the property.

    The employee uses the hired property 80% for employment-related (and income tax deductible) purposes and 20% for private purposes.

    The taxable value of the residual fringe benefit (without the otherwise deductible rule) is $250 (that is, $500 reduced by the employee contribution of $250).

    End of example

    Apply the otherwise deductible rule as follows:

    Step Action Result

    1

    Disregard any employee contribution and calculate the taxable value of the residual fringe benefit as if there was no employee contribution.

    $500

    2

    Now suppose that the employee had hired the goods for an amount equal to the amount of the taxable value calculated in step 1. How much of this hypothetical hiring cost would have been income tax deductible to the employee?

    $500   80%
    = $400

    3

    Now look at the actual fringe benefit situation. If the employee made a contribution towards the residual fringe benefit, how much of this contribution is allowable as an income tax deduction to the employee? That is, how much of the employee contribution relates to the business use component of the residual fringe benefit?

    $250   80%
    = $200

    4

    Subtract the actual deductible amount (step 3) from the hypothetical deductible amount (step 2). The result 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: contribution set with regard to employee's use of property

    An employee is provided with the use of goods (hired by the employer) to the value of $500. The employee intends to use the hired property 50% for employment-related (and income tax deductible) purposes and 50% for private purposes.

    The employee contribution of $250 is set by the employer after considering how the employee intends to use the goods. (That is, the employer knows that under the otherwise deductible rule there will be no FBT liability on that part of the fringe benefit used to produce income, so the employer calculates an employee contribution sufficient to avoid incurring FBT on that part of the fringe benefit used for a private or domestic purpose).

    At the end of the FBT year, the employee finds that the hired property has been used 80% for employment-related (and income tax deductible) purposes and 20% for private purposes.

    The taxable value of the residual fringe benefit (without the otherwise deductible rule) is $250 (that is, $500 reduced by the employee contribution of $250).

    End of example

    Apply the otherwise deductible rule as follows:

    Step Action Result

    1

    Disregard any employee contribution and calculate the taxable value of the residual fringe benefit as if there was no employee contribution.

    $500

    2

    Now suppose that the employee had hired the property for an amount equal to the amount of the taxable value calculated in step 1. How much of this hypothetical purchase price would have been income tax deductible to the employee?

    $500   80%
    = $400

    3

    Now look at the actual fringe benefit situation. If the employee made a contribution towards the residual fringe benefit, how much of this contribution is allowable as an income tax deduction to the employee? That is, how much of the employee contribution relates to the business use component of the residual fringe benefit?

    If the employer, in setting the amount of the employee contribution, had not allowed for the intended use of the hired goods, the employee would have paid a contribution of $500 and would have been entitled to a deduction for business use.

    $500   80% business usage

    = $400

    However, because the employer calculated the amount of the employee contribution after taking into account the intended business use and the effect of the otherwise deductible rule, the employee's income tax deduction is limited to the amount calculated as follows:

    The amount that would have been allowed as a deduction to the employee if no allowance had been made for the income-producing purpose for which the hired property was to be used, reduced by the amount of the allowance that was made.

    = ($500 x 80%) - ($500 x 50%)

    = $400 - $250

    = $150

    4

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

    $400 - $150
    = $250

    5

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

    $250 - $250
    = 0

      Last modified: 15 Apr 2015QC 17817