18.4 In-house residual fringe benefits
A residual fringe benefit is valued as an in-house residual fringe benefit if you (or an associate) provide the benefit and it is identical or similar to rights, services or facilities you (or an associate) provide to the public in the ordinary course of business. Examples include professional advice provided free or at a discount by a law firm to its employees, and video recorders hired out to employees of a television rental firm at a discount.
A benefit provided under a contract of investment insurance doesn't qualify for valuation under these rules. Such a benefit is valued under the rules detailed below for external residual fringe benefits. A contract of investment insurance means a contract of life assurance under which a payment of money will be made if the person whose life is insured is alive on a specified date, whether or not the contract also insures the payment of money in any other event.
Taxable value of in-house residual fringe benefits - not accessed under a salary packaging arrangement
The taxable value of an in-house residual fringe benefit is 75% of the lowest arm's length price charged to the public at the time for identical benefits, less any amount paid by the employee.
Identical benefits are the same in all respects except for any differences that are minimal or insignificant, or that relate to the value of the benefits.
An employer who operates a television rental store allows an employee the use of a video recorder for three months during the FBT year.
The normal arm's length cost of an equivalent rental granted to a member of the public at that time is $100.
The employee is charged $50.
The taxable value is (75% $100) - $50 = $25
End of example
Where no identical benefits are provided to the public, the taxable value is 75% of the amount the employee could be expected to pay to acquire the benefit under an arm's length transaction, less any amount paid by the employee.
An example might be where an employer who charters boats to the public provides a boat for a trip by the employee's family under significantly different conditions of use from those that ordinarily apply to the public, such that there is a material difference in the value of the benefit.
Where the period during which the benefit is provided extends past the end of the FBT year, you apportion the taxable value between the two years on a pro rata basis.
Taxable value of in-house residual fringe benefits - accessed under a salary packaging arrangement
Changes have been made to the FBT law so that from 22 October 2012 onwards, the taxable value of an in-house residual fringe benefit provided under a salary packaging arrangement is its notional value at the comparison time, reduced by any recipients contribution. However, transitional rules may apply that affect the commencement date of the changes.
Example: Taxable value of an in-house residual fringe benefit
Cecilia works for an appliance rental franchise. As part of her remuneration, she agreed to salary package the rental of a flat screen television and video gaming console for a six month period.
Ordinarily her employer values the rental for the purposes of FBT at 75% of the lowest price paid by other customers.
However, from 22 October 2012, the employer would instead determine the taxable value on the basis of its notional value (which is its market value) and is therefore determined to be the retail price of the rental contract.
End of example
Salary packaging arrangements
Salary packaging arrangements (also commonly referred to as salary sacrifice or total remuneration packaging) are arrangements where either:
- You enter into an agreement with your employee to have their salary and wages reduced (or sacrificed) in order to receive a benefit; or
- A reduction in salary is not negotiated, but you give your employee a benefit as part of their employment contract, and it is reasonable to conclude that the salary and wages they would have received would have been greater if the benefit wasn't provided.
Example: Negotiated salary packaging arrangement
Felicity has just started working for a car company. In negotiating her remuneration package she agrees with her new employer to forego $25,000 of her yearly salary in order to receive the use of a car.
As she has entered into an agreement to reduce her salary and wages, Felicity would be taken to have entered into a salary packaging arrangement.
End of example
Example: Non-negotiated salary packaging arrangement
McKenzie has started employment with an IT firm. His job was previously advertised as having a total remuneration package of $100,000 per year.
McKenzie only receives $95,000 in salary and wages but is given by his employer, free of charge, gaming and photography software with a retail value of $5,000.
In this case, while McKenzie has not entered into a separate agreement to reduce his salary and wages, the salary and wages he would have received would clearly have been greater if the benefit had not been provided. Therefore, McKenzie has entered into a salary packaging arrangement.
End of example
Transitional rules apply where an existing salary packaging arrangement was entered into before the 22 October 2012.
Table: How the transitional rules apply
The benefit was provided before 22 October 2012
The previous valuation rules apply.
- An existing salary packaging arrangement was entered into before 22 October 2012, and
- The reduction of salary and wages occurred on or after 22 October 2012 and/or
- The benefit was provided on or after the 22 October 2012
The previous valuation rules continue to apply up to, and including, the earlier of:
- 31 March 2014
- The date of a material variation to the existing salary packaging arrangement
A salary packaging arrangement was entered into on or after 22 October 2012
The transitional rules do not apply.
Meaning of ‘existing salary packaging arrangement’
An existing salary packaging arrangement means a salary packaging arrangement that, before the 22 October 2012, was both:
- agreed to (that is, the employer and employee agree to conditions of arrangement) and
- entered into (that is, the arrangement was given legal force).
There is no requirement for the actual reduction of salary or wages of the provision of the benefit to occur before 22 October 2012, only that the arrangement to do so was entered into and had legal force before 22 October 2012.
Example: Existing salary packaging arrangement where salary deductions start after 22 October 2012
An employer offers a salary packaging arrangement to employees which must be taken up before 22 October 2012. The benefits will be available to employees during the months of December 2012 and January 2013. However, the pre-tax salary deductions do not start until the employee has submitted a claim for expenses incurred during the relevant period.
An employee accepted the offer before 22 October 2012 and the employee receives the reimbursement for expenses before 1 April 2014. This arrangement would be covered by the transitional provisions.
End of example
Example: Existing salary packaging arrangement where employer offers arrangement and employee takes it up before 22 October 2012
A retail employer provides its employee with the option to salary package certain in-house property fringe benefits. There is no end date for the offer to salary package and no details on the terms or conditions that apply to particular employees.
Harold works for the retail employer and has previously used the salary packaging offer to purchase a coffee machine that his employer sells. He is now deciding whether to take up the offer to salary package a kayak which his employer sells. On 18 October 2012, he decides to take up the offer and fills in the requisite forms that lock him into the salary packaging arrangement.
As he has entered into the pre-existing offer for salary packaging (in respect to the kayak) and has an agreement that is binding before 22 October 2012, Harold’s benefits would be covered by the transitional provisions.
End of example
Example: Existing salary packaging arrangement where employer offers arrangement and employee does not take it up before 22 October 2012
As per the example above, with the exception that Harold delays his decision and decides on 24 October 2012 that he wants to take up the salary packaging offer.
In this case, while his employer has offered a salary packaging arrangement before 22 October 2012 and despite the fact that he entered into a previous arrangement for the purchase of the coffee machine, Harold does not have a binding agreement in place in respect to the packaging for a kayak. For that reason, Harold’s benefits would not be covered by the transitional provisions.
End of example
Material variation to an existing salary packaging arrangement
Where an existing salary packaging arrangement is materially altered or varied on or after 22 October 2012, it will no longer be subject to the transitional arrangements.
In determining whether an alteration or variation is material to the existing salary packaging arrangement, regard must be had to the particular wording of the agreement. What is considered material will often depend on the facts and circumstances of the arrangement.
Alterations or variations of an existing salary packaging arrangement that would more than likely be considered material include, but are not limited to:
- change of employer
- alteration of the fixed end date of the arrangement; and
- variation to the types of benefits covered under the arrangement.