Explanatory MemorandumCirculated By the Authority of the Treasurer, the Hon Wayne Swan Mp
Fringe benefits tax - jointly held assets
Outline of chapter
4.1 Schedule 4 to this Bill amends the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) to ensure that where a fringe benefit is provided jointly to an employee and their associate, the employer's fringe benefits tax (FBT) liability on the taxable value of the fringe benefit will only be reduced to the extent the employee's share of the fringe benefit is used for income producing purposes.
Context of amendments
4.2 Subsection 138(3) of the FBTAA 1986 deems a benefit provided jointly to an employee and one or more associates of the employee, to be provided solely to the employee. This is to prevent the double counting of fringe benefits.
4.3 The 'otherwise deductible' rule is an important design feature of the FBT system and operates so that an employer can reduce the taxable value of certain fringe benefits, when, if the employee had incurred the expenses themself, the employee could have claimed a personal tax deduction. For example, if an employer provides an employee with a low interest loan to purchase an investment property, the employee can reduce the taxable value of the loan fringe benefit to the extent the interest would have been 'otherwise deductible' to the employee, had the employee incurred additional interest equal to the net value of the loan fringe benefit.
4.4 The operation of subsection 138(3) and the otherwise deductible rule was considered by the Federal Court of Australia in National Australia Bank Ltd v FC of T 93 ATC 4914 ( NAB case). In the NAB case, an employer provided low interest loans jointly to the employee husband and his wife which were invested in a jointly held investment property (a loan fringe benefit).
4.5 The Federal Court held that as a result of subsection 138(3), the employee was the sole recipient of the loan fringe benefit. It further held that as sole recipient of the loan and sole investor of the proceeds, if the employee husband had incurred and paid unreimbursed interest on the loan, he would have been entitled to a deduction for the expense. Thus, under the otherwise deductible rule in section 19 of the FBTAA 1986, the taxable value of the loan fringe benefit is reduced to nil so that the employer had no FBT liability arising from the loan fringe benefit provided to both the employee and his spouse.
4.6 This outcome is inconsistent with the operation of the otherwise deductible rule as it would apply where a benefit is provided solely to an associate. In these cases, the otherwise deductible rule does not apply to reduce the employer's FBT liability for the fringe benefit, as the otherwise deductible rule does not apply where fringe benefits are provided to a spouse (associate).
4.7 This outcome is also in conflict with the income tax position as determined by the courts that income and deductions arising from jointly owned rental property should be allocated between joint owners in accordance with their interest in the property (eg, joint tenants in a rental property would include 50 per cent of the rental income in their assessable income and claim 50 per cent of the rental property expenses).
4.8 The anomaly has also led to arrangements involving expense payment fringe benefits where a spouse on a higher marginal tax rate salary sacrifices their income by an amount equivalent to the joint rental expenses. This allows the spouse on the higher marginal tax rate through a salary reduction to effectively claim a deduction for the entirety of the rental expenses despite owning only a share in the property.
Example 4.1 Paul's income is subject to the top rate of taxation. Paul and his wife Tracy jointly own a rental property, each with a 50 per cent interest. Paul is the main income earner.The rental income derived from the property is $20,000 and the associated deductible expenses are $10,000.Paul's employer reimburses Paul and Tracey $10,000 for the rent expenses. Paul's employer has no FBT liability on the fringe benefit because the 'otherwise deductible rule' operates to reduce the taxable value to nil. This includes Tracy's share of the expenses because, as a result of subsection 138(3) of the FBTAA 1986, Paul is taken to be the sole recipient of the fringe benefit.Paul can effectively pay 100 per cent of the expenses out of pre-tax income. The tax saving from the arrangement is $4,650.Another couple, Tony and Fiona also have a 50 per cent interest in a rental property and have the same incomes as Paul and Tracy. Tony can claim a tax deduction for 50 per cent of the rental expenses. Although the two couples are in similar financial circumstances, Tony is not able to enter into a salary sacrifice arrangement. Tony's tax saving is half that of Paul's.
Comparison of key features of new law and current law
|New law||Current 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 a result of the NAB case an employer can reduce the taxable value of a fringe benefit provided jointly to an employee and their associate in relation to an income earning asset owned by both the employee and their associate.|
Detailed explanation of new law
4.9 Schedule 4 inserts a new provision into the otherwise deductible rule for loan fringe benefits, expense payment fringe benefits, property fringe benefits and residual fringe benefits in subsections 19(1), 24(1), 44(1) and 52(1) of the FBTAA 1986 which will provide a different calculation for the application of the otherwise deductible rule where because of subsection 138(3) of the FBTAA 1986 a fringe benefit is provided jointly to an employee and their associate and is deemed to be provided solely to the employee. [Schedule 4, items 7, 17, 30 and 39]
4.10 The change to the otherwise deductible rule in these circumstances operates to make a final adjustment to the notional deduction (ND) component in the formula (TV - ND) where TV is the taxable value. The adjustment reduces the unadjusted notional deduction by the employee's percentage of interest in the income producing asset or thing (whether tangible or intangible) to which the benefit relates. This adjustment ensures that the taxable value of the benefit is only reduced by the employee's share of the benefit. [Schedule 4, items 8, 22, 31 and 40]
Example 4.2 Neena and her husband Marek are jointly provided with a $100,000 low interest loan by Neena's employer which they use to acquire shares. The loan fringe benefit has a taxable value of $10,000. Neena and Marek use the loan to purchase $100,000 of shares which they will hold jointly with a 50 per cent interest each. Neena and Marek return 50 per cent of the dividends derived from the shares as assessable income in each of their income tax returns.Under the current law (and as a result of the NAB case) the otherwise deductible rule would apply to reduce the taxable value of the loan fringe benefit ($10,000) (ie, in respect of both Neena and Marek's share of the benefit) to nil and consequently the employer would have no FBT liability.As a result of new paragraph 19(1)(i) and new subsection 19(5) the notional deduction of $10,000 is reduced by Neena's percentage of interest in the shares (ie, 50 per cent so that the taxable value of the loan fringe benefit of $10,000 is reduced by $5,000). The employer has an FBT liability on $5,000 which reflects the share of the loan fringe benefit that was provided to Marek.
4.11 The calculation used to adjust the notional deduction will also apply to reduce the taxable value of a loan, expense payment, property or residual fringe benefit in circumstances where the fringe benefit is applied only partly for income producing purposes, where more than one income producing asset is held or where there is a change, in the FBT year, of the employee's percentage of interest in the income producing asset.
Example 4.3 Same as in Example 5.2 except Neena and Marek only use 50 per cent of the $100,000 loan for acquiring shares. They use the other 50 per cent ($50,000) for a private overseas holiday. The taxable value of the loan fringe benefit that relates to that part of the loan used for private purposes ($5,000) is not deductible to either Neena or Marek so the otherwise deductible rule does not apply to reduce that part of the loan fringe benefit.The taxable value of the loan fringe benefit that arises on that part of the loan that is used for acquiring shares can be reduced by Neena's share of the benefit (ie, $2,500). The employer can reduce the taxable value of the loan fringe benefit ($10,000) by $2,500. The taxable value of the loan fringe benefit provided to Neena and Marek that will be subject to FBT is $7,500 ($10,000 - $2,500).
4.12 Consequential amendments are made to the otherwise deductible rules in sections 19, 24, 44 and 52 to ensure that the new provisions are linked appropriately with the existing rules. [Schedule 4, items 1 to 6, 10 to 16, 18 to 21, 24 to 29 and 33 to 38]
Application and transitional provisions
4.13 The amendments apply to benefits provided from 7:30 pm Australian Eastern Standard Time (AEST) on 13 May 2008. [Schedule 4, subitems 9(1) and 23(1), items 32 and 41]
4.14 For loans entered into before 7:30 pm (AEST) on 13 May 2008, the existing law will continue to apply to loan benefits provided before 1 April 2009. [Schedule 4, subitem 9(2)]
4.15 For expense payment benefits, property benefits and residual benefits provided under a salary sacrifice arrangement, the changes will apply to agreements entered into after 7:30 pm (AEST) on 13 May 2008. For agreements entered into before this time, employees will be able to utilise the current law until 1 April 2009. [Schedule 4, subitem 23(2)]
4.16 Part 2 of Schedule 4 to this Bill also makes some minor technical corrections to the FBT law. The amendments will correct certain cross references and in line with current drafting practice, improve the readability of these provisions. [Schedule 4, Part 2, items 42 to 75]