House of Representatives

Taxation Laws Amendment Bill (No. 2) 1998

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 2 - Fringe benefits tax

Overview

2.1 Schedules 2, 3 and 12 of the Bill will amend the Fringe Benefits Tax Assessment Act 1986 (FBTAA), the Income Tax Assessment Act 1936 (ITAA36) and the Income Tax Assessment Act 1997 (ITAA97) to implement the Government's response to the recommendations concerning fringe benefits tax (FBT) made by the Small Business Deregulation Task Force (SBDTF) in November 1996.

2.2 The existing exemption for taxi travel will be extended and simplified so that taxi travel beginning or ending at an employee's place of work at any time qualifies for the exemption. [Schedule 3]

2.3 A new exemption from FBT for car parking benefits, other than car parking benefits provided in a commercial car park, will be provided for certain small business owners. This exemption will not extend to car parking benefits provided by government bodies or listed public companies and their subsidiaries. [Schedule 3]

2.4 The determination of whether an employer will be liable for FBT when benefits are provided to employees or their associates by a third party under the 'arranger' provisions will be simplified. [Schedule 3]

2.5 New Part XIA of the FBTAA will contain the legislative provisions to govern the proposed new record keeping exemption arrangements (RKEA). [Schedule 12]

2.6 The RKEA are specifically targeted at those employers whose base year fringe benefits do not exceed a threshold amount ($5,000 for the 1996-97 FBT year). The RKEA will provide a reduction in compliance costs for small FBT payers who do not make a material change in the value and type of benefits provided each year.

2.7 Certain benefits relating to approved student exchange programs are to be exempted from FBT. [Schedule 2]

2.8 These measures, the first four of which are specifically targeted at reducing compliance costs for small businesses, are explained in the following sections of this Chapter:

Section 1 Taxi travel
Section 2 Exemption for car parking provided by small business employers
Section 3 Arranger provisions
Section 4 Record keeping exemption arrangements
Section 5 Regulation Impact Statement for taxi travel and car parking measures
Section 6 Regulation Impact Statement for changes to the arranger provisions
Section 7 Regulation Impact Statement for the record keeping exemption arrangements
Section 8 FBT exemption for approved student exchange programs

2.9 The amendments to the FBTAA, ITAA36 and ITAA97 are in Schedules 2, 3 and 12 . The application provisions for the amendments being proposed are also in those schedules.

Section 1 Taxi travel

Summary of the amendments

Purpose of the amendments

2.10 The amendments will extend and simplify the existing exemption for taxi travel. Employers will only have to ascertain, for the purpose of the exemption, whether the taxi travel started or ended at the work place.

2.11 The time at which the travel commenced will no longer be relevant. Nor will it be necessary for the travel to be directly between the place of work and the employee's home. These changes will reduce compliance costs for employers.

Date of effect

2.12 The amendments will apply in relation to assessments for the FBT year commencing 1 April 1997 and all later FBT years. [Subitem 12(1)]

Background to the legislation

2.13 Currently section 58Z of the FBTAA exempts from FBT benefits arising from certain taxi travel. Subsection 58Z(1) exempts a benefit arising from taxi travel by an employee where the travel is directly between the employee's home and place of work and commences between 7 pm and 7 am.

2.14 Subsection 58Z(2) exempts benefits arising from certain taxi travel as a result of sickness or injury to an employee. This exemption is not affected by these amendments.

Explanation of the amendments

2.15 Subsection 58Z(1) is to be repealed and replaced with a new subsection 58Z(1) so that a benefit arising from taxi travel beginning or ending at an employee's place of work will be an exempt benefit. The travel must be a single taxi trip. For example, if an employee travels by taxi from work to a sporting event and then, when the event is over, by taxi home, only the taxi fare from work to the sporting event would be an exempt benefit. [Item 2 - new subsection 58Z(1)]

Section 2 Exemption for car parking provided by small business employers

Summary of the amendments

Purpose of the amendments

2.16 The amendments will remove FBT compliance costs for small business employers in respect of certain car parking fringe benefits. Employers who qualify for this car parking benefit exemption will no longer have to keep records or calculate the taxable value of the car parking benefits. The records required for car parking fringe benefits are generally not required for any other FBT purpose.

2.17 The proposed exemption will not extend to car parking benefits provided by small business employers in commercial car parks. Where an employer provides car parking facilities for employees or associates in a commercial car park, those car parking benefits will continue to be subject to FBT.

2.18 The restrictions on income tax deductions for car parking expenses incurred by self-employed persons, partnerships or trusts will be removed to ensure that the income tax and FBT treatment of car parking continues to be consistent.

Date of effect

2.19 The amendments to the FBTAA will apply in relation to assessments for the FBT year commencing 1 April 1997 and all later FBT years. The amendments to the ITAA36 and ITAA97 will apply in relation to expenditure incurred on or after 1 July 1997. [Subitems 12(1) and 12(3)]

Background to the legislation

Fringe benefits tax law

2.20 Division 10A of Part III of the FBTAA subjects car parking benefits to FBT. Subsection 39A(1) lists the conditions which must be met for a car parking fringe benefit to arise. In broad terms, a car parking fringe benefit will arise where an employer provides car parking for more than 4 hours for an employee's car that is used for travel between home and the workplace. Further, a commercial car park, which charges more than a specified amount for all-day parking ($5.25 for the FBT year starting 1 April 1998), must be located within a 1 kilometre radius from where the car is parked.

2.21 Where an employer knows the number of benefits provided, the employer may determine the taxable value of the car parking fringe benefits using the commercial parking station method, the market value method or the average cost method. Alternatively, an employer may elect to calculate the taxable value of all car parking fringe benefits provided during the year by using the statutory formula method or the 12 week record keeping method. Particular records are required for each of these methods.

Income tax law

2.22 Broadly, Division 4A of Part III of the ITAA36 reduces the amount of any deduction allowable for car parking expenses incurred by a self-employed person, a partnership or a trust. The deduction is reduced by an amount equivalent to the taxable value of the car parking fringe benefit that would have arisen if the car parking had been provided by an employer to an employee. Division 4A incorporates the valuation methods available to employers under the FBTAA for valuing car parking fringe benefits. The purpose of Division 4A is to ensure that there is consistency in the treatment of car parking expenses for employees and self-employed persons.

2.23 Division 4A replaced section 51AGB, which performed the same function, to take into account the new valuation methods for car parking fringe benefits introduced as part of the FBT Cost of Compliance Review measures. Section 51AGB applied to car parking expenses incurred from 1 July 1994 to 30 June 1995. Division 4A has applied to car parking expenses incurred from 1 July 1995.

Explanation of the amendments

Fringe benefits tax law

2.24 Under the proposed amendments certain car parking benefits will be exempt from FBT under new section 58GA [item 1] . The types of car parking benefits which qualify for exemption are explained below.

What kinds of car parking benefits qualify for exemption?

2.25 Car parking benefits other than those provided in a commercial car parking station will be covered by the exemption. [item 1 - new paragraph 58GA(1)(a)] A 'commercial car parking station' is defined in subsection 136(1) as, in general terms, a commercial car park that provides all-day parking to the public for a fee.

2.26 The employer of the employee in respect of whose employment the car parking benefit is being provided must not:

·
be a public company within the meaning of paragraph 103A(2)(a) of the ITAA36 or a subsidiary of such a company. This test must be satisfied on the day on which the car parking benefit is provided; or
·
be a government body; or
·
have a sum of ordinary income and statutory income of $10 million or more in the year of income ending immediately before the commencement of the FBT year in which the benefit is provided.

[Item 1 - new paragraphs 58GA(1)(b), (c) and (d)]

2.27 In broad terms, a public company under paragraph 103A(2)(a) is a company with shares listed on a stock exchange. 'Government body' is defined by subsection 136(1) of the FBTAA to mean the Commonwealth, a State, a Territory or an authority of the Commonwealth or of a State or Territory.

What is ordinary income and statutory income?

2.28 For the purpose of new section 58GA , ordinary income and statutory income have the same meaning as in the ITAA97. [item 1 - new subsection 58GA(3)] Ordinary income is defined in section 6-5 of ITAA97 as income according to ordinary concepts. Statutory income is defined in section 6-10 as, broadly, income that is not ordinary income but included in your assessable income by specific provisions. Ordinary income and statutory income include exempt income.

Phasing in arrangements for 'new' small businesses

2.29 Some employers will not have commenced their business at the start of the year of income which ends before the start of the FBT year in which a benefit is provided. A special provision is necessary to enable these employers to access the FBT exemption being proposed for car parking fringe benefits.

2.30 Under the amendments proposed, these employers, including tax-exempt employers, will be able to access the exemption based on a reasonable estimate of the sum of the ordinary income and statutory income they would have earned in the year (their business start-up year) assuming they commenced operations at the start of that year. They will be eligible for the exemption if the sum of their estimated ordinary income and statutory income is less than $10 million. [Item 1 - new subsection 58GA(2)] A tax-exempt employer is defined in new subsection 58GA(3) as an employer, all of whose income is exempt from tax.

2.31 If the estimate made by an employer for the purpose of new subsection 58GA(2) is not reasonable, the Commissioner of Taxation can make a reasonable estimate of the employer's ordinary and statutory income assuming the employer commenced operations at the commencement of the business start-up year. The Commissioner, based on this estimate, can then determine whether the car parking fringe benefit in question is exempt. If the amount of the Commissioner's estimate is $10 million or more, the employer will be liable to pay additional tax because an exemption was claimed when it should not have been. [Item 3 - new section 115B]

Income tax law

2.32 Amendments to the ITAA36 and ITAA97 are necessary to complement the introduction, in the fringe benefits tax law, of the new FBT exemption for car parking benefits provided by small businesses. The following amendments are contained in Parts 2 and 3 in Schedule 3 of the Bill:

·
repeal of section 51AGB and Division 4A of Part III (sections 89A to 89JC) of the ITAA36. [Items 8 and 9] The provisions in Division 4A, which deal with reducing certain deductions for self-employed persons, partnerships and trusts, replaced section 51AGB with effect from 1 July 1995. The repeal of Division 4A will ensure that the FBT and income tax treatment of car parking expenses continue to be consistent;
·
repeal of subsection 262A(4K) which currently refers to record keeping provisions in relation to the application of section 51AGB and section 89DB; and [item 10]
·
modify the entry for 'car parking' in the table in section 12-5 of the ITAA97 which currently refers to particular kinds of deductions including those in section 51AGB and Division 4A (sections 89A to 89JC) of the ITAA36. As these sections are being repealed, they need to be removed from the entry. [Item 11]

Section 3 Arranger provisions

Summary of the amendments

Purpose of the amendments

2.33 To simplify the application of the arranger provisions and reduce compliance costs for employers. These amendments are intended to make it easier for employers to determine whether they are liable for FBT for benefits provided to their employees by third parties.

Date of effect

2.34 The amendments will apply in relation to assessments for the FBT year commencing 1 April 1998 and for all later FBT years. [Subitem 12(2)]

Background to the legislation

2.35 A fringe benefit includes, in general terms, a benefit provided to an employee in respect of the employee's employment where the benefit is provided by a third party other than the employer (or an associate of the employer) under an arrangement between the third party providing the benefit and the employer (or an associate of the employer). The relevant provisions are paragraph (e) of the definition of 'fringe benefit' and the definition of 'arrangement' in subsection 136(1) of the FBTAA. These provisions and the third party providing the benefit are commonly referred to as the 'arranger provisions' and the 'arranger' respectively.

2.36 The definition of arrangement, and therefore the scope of the arranger provisions, is potentially very wide. For example, an employer may currently be liable for FBT under the arranger provisions if the employer is aware that a third party is providing benefits to employees and does nothing to prohibit employees from accepting those benefits.

Explanation of the amendments

2.37 The definition of fringe benefit is to be amended so that there will be two ways in which a fringe benefit may arise where a benefit (a third party benefit) is provided to an employee, or an associate of the employee, in respect of the employee's employment, by a third party as described in paragraph 2.35 above. Under the amendments proposed, a benefit will be a fringe benefit only if:

·
the benefit is provided under an arrangement, which involves an agreement of some kind, between the employer and the third party; or
·
the employer is involved in a particular way in the provision of the benefit.

Benefits provided under an arrangement

2.38 Paragraph (e) of the current definition of 'fringe benefit' in subsection 136(1) of the FBTAA will be amended to confine the scope of this provision to arrangements covered by paragraph (a) of the definition of 'arrangement'. [Item 5] Paragraph (a) describes different kinds of arrangements and covers agreements, arrangements, understandings, promises and undertakings. In general terms, a fringe benefit will arise where a third party benefit is provided and there is some form of agreement between the employer and the third party.

2.39 A fringe benefit will not arise under paragraph (e) of the definition of fringe benefit unless there is an agreement of some kind between an employer and a third party. It will no longer be enough to look at the employer's action or course of conduct in relation to the provision of the third party benefit, nor will it be necessary to consider the other different kinds of arrangements described in paragraph (b) of the definition of arrangement.

Involvement by employer or associate of employer

2.40 In general terms, a fringe benefit will arise under new paragraph (ea) of the definition of fringe benefit where an employer or an associate of the employer participates, facilitates or promotes the provision or receipt of a third party benefit. A third party benefit will be a fringe benefit only if the employer knew, or ought to have known, that he or she was participating, facilitating or promoting the provision or receipt of the benefit. [Items 4 and 6]

2.41 A benefit will be a fringe benefit if the employer knowingly:

·
participates in or facilitates the provision or receipt of the benefit; or
·
participates in, facilitates or promotes the scheme involving the provision of the benefit.

2.42 An employer will be liable to FBT for the third party benefit where the employer, or the associate of the employer, actually knew that he or she was involved in the above way in relation to the benefit.

Alternatively, if the employer, or the associate of the employer, does not actually realise that they are involved, for example:

·
participating in or facilitating the provision or receipt of a third party benefit; or
·
participating in, facilitating or promoting the scheme involving the provision of the benefit;

liability to FBT for the third party benefit may still arise. It will arise where it is reasonable to conclude that the employer should have known that he or she was involved in a relevant way in relation to the benefit.

2.43 An employer will not be liable for FBT in respect of a third party benefit if the employer did not agree and is not involved in relation to the provision or receipt of the benefit, regardless of whether the employer knew that the benefit had been provided. For example, entertainment by way of meals provided to employees by a third party would not give rise to a fringe benefit unless the employer agreed to the benefit being provided or the employer was involved in a relevant way in providing the benefit.

2.44 An employer would not necessarily be liable for FBT for a third party benefit merely because the employer was involved in relation to the benefit. A third party benefit would be a fringe benefit only if the employer knew, or ought to have known, that he or she was involved in relation to a third party benefit. For example, an employer will not be able to avoid liability for a third party benefit simply by claiming that he or she did not know or realise that their involvement resulted in a third party providing benefits to the employer's employees or associates of employees and that any involvement in the provision or receipt of the benefit was unintentional. If it would be reasonable to conclude that the employer or associate of the employer should have known that he or she was involved in relation to the benefit because for example it is customary in the industry concerned, a fringe benefit would arise.

2.45 On the other hand, an employer would not be liable for FBT for a third party benefit if the employer was involved in relation to the benefit but did not realise that he or she was involved and could not reasonably be expected to know that he or she was involved.

2.46 The following flow chart outlines the steps involved in determining whether an employer is liable to FBT under the simplified arranger provisions. The chart should be read in conjunction with the above discussion.

FBT liability of employers for benefits provided to employees by third parties

Section 4 Record keeping exemption arrangements

Summary of the amendments

Purpose of the amendments

2.47 The proposed RKEA will reduce compliance costs by allowing certain employers:

·
not to keep FBT records for an FBT year; and
·
to have their FBT liability for that FBT year determined from the aggregate fringe benefits amount of an earlier base year in which FBT records were kept.

Date of effect

2.48 The record keeping exemption aspect of this measure will apply in relation to benefits provided from the day Royal Assent is received. The concessional liability aspect of the RKEA will apply in respect of the 1998-99 and later FBT years. [Item 4 of Schedule 12]

Background to the legislation

Current FBT record keeping requirements

2.49 The general record keeping requirement is set out in section 132. An employer is required to keep records that explain all transactions and other acts that are relevant for ascertaining the employers FBT liability. An employer must retain those records for a period of 5 years after the completion of the transactions or acts to which they relate.

2.50 Where an associate of an employer provides benefits to the employers employees, the associate must keep and retain those records for a period of 5 years and provide a copy of those records to the employer, who must also retain those records for 5 years.

2.51 In addition, an employer is required under section 123 to retain substantiation records, called statutory evidentiary documents, that are required to support the substantiation rules. Where an employer fails to retain a statutory evidentiary document for 5 years, that document is deemed never to have been given to the employer. For example, an employer would be unable to reduce the taxable value of a fringe benefit under the otherwise deductible rule if the relevant substantiation records had not been retained.

Calculation of FBT liability

2.52 An employers FBT liability for a year is determined from the aggregate fringe benefits amount for the year. This amount is defined in subsection 136(1), broadly, as the sum of the taxable values of all fringe benefits provided by an employer during the FBT year. Section 66 imposes FBT in respect of an employers fringe benefits taxable amount. The fringe benefits taxable amount is defined in section 136AA, broadly, as the grossed up amount of the aggregate fringe benefits amount of the employer.

Explanation of the amendments

2.53 All employers will be eligible for the RKEA except employers who are:

·
government bodies as defined in subsection 136(1); or
·
exempt from income tax on all of their income at any time during the year.

[New paragraph 135E(2)(b) and section 135J]

2.54 Table 1 at the end of this section provides an overview of how the RKEA will operate. New Part XIA which contains the proposed RKEA provisions has 3 Divisions as follows:

Division Description New sections
1 Overview 135A
2 Two conditions to be satisfied to qualify for the RKEA 135B and 135C
3 Consequences if the 2 conditions in Division 2 are satisfied 135D to 135L

Division 2: Conditions to be satisfied to qualify for the RKEA

2.55 To qualify for the RKEA for an FBT year (the current year), an employer must satisfy two conditions in new section 135B . The two conditions are that the employer must:

·
have established an FBT base year; and
·
not have been given a notice from the Commissioner of Taxation under new paragraph 135E(2)(c) during the FBT year immediately before the current year requiring the employer to resume record keeping.

First condition: need to establish a base year

Establishing a base year

2.56 A base year will be established for an employer in relation to the current FBT year where either:

·
the FBT year immediately before the current FBT year was a base year; or [New paragraph 135B(2)(a)]
·
an earlier FBT year was a base year and the employers FBT liability for every FBT year after that base year and before the current year was determined under new section 135G by using the employers aggregate fringe benefits amount for that earlier FBT year. [New paragraph 135B(2)(b)]

2.57 If an employer who has qualified for the RKEA by establishing a base year chooses to have the FBT liability determined from the aggregate fringe benefits amount for the current year, the employer will not be able to rely on that base year in the year following the current year. This is because the continuity between the base year and the year following the current year would be broken. The employer would have to establish a new base year to qualify for the RKEA again. It should be noted that, in these circumstances, the current year could be a base year in relation to the following FBT year if the requirements in new section 135C (which are discussed below at paragraph 2.59) are satisfied.

2.58 As a transitional measure, employers will be able to use either the 1996-97 or the 1997-98 FBT year, or a later FBT year, as their first base year. An employer who wishes to qualify for the RKEA in the 1998-99 FBT year will only be able to use the 1996-97 FBT year as the base year if the aggregate fringe benefits amount in the 1997-98 FBT year is not more than 20% greater than the aggregate fringe benefits amount for the 1996-97 base year. This tolerance rule, which is set out in new section 135K , is explained below at paragraphs 2.72-2.82. [Item 5 of Schedule 12]

When will an FBT year be a base year?

2.59 An FBT year will be a base year in relation to an employer if:

·
the employer has carried on business operations throughout the FBT year; [New paragraph 135C(1)(a)]
·
the employer has lodged an FBT return for the FBT year. [New paragraph 135C(1)(b)] Some employers provide fringe benefits but the aggregate fringe benefits amount of the fringe benefits is nil, for example, because of employee contributions. These employers are not generally required to lodge returns. However, these employers would need to lodge an annual return to 'enter' the RKEA;
·
all the records for the FBT year have been kept and retained as required under section 132. [New paragraph 135C(1)(c)] Employers who are relying on section 132A to obtain the necessary documentary evidence within a reasonable time are still able to treat a year as a base year where that documentary evidence is obtained;
·
the aggregate fringe benefits amount for the FBT year does not exceed the exemption threshold; and [New paragraph 135C(1)(d)]
·
the employers FBT liability for the FBT year is worked out from the aggregate fringe benefits amount for that year and not an earlier base year. [New paragraph 135C(1)(e)] This condition will ensure that a base year will continue to be relevant until an employer's FBT liability is determined from the aggregate fringe benefits amount for the current year. The FBT years following a base year will not become base years simply because the other requirements of new sections 135B and 135C are satisfied in relation to those years.

Chart 1 at the end of this section shows how to work out whether an FBT year is a base year.

The exemption threshold

2.60 The exemption threshold for the FBT year commencing on 1 April 1996 is $5,000. The threshold for a later FBT year will be the previous year's threshold as adjusted by a factor equal to the percentage increase, if any, in the Consumer Price Index for the year ending on the previous 31 December. The increase is worked out by dividing the sum of the index numbers for the four quarters ending 31 December by the sum of the corresponding index numbers for the previous year. The index number is to be calculated to three decimal places. [New subsections 135C(2) to (8)]

2.61 The increased threshold amounts for the 1997-98 and 1998-99 FBT years are $5,130 and $5,145 respectively. These amounts reflect CPI movement factors referred to in new subsection 135C(4) of 1.026 and 1.003 respectively for the years ending 31 December 1996 and 1997.

Second condition: Commissioners notice

2.62 The second condition necessary to qualify for the RKEA for a current year is set out in new subsection 135B(3) . The condition is that an employer must not have been given a notice from the Commissioner under new paragraph 135E(2)(c) requiring the employer to resume record keeping during the FBT year immediately before the current year. It is envisaged that the Commissioner would issue a notice when there is reason to suspect that the value of benefits provided by an employer had increased well above the limit allowed for remaining in the RKEA and an employer had insufficient records available to refute that position. On receipt of a new paragraph 135E(2)(c) notice, an employer would not be eligible to re-enter the RKEA until the employer had established a new base year.

Division 3: Consequences of qualifying for the RKEA

2.63 The main consequences of qualifying for the RKEA for a current FBT year are that employers:

·
will not be required to keep or retain FBT records for that year in accordance with subsection 132(1), subject to certain exceptions; and [New section 135E]
·
may have their FBT liability for the current year determined under new section 135G from their aggregate fringe benefits amount from an earlier base year in which FBT records were kept.

When will records still need to be kept?

2.64 New subsection 135E(2) describes the circumstances when employers, despite qualifying for the RKEA by satisfying the conditions in new section 135B , will still need to keep and retain FBT records. The circumstances include those described in:

·
new paragraph 135E(2)(a) which covers copies of records that an associate of the employer provides to the employer under subsection 132(2). These records relate to benefits provided by the associate to the employers employees;
·
new paragraph 135E(2)(b) which covers situations where an employers status changes to either an income tax exempt body or a government body. In such cases, records would be required to be kept from the day the employers status changed; and
·
new paragraph 135E(2)(c) which covers situations where an employer receives a notice from the Commissioner requiring the employer to recommence keeping and retaining records. This requirement will apply from the date the employer is given such a notice.

How long do records have to be kept?

2.65 An employer will be required to keep records for a base year for a period of 5 years after the end of the last FBT year for which the base year is relevant in determining the employers liability. Examples of the operation of this rule are set out in Chart 2 at the end of this section. [New section 135F]

How to work out FBT liability under the RKEA

2.66 Subject to certain exceptions, an employers FBT liability for the current year will be worked out using the employers aggregate fringe benefits amount for the employers most recent base year instead of the current year. [New section 135G]

2.67 Employers who cease business during the current year will also be able to take advantage of the concessions available under the RKEA under new section 135L . Employers in these circumstances who do not wish to have their FBT liability determined using the aggregate fringe benefits amount for the current year will be able to pro rate their base year aggregate fringe benefits amount in accordance with the proportion of the current year during which they were in business. New section 135L is discussed in more detail at paragraph 2.83.

What are the exceptions to determining the FBT liability for the current year under section 135G?

2.68 There are three exceptions which will result in an employers FBT liability for a current year being determined using the employers aggregate fringe benefits amount for the current year rather than the aggregate fringe benefits amount for the base year. These exceptions are provided in new sections 135H, 135J and 135K , which are discussed below at paragraphs 2.70 2.82.

2.69 There is an important consequence for employers where new sections 135H, 135J and 135K apply. While these employers will continue to be exempt from the record keeping requirement for the current year under subsection 132(1), they will not be exempt from the operation of section 123. They would need to obtain and retain any relevant substantiation records if they wish to rely on any exemptions or reductions in the taxable value of fringe benefits. Of course, employers in these circumstances are given some protection against the operation of section 123 by section 123B, under which the substantiation rules do not apply if an employer has alternative evidence that is acceptable to the Commissioner.

Exception 1: Employer chooses to use the current year actual aggregate fringe benefits amount

2.70 An employer may choose under new section 135H to use the aggregate fringe benefits amount for the current year rather than the aggregate fringe benefits amount for the base year. An employer might choose the current year aggregate fringe benefits amount when that amount is less than the base year amount.

Exception 2: Employer is a government body or an income tax exempt body

2.71 An employer will not be able to use the aggregate fringe benefits amount for a base year where the employer is a government body or an income tax exempt body at any time during the current year. [New section 135J]

Exception 3: Aggregate fringe benefits amount in current year increases too much

2.72 An employer will not be able to use the aggregate fringe benefits amount from a base year when the aggregate fringe benefits amount in the current year is more than 20% greater than the amount in the employers most recent base year. [New subsection 135K(1)]

2.73 A concession is provided for employers whose aggregate fringe benefits amount in the base year is less than $500. These employers will be able to exceed the 20% test in the current year and still have their current year FBT liability determined from their base year aggregate fringe benefits amount providing the difference between the aggregate fringe benefits amounts in the current and base year is $100 or less.

Example: The aggregate fringe benefits amount of an employer in the base year is $150. In the current year for which the employer has qualified for the RKEA, the aggregate fringe benefits amount is $200 (an increase of 33%). Although the increase of $50 represents more than 20%, it is less than $100. This employer would not be disqualified from remaining in the RKEA in the following year and could continue to use the same aggregate fringe benefits amount for determining the employer's FBT liability.

Special rules to assist employers to work out whether their aggregate fringe benefits amount has increased too much

2.74 Given that employers who qualify for the RKEA are not required to keep FBT records, they may experience some difficulties in determining the aggregate fringe benefits amount in a current year for the purpose of applying the 20% tolerance test described above.

2.75 The RKEA are specifically targeted at employers whose fringe benefits do not significantly alter in amount each year. Further, the onus of proof will be on the employer to show that the level of benefits has remained within the 20% tolerance limit.

2.76 Against this background, special rules are proposed to assist employers in determining their aggregate fringe benefits amount for a current year even though FBT records may not have been kept. These rules, which deal with the retention of statutory evidentiary documents and the valuation of car fringe benefits, are discussed in more detail below. [New subsection 135K(2)]

Statutory evidentiary documents

2.77 Section 123 provides that these documents are deemed never to have been maintained where an employer fails to retain them for the required retention period. The effect of section 123 is to be disregarded for the purpose of determining the aggregate fringe benefits amount in the current year. This rule will ensure that the aggregate fringe benefits amount for a current year is not higher than it would have been had substantiation records been kept. [New subsection 135K(3)]

Car benefits

2.78 Special rules apply in calculating the taxable value of car fringe benefits under the statutory formula and cost basis methods to determine whether the aggregate fringe benefits amount in a current year has exceeded the 20% tolerance limit.

2.79 Where an employer used the statutory formula method under section 9 to determine the taxable value of a car fringe benefit, the annualised number of kilometres travelled by the car during that year is relevant in determining the appropriate statutory fraction under paragraph 9(2)(c).

2.80 When determining whether the aggregate fringe benefits amount for a current year is within the 20% tolerance allowed, the taxable value of the car may be determined by reference to the statutory fraction used in the first year that the car benefit is provided, which may be the base year, providing the annualised number of kilometres travelled in the current year is at least 80% of the annualised number of kilometres travelled in that first year that the car benefit is provided. This concession provides an additional safeguard when an employer is determining the aggregate fringe benefits for a current year. [New subsections 135K(4) and (6)]

Example: An employer provides only a car fringe benefit during the base year and uses the statutory formula method. The base value of the car is $25,000 and the car has travelled 15,500 km. The taxable value of the car fringe benefit would be $5,000 ($25,000 x 0.20). In a later year (the current year), for which the employer has qualified for the RKEA, the car travels 13,100 km.

But for this 80% margin, the taxable value of the car fringe benefit would be $6,500 ($25,000 x 0.26). However, as the number of kilometres travelled by the car (13,100 km) is at least 80% of the number of kilometres in the base year (80% x 15,500 = 12,400 km), the taxable value of the car fringe benefit is $5,000 for the purpose of determining whether the aggregate fringe benefits amount for the current year is within the tolerance limit.

2.81 Where an employer uses the cost basis method under section 10, a parallel concession will apply to the business use percentage under subsection 10(2).

2.82 When determining the aggregate fringe benefits amount for a current year, the employer may use the business use percentage for the first year that the car benefit is provided, which may be the base year, if the business use percentage for the current year is not more than 20 percentage points lower than the business use percentage for that first year that the car benefit is provided. [New subsections 135K(5) and (6)]

Example: An employer qualified for the RKEA in a base year when the business use percentage was 70%. In a later FBT year the actual business use percentage drops to 55%.

As the business use percentage has dropped by 15 percentage points (ie., not more than 20 percentage points) in relation to the base year, the employer can use a business use percentage of 70% to determine the aggregate fringe benefits amount for the current year.

Employer not in business throughout current year

2.83 New section 135L will assist those employers who have qualified for the RKEA but who cease to carry on business operations during the current year. This provision is necessary to enable those employers to remain in the RKEA for part of an FBT year and have their liability determined from a proportion of the aggregate fringe benefits amount in the employers most recent base year. These employers would also be able to choose to have their FBT liability determined from the current (part) year aggregate fringe benefits amount using new section 135H .

Example: An employer has been using the RKEA for a few years and having the FBT liability determined using the base year aggregate fringe benefits amount of $4,800. The employer ceases business operations after 146 days of the current year. New section 135L will apply so that:

·
the 20% tolerance limit under new subsection 135K(1) for the purposes of comparing the aggregate fringe benefits for the current year with the base year amount will be $2,304 (146/365 x 4800 x 1.2); and
·
providing the current year aggregate fringe benefits amount is not more than $2,304, the FBT liability under new section 135G will be determined assuming aggregate fringe benefits of $1,920 (146/365 x $4,800).

TABLE 1

Summary of the Record Keeping Exemption Arrangements (RKEA) in new Part XIA
Employer satisfies Division 2 requirements in respect of a current year and ... Record keeping requirements for the current year FBT liability for the current year Effect on eligibility status for the RKEA in the following year
... takes advantage of Division 3 by having the FBT liability determined using the aggregate fringe benefits amount for the most recent base year Exempt from keeping FBT records, except for: * copies of records provided by associates. New section 135E: see paragraphs 2.63 -2.65. Calculated using the aggregate fringe benefits amount for the most recent base year. New section 135G: see paragraph 2.66 No effect - the employer continues to be eligible for the RKEA. New section 135B: see paragraph 2.56.
... employer chooses to use aggregate fringe benefits amount of the current year Exempt from keeping FBT records, except for: * copies of records provided by associates. New section 135E: see paragraphs 2.63 -2.65. Calculated using the aggregate fringe benefits amount for the current year. New section 135H: see paragraphs 2.68 - 2.70. Not eligible unless the current year is established as a new base year. New sections 135B and 135C: see paragraphs 2.57 and 2.59.
... aggregate fringe benefits amount for the current year increases above the 20% tolerance allowed Exempt from keeping FBT records, except for: * copies of records provided by associates. New section 135E: see paragraphs 2.63 -2.65. Calculated using the aggregate fringe benefits amount for the current year. New section 135K: see paragraphs 2.68, 2.69 and 2.72 - 2.82. Not eligible unless the current year is established as a new base year. New sections 135B and 135C: see paragraphs 2.59 and 2.60.
... ceases business part way through the year Exempt from keeping FBT records, except for: * copies of records provided by associates. New section 135E: see paragraphs 2.63 -2.65. Providing that the 20% tolerance test (pro-rated) is satisfied, the liability is calculated using a proportion of the aggregate fringe benefits amount of the base year. Otherwise the aggregate fringe benefits amount of the current year could be used. New sections 135H, 135K and 135L: see paragraphs 2.67 and 2.83. Not applicable.
... receives a Commissioner's notice Must resume keeping FBT records from receipt of notice from Commissioner. New paragraph 135E(2)(c): see paragraph 2.64. Calculated using the aggregate fringe benefits amount for the most recent base year. New section 135G: see paragraph 2.66. Not eligible. Subsection 135B(3): see paragraphs 2.55 and 2.62.

Chart 1 - Section 135C

What is the exemption threshold?

The exemption threshold is:

·
$5000 for the FBT year beginning on 1 April 1996, and
·
for later years, the threshold for the privious year indexed in accordance with the Consumer Price Index for the 12 months ending 31 December; that is:

·
$5130 for the year beginning on 1 April 1997; and
·
$5145 for the year beginning on 1 April 1998.

Chart 2 - Section 135F

Section 5 Regulation Impact Statement for taxi travel and car parking measures

Policy objective

2.84 The policy objective of these measures is to reduce the cost of record keeping by small business. First, by simplifying the existing exemption for taxi travel, and second, by exempting benefits arising from car parking provided by small business employers.

2.85 These measures will involve amendments to the fringe benefits tax legislation and the income tax legislation.

Background

2.86 The proposed measures implement the Government's response to the SBDTF's recommendations concerning the treatment of car parking and taxi travel under the fringe benefits tax law. The SBDTF recommended in November 1996 that all benefits relating to taxi travel and car parking be exempt from FBT.

2.87 Under the existing FBTAA, benefits arising from certain taxi travel are exempt from FBT. To qualify for exemption, the travel must be directly between the employee's home and place of work and commence between 7 pm and 7 am. Taxi travel arising because of sickness or injury to an employee is also exempt in certain circumstances.

2.88 Car parking is subject to FBT broadly where an employer provides car parking, essentially in the central business district, for more than 4 hours for an employee's car that is used for travel between home and the work place. Where car parking expenses are incurred by a self-employed person, a partnership or a trust, the amount of any income tax deduction is reduced to ensure that the income tax and FBT treatment of car parking is consistent.

Implementation options

2.89 There were no options for implementing these measures.

The FBTAA will be amended to simplify the existing exemption for benefits arising from taxi travel to cover taxi travel beginning or ending at an employee's place of work at any time of the day. The exemption for taxi travel arising from sickness or injury will remain unchanged.

2.90 The FBTAA will also be amended to exempt car parking benefits provided by certain employers unless the parking is in a commercial car park. Employers other than government bodies, listed public companies and subsidiaries of such companies will be eligible for the exemption if their ordinary income and statutory income (ie. gross income) for the year of income ended before the start of the FBT year in which the car parking benefits are provided is less than $10 million.

2.91 Where employers have not commenced business operations before the start of that year, they will be required to make a reasonable estimate of the ordinary and statutory income they would have derived if they had commenced operations at the start of the year of income during which they commenced operations. While the rules for employers in these circumstances require them to make an estimate and therefore will involve some compliance costs, the rules are necessary to ensure that genuine small business employers will have access to the exemption from the day they commence operations.

2.92 The income tax law will be amended to remove the restrictions on deductions for car parking expenses incurred by self-employed persons, partnerships or trusts.

2.93 The FBT changes will apply for the FBT year commencing 1 April 1997 and all later FBT years. The income tax changes will apply to car parking expenses incurred on or after 1 July 1997.

Assessment of impacts (costs and benefits)

Impact group

2.94 The exemption for certain car parking benefits will affect employers, other than government bodies or listed public companies and their subsidiaries, whose ordinary income for the relevant year of income is less than $10 million and who provide car parking for employees other than in a commercial car park.

2.95 The change to the exemption for benefits arising from taxi travel will affect all employers who provide taxi travel arriving at or leaving from the work place for their employees.

2.96 These measures will not have a significant impact on the Government, the Australian Taxation Office, tax agents or accountants.

Costs and benefits

2.97 The FBT liability and compliance costs of employers who qualify for these exemptions will be reduced. The SBDTF referred to 'The Working Overtime Survey' which showed that a substantial reduction in compliance costs is likely to result in increased business activity and higher profitability.

2.98 Employers who provide taxi travel will no longer be required to distinguish between taxi travel undertaken directly between the employee's home and place of work commencing between 7 pm and 7 am and other taxi travel. They will not have to ascertain all destination and departure points and the time of travel. Further, employers will not need to ascertain that the travel was direct. Employers will only need to ensure that taxi travel begins or ends at the place of work.

2.99 Employers who qualify for the car parking exemption will no longer have to compile and keep the records necessary to calculate the taxable value of the car parking benefits. The valuation rules for car parking benefits are complex. Employers sometimes experience difficulties in counting the number of car parking fringe benefits provided during an FBT year or in determining the taxable value of car parking fringe benefits.

2.100 Where an employer knows the number of benefits provided, the employer may determine the taxable value of the car parking fringe benefits using the commercial parking station method, the market value method or the average cost method. Alternatively, an employer may elect to calculate the taxable value of all car parking fringe benefits provided during the year by using the statutory formula method or the 12 week record keeping method. Records are required for each of these methods which, in some cases, are not required for any other purpose.

Financial impact

2.101 The revenue impact of the simplified taxi travel exemption is not quantifiable but is not expected to be large. The exemption for car parking provided by small business employers is expected to have an on-going revenue cost of around $35 million from 1997-98.

Conclusion

2.102 These measures offer a reduction in compliance costs for all employers who provide taxi travel arriving at or leaving from the work place for employees and for certain small business employers who provide car parking for their employees. The Treasury and the ATO will monitor this taxation measure, as part of the whole taxation system, on an ongoing basis. In addition, the ATO has consultative arrangements in place to obtain feedback from professional and business associations through taxpayer forums.

Section 6 Regulation Impact Statement for changes to the arranger provisions

Policy objective

2.103 To implement the Government's response to the Small Business Deregulation Task Force's recommendation concerning the arranger provisions in the FBTAA. The proposed changes to the arranger provisions aim to reduce the compliance problems for employers arising from the arranger provisions.

Background

2.104 A fringe benefit includes, in general terms, a benefit provided to an employee in respect of the employee's employment where the benefit is provided by a person other than the employer under an arrangement between the person providing the benefit and the employer. The relevant provisions in the FBTAA are commonly referred to as the 'arranger provisions'.

2.105 The current definition of arrangement is very wide. The Australian Taxation Office (ATO)'s view, set out in taxation rulings and determinations, is that an employer is liable for FBT if the employer is aware that a third party is providing benefits to employees and the employer does not prohibit employees from accepting the benefits.

2.106 Compliance problems arise under the arranger provisions when benefits are initiated and provided by a third party. It is often difficult for an employer to determine the FBT liability as often the employer does not know the value of benefits provided to employees during the year. These circumstances typically arise when benefits are provided to employees under product promotion schemes or when employees are entertained, for example, through the provision of meals.

2.107 The Small Business Deregulation Task Force (the Task Force) recommended in November 1996 that the arranger provisions in the FBTAA be changed from the 1998-99 financial year so that the onus of paying FBT lies with the supplier of the benefit. The Government asked the ATO to consult with business through representatives of the FBT Subcommittee of the Commissioner of Taxation's National Taxation Liaison Group (NTLG FBT Subcommittee) in the light of the Task Force's recommendation and report to Government by 30 June 1997 on the best means of addressing concerns with the arranger provisions.

Implementation option

2.108 The implementation of the Government's policy objective involves amending the FBTAA to simplify the application of the arranger provisions. As a result of the proposed changes, an employer will be liable for FBT for benefits provided at the initiative of a third party only where there is an agreement between the employer and the third party or where the employer participates in, or facilitates, the provision of benefits by the third party.

2.109 Employers will still have to determine whether they are liable for FBT in these circumstances but this measure will make that determination easier and more certain.

2.110 This measure will be effective from 1 April 1998.

Assessment of impacts (costs and benefits)

Impact group

2.111 This measure will affect employers whose employees receive benefits from third parties where there is not an agreement between the employer and third party. It can be difficult for employers in these circumstances to determine whether they are liable to pay FBT in respect of the benefit. This option will make it significantly easier for those employers to determine whether they are liable to pay FBT for such benefits.

Costs and benefits

2.112 This measure will significantly reduce the compliance costs of employers in determining whether they are liable to pay FBT.

2.113 In particular, this measure will result in meals provided to employees at the initiative of third parties generally not being subject to FBT. The imposition of FBT to the benefits arising from meals provided in these circumstances under the existing law creates compliance problems for employers.

2.114 Where employers are liable for FBT for benefits provided to employees by third parties, some difficulties may remain for employers in obtaining from third parties the information about the value of the benefits. However, it is assumed that an employer would not enter into an agreement with a third party for the provision of benefits to employees, or participate in the provision of benefits to employees by a third party, where the employer will be exposed to a FBT liability without being provided with the relevant information by the third party.

2.115 The commencement date of 1 April 1998, which is the start of the 1998-99 FBT year, would minimise any disruption for employers.

2.116 The proposed changes will not have any significant impact on ATO administration costs.

Financial impact

2.117 The revenue implications of this measure are negligible.

Consultation

2.118 As requested by the Government, the ATO consulted with business through the NTLG FBT Subcommittee to clarify the concerns of business with the arranger provisions.

Conclusion

2.119 This measure offers a significant reduction in compliance costs for employers by clarifying their FBT liability where benefits are provided to employees at the initiative of third parties.

2.120 Feedback can be provided on this measure through the NTLG FBT Subcommittee and other taxpayer consultation forums.

Section 7 Regulation Impact Statement for the record keeping exemption arrangements

Policy objective

2.121 The policy objective of this measure is to reduce the compliance costs of record keeping for small business by exempting employers from the requirement to keep records for FBT purposes in certain circumstances.

Background

2.122 The measure was announced in a statement by the Prime Minister entitled More Time for Business on 24 March 1997 in response to the recommendations of the Small Business Deregulation Task Force.

2.123 The general record keeping requirement is set out in section 132 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). An employer is required to keep records that explain all transactions and other acts that are relevant for ascertaining the employers liability to FBT. An employer must retain those records for a period of 5 years after the completion of the transactions or acts to which they relate.

2.124 Where an associate of an employer provides benefits to the employers employees, the associate must keep and retain those records for a period of 5 years and provide a copy of those records to the employer. The employer must retain those records for 5 years.

2.125 In addition, an employer is required under section 123 of the FBTAA to retain documents, called statutory evidentiary documents, to support the substantiation rules. Where an employer fails to retain a statutory evidentiary document in relation to a fringe benefit for 5 years, the document is deemed never to have been given to the employer (and hence the employer is unable to rely upon it when determining the taxable value of the fringe benefit). For example, the taxable value of a fringe benefit can be reduced under the otherwise deductible rule only if an employer has complied with the substantiation rules.

Implementation option

2.126 There is only one option for implementing this measure. That is to amend the FBTAA.

2.127 Employers, other than government bodies and tax exempt bodies, who provide fringe benefits with an aggregate fringe benefits amount not greater than a threshold amount in a particular year, the base year, ($5,000 in the 1996-97 FBT year) will be able to elect not to keep FBT records for future FBT years. The amount of $5,000 will be adjusted annually for the 1997-98 FBT year and later FBT years in line with movements in the Consumer Price Index.

2.128 For an FBT year that the record keeping exemption arrangements (RKEA) apply, an employers FBT liability will generally be the same as the employers liability in the base year. However, if there is a material increase in the value of benefits provided during the year, the employers liability will be calculated in the normal way. A material increase in the value of benefits would be an increase in the aggregate fringe benefits amount of more than 20% of the base year (unless the increase is $100 or less).

2.129 This measure will apply from the day Royal Assent is received. An employer who qualifies for the RKEA will not be required to keep FBT records from the day that Royal Assent is received for the amending legislation. Further, an employer will be able to use either the 1996-97 FBT year or the 1997-98 FBT year as the first base year for the RKEA.

Assessment of impacts (costs and benefits)

Impact group

2.130 This measure will affect employers, other than government bodies and tax exempt bodies, who provide fringe benefits with an aggregate fringe benefits amount not greater than the threshold amount in a particular FBT year and maintain a similar level of benefits in later years.

2.131 Those employers who are eligible for the RKEA will be able to elect not to keep most FBT records in later years provided there is not a material change in the value of benefits provided. Employers would still have to retain records which they receive from associates in respect of benefits provided to their employees by those associates.

2.132 Around 30,000 small businesses lodging returns and paying FBT may fall within the exemption threshold. However, it is difficult to estimate the number of employers that will use the RKEA. Some employers may have the scope to reduce the level of fringe benefits they provide below the exemption threshold. Others providing fringe benefits may not lodge returns (for instance, because the value of the fringe benefits is reduced to nil by employee contributions).

2.133 Some employers who would be eligible for the RKEA may continue to keep records because they may not be certain that the value of benefits will fall within the limits of the exemption. Other eligible employers who currently do not lodge FBT returns may continue to keep records because they do not wish to start lodging FBT returns.

2.134 This measure will not have a significant impact on the Government. This measure will impact on tax agents and accountants to the extent that they will need to familiarise themselves with the measure and advise employers as to whether they should utilise the RKEA.

2.135 The Australian Taxation Office will have to make minor changes to forms and systems to administer the RKEA.

Costs and benefits

2.136 The compliance costs of employers who qualify for the RKEA as proposed will be reduced because of the reduction in reporting costs, for example, that would be incurred in obtaining and storing FBT substantiation records.

2.137 However, employers would need to recommence record keeping when there is a material variation in the value of the benefits being provided. In addition, employers would need to retain records relating to benefits provided by associates.

2.138 The reduction in compliance costs would mainly be for those employers who maintain the same type and level of benefits year after year.

2.139 There would be some additional costs to the extent that employers will need to learn about the changes to the law and determine whether they qualify for the RKEA. However, these additional costs would be more than offset by the time saved by employers in preparing, storing and accessing the fringe benefits source documents, as they are currently required to do for FBT purposes. Therefore, there will be an overall saving in compliance costs.

Financial impact

2.140 This measure is expected to result in a loss to revenue of $5 million in the 1998-99 financial year, $25 million in 1999-2000 and $20 million in 2000-2001 and 2001-2002.

Conclusion

2.141 This measure will reduce the compliance costs for employers who qualify for the record keeping exemption arrangements. The Treasury and the ATO will monitor this taxation measure, as part of the whole taxation system, on an ongoing basis. Feedback can be provided on this measure through the Department of Treasury and the Australian Taxation Office in the usual manner.

Section 8 FBT exemption for approved student exchange programs

Summary of the amendment

Purpose of the amendment

2.142 The amendments in Schedule 2 of the Bill will provide an exemption from FBT for benefits consisting of places in an approved student exchange program where an employer (or an associate of the employer) does not select, or participate in the selection of, the recipient of the benefit.

Date of effect

2.143 The amendment will apply in relation to assessments for the FBT year commencing on 1 April 1996 and all later FBT years. [Item 2]

Background to the legislation

2.144 Some student exchange bodies invite employers to purchase places in student exchange programs for their employees or their children. Under the existing law, a fringe benefit arises where an employer provides a place in a student exchange scheme for an employee or an associate of an employee.

Explanation of the amendment

2.145 New section 58ZB is inserted in Division 13 of Part III of the FBTAA to exempt from FBT benefits consisting of places in student exchange programs where certain conditions are satisfied. [Item 1]

2.146 For a benefit consisting of a place in a student exchange program to be an exempt benefit, the conditions set out in new subsection 58ZB(1) must be satisfied. In particular, new paragraph 58ZB(1)(c) stipulates that an employer (or an associate of the employer) must not select, or take part in the selection of, the recipient of the benefit. An employer would be considered to have taken part in the selection process where the employer controlled or influenced the selection of the recipient. A benefit will qualify for exemption only where the recipient is selected independently by the student exchange body.

2.147 A further condition is that the student exchange program must be an approved student exchange program. An approved student exchange program is defined in new subsection 58ZB(2) as a student exchange program run by a student exchange body registered with the relevant State or Territory body in accordance with the National Guidelines for Student Exchange. These guidelines are published by the National Co-ordinating Committee for International Secondary Student Exchange.


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