Edited version of private advice

Authorisation Number: 1051522896707

Date of advice: 30 May 2019

Ruling

Subject: Fringe benefits tax - otherwise deductible rule and self-education

Question 1

Would a payment to the employee as a reimbursement for work-related education expenses give rise to a fringe benefit under the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

Question 2

Can the taxable value and therefore the FBT liability on the reimbursement be reduced to nil by the 'otherwise deductible' rule under section 24 of the FBTAA?

Answer

Yes

This ruling applies for the following period

Year ended 31 March 2019

The scheme commenced on

1 April 2018

Relevant facts

The employer hired an employee in 2017. The employee is still in employment with the employer.

The employee enrolled in a course of study in 2018. The course was undertaken under a FEE-HELP loan arrangement and is not subsidised by the Commonwealth supported (CSP) scheme.

The employer agreed with the employee to reimburse 50% of the course fees and provide additional study leave for the entire education course.

The payments were made in the second half of 2018 to the employee.

The employee has provided payment invoices and unit descriptions to the employer as items of evidence.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 20

Fringe Benefits Tax Assessment Act 1986 Section 24

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Question 1

Would a payment to the employee as a reimbursement for work-related education expenses give rise to a fringe benefit under the Fringe Benefits Tax Assessment Act (FBTAA)?

The employer provides study assistance to approved employees where qualified. In order to qualify for assistance under the policy, an employee must undertake relevant work-related education. The employer has agreed to reimburse up to 50% of the costs incurred by the employee.

Section 20 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) sets out the circumstances in which a reimbursement will be an expense payment benefit. Section 20 states:

Where a person (in this section referred to as the provider):

(a) makes a payment in discharge, in whole or in part, of an obligation of another person (in this section referred to as the recipient) to pay an amount to a third person in respect of expenditure incurred by the recipient; or

(b) reimburses another person (in this section also referred to as the recipient) in whole or in part, in respect of an amount of expenditure incurred by the recipient.

As the employer reimbursed the employee for expenses they incurred, the benefit is an expense payment benefit under paragraph 20(b) of the FBTAA.

Question 2

Can the taxable value and therefore the FBT liability on the reimbursement be reduced to nil by the 'otherwise deductible' rule under section 24 of the FBTAA?

The taxable value of an expense payment benefit can be reduced in certain circumstances by the 'otherwise deductible' rule if the employee would have been entitled to claim an income tax deduction for the expense if they had not been reimbursed by the employer. The requirements for the 'otherwise deductible' rule to apply to expense payment benefits are set out in section 24 of the FBTAA, which states:

(1) Where:

(a) the recipient of an expense payment fringe benefit in relation to an employer in relation to a year of tax is an employee of the employer; and

(b) if the recipient had, at the time when the recipients expenditure was incurred, incurred and paid unreimbursed expenditure (in this subsection called the gross expenditure), in respect of the same matter in respect of which the recipients expenditure was incurred, equal to:

(i) in the case of an in-house expense payment fringe benefit - the amount that, but for this subsection and Division 14 and the recipients contribution, would be the taxable value of the expense payment fringe benefit in relation to the year of tax; or

(ii) in the case of an external expense payment - the amount of the recipients expenditure;

a once-only deduction (in this subsection called the gross deduction) would, or would if not for section 82A of the Income Tax Assessment Act 1936, and Divisions 28 and 900 of the Income Tax Assessment Act 1997, have been allowable to the recipient under either of those Acts in respect of the gross expenditure; ...

In summarising, the 'otherwise deductible' rule as set out in section 24 of the FBTAA will apply to reduce the taxable value of an expense payment benefit if the following conditions are satisfied:

1. the recipient of the benefit is the employer's employee;

2. the employee who received the benefit, would have been entitled to a once-only deduction had the employer not reimbursed the employee for the expense incurred.

A 'once-only' deduction is defined in subsection 136(1) of the FBTAA to mean:

once-only deduction, in relation to expenditure, means a deduction in a year of income in respect of a percentage of the expenditure where no deduction is allowable in respect of a percentage of the expenditure in any other year of income.

It is confirmed in question 1 that the employer provides an expense payment benefit to an employee.

Self-education expenses are deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA1997) where there is a relevant connection to the taxpayer's current income-earning activities.

The deductibility of self-education expenses is discussed in Taxation Ruling TR 98/9 Income tax: deductibility of self-education expenses incurred by an employee or a person in business (TR 98/9).

General guidelines for determining the deductibility of self-education expenses are provided in paragraphs 12 to 17 of TR 98/9. At these paragraphs the ruling states:

12. Self-education expenses are deductible under section 8-1 [of the Income Tax Assessment Act 1997 (ITAA 1997) where they have a relevant connection to the taxpayer's current income-earning activities.

13. If a taxpayer's income-earning activities are based on the exercise of a skill or some specific knowledge and the subject of self-education enables the taxpayer to maintain or improve that skill or knowledge, the self-education expenses are allowable as a deduction.

14. If the study of a subject of self-education objectively leads to, or is likely to lead to, an increase in a taxpayer's income from his or her current income-earning activities in the future, the self-education expenses are allowable as a deduction.

15. The fact that the study will enable a taxpayer to get employment, to obtain new employment or to open up a new income-earning activity (whether in business or in the taxpayer's current employment) is not a sufficient basis in itself for self-education expenses to be deductible. This includes studies relating to a particular profession, occupation or field of employment in which the taxpayer is not yet engaged. The expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

16. In practice, the above principles do not always operate on a mutually exclusive basis. It is always necessary to have regard to the words of section 8-1 and apply them to the facts.

17. An expense is deductible under section 8-1 when it has the essential character of an income-producing expense. The essential character is to be determined by an objective analysis of all the surrounding circumstances. There are circumstances where apportionment under section 8-1 is required. For example, if a study tour or attendance at a work-related conference or seminar is undertaken for income-earning purposes and for private purposes. It is appropriate to apportion the expenses between the purposes. If the income-earning purpose is merely incidental to the main private purpose, only the expenses which relate directly to the former purpose are allowable. However, if the private purpose is merely incidental to the main income-earning purpose, apportionment is not appropriate.

The employer has confirmed that the attendance at this course has enhanced the employee's position within the organisation and that the gaining of the extra qualification was not for the benefit of gaining future employment. It increased the employee's knowledge and capacity in improving and advancing organisational goals while employed in their current position.

The course broadened the employee's knowledge and context, and there is a greater opportunity for the employee to practice skills learned.

It is accepted that the employee meets the general guidelines for deductibility of self-education expenses.

The employee has incurred expenses for tuition fees which he initially funded with a FEE-HELP loan.

The deductibility of tuition fees and higher education loan repayments is specifically discussed at paragraphs 23 and 24 of TR 98/9 as follows:

23. Subject to the general tests under section 8-1 being met, the following types of expenses related to self-education are allowable:

(a) course or tuition fees of attending an educational institution, work-related conference or seminar, including student union fees;

...

24. The following expenses related to self-education are not allowable under section 8-1:

(a) a student contribution amount or debt repayment amount specified in section 26-20 of the ITAA 1997;

...

Paragraph 85 of TR 98/9 then provides further detail on these general statements:

85. Course or tuition fees incurred in attending an educational institution or attending work-related conferences or seminars, including student union fees, are allowable under section 8-1. However, you cannot deduct a student contribution amount paid to a higher education provider under the Higher Education Support Act 2003; paragraph 26-20(1)(ca) of the ITAA 1997. Such payments are made by a student to cover the cost of a course of study at a tertiary educational institution. Repayment amounts for a Higher Education Loan Program (HELP) debt or a Student Financial Supplement Scheme (SFSS) debt are also not deductible: paragraph 26-20(1)(cb) and paragraph 26-20(1)(d) of the ITAA 1997, respectively.

These general principles were discussed in regards to studies funded by FEE-HELP loans in ATO Interpretative Decision ATO ID 2005/26 Income Tax Deductions: self-education - course fees paid from FEE-HELP loan funds (ATO ID 2005/26).

In ATO ID 2005/26, a taxpayer was allowed a deduction under section 8-1 of the ITAA 1997 for university course fees paid where he obtained a FEE-HELP loan for the fees. In providing the reasoning for this decision, ATO ID 2005/26 applies paragraphs 13 to 15 of TR 98/9 and states:

The course of study is directly related to the taxpayer's current income earning activities and is likely to lead to an increase in the taxpayer's income. Even though the taxpayer has obtained a loan for all or part of the fees for the course under FEE-HELP, this does not preclude the taxpayer from claiming a deduction for the expenses incurred in relation to the course.

In considering the principles set out in TR 98/9 and applied in ATO ID 2005/26, the employee would have been entitled to claim a once-only deduction for the course fees.

The taxable value of the expense payment benefit can therefore be reduced to nil under the 'otherwise-deductible' rule.