NTLG FBT Sub-committee minutes - 17 November 2005 .

Venue:

Taxpayers' Australia, 1405 Burke Road, East Kew

Meeting commenced at 10.00am

Attendees:

Lee Beaver (Chairperson)	Tax Office	Paul Hockridge	CPAA
Maria Benardis	ICAA	Evan Lancaster	TA
Steve Cane	NTAA	Elizabeth Lucas	CPAA
Graham Clarke	ICAA	Andrew Purdon	CPAA
Joanne Dibetta	Tax Office	Stephen Quah	Tax Office
Richard Ferraro	FCAI	Karen Stein	ICAA
Anthony Greco	TA	Marinda Waller	NIA

Apologies:

Ray Conwell	LCA	Frank Klasic	LCA
Lance Cunningham	NIA	Elsa Payne	TIA
James Deliyannis	NTAA

^[H1]Disclaimer

Please note: NTLG FBT sub-committee agendas, minutes and related papers are not binding on the Tax Office or any of the other bodies referred to in these papers. While every effort is made to accurately record views expressed, the wording necessarily represents a summary of statements of general position only, and care should be taken in interpreting those statements. These papers reflect the position at the date of release (unless otherwise noted) and readers should note that the position on any issue may subsequently change.

External representatives

CPA Aust	CPA Australia
FCAI	The Federal Chamber of Automotive Industries
ICAA	Institute of Chartered Accountants in Australia
LCA	Law Council of Australia
NIA	National Institute of Accountants
NTAA	National Tax and Accountants Association
TA	Taxpayers' Australia
TIA	Taxation Institute of Australia

Agenda items

Agenda items are provided by external representatives and the Tax Office

1 Opening of meeting including any changes to the agenda

The chairperson opened the meeting and welcomed members.

Apologies were received from Ray Conwell (LCA), Lance Cunningham (NIA), James Deliyannis (NTAA), Frank Klasic (LCA) and Elsa Payne (TIA).

2 Confirmation of minutes of the 18 August 2005 meeting

The minutes of the 18 August 2005 meeting were accepted.

3 Items carried over from previous meetings

3.1 Review of living-away-from-home allowance

TD 2000/D5 was withdrawn on 19 October 2005 .

Following a review of the issues raised in the draft determination it is considered that it is not possible that an answer can be provided to the question that would be applicable in all cases.

Sufficient guidance for case by case application of the living-away-from-home allowance provisions in the Fringe Benefits Tax Assessment Act 1986 (FBTAA) is contained in the long standing comprehensive ruling on living -away-from-home allowances, MT 2030.

The review of the living-away-from-home allowance provisions has been discussed at this forum on a number of previous occasions. The outcome noted at this meeting is Miscellaneous Taxation Ruling MT 2030 provides the broad guidelines necessary to apply those provisions. For example, issues relating to whether an employer must be satisfied that an employee in fact establishes that the employee has a residence at a place other than the locality at which the employee temporarily resides are set out in paragraphs 22, 29 & 30. A further example of the practical guidance provided by MT 2030 is the acceptance that an employer who pays a living-away-from-home allowance can rely on a survey of accommodation and living costs at the employee's temporary work location in order to compensate the employee for such costs that the employee might be expected to incur.

The Tax Office did indicate that it will continue to monitor living-away-from-home allowance issues and cases. There may, in the future, be a case that raises issues of significant concern relating to 'reasonableness' which may provide an opportunity to seek clarification from the Federal Court on how the Court would interpret section 30 and 31.

3.2 Joint submission on compliance issues

The Tax Office advised that Government is still considering the submission.

4 TRs/TDs, LAPS, class rulings and ATOIDS issued since the May meeting

4.1 FBT related taxation rulings

The Tax Office advised that no FBT related taxation rulings, taxation determinations and law administration practice statements have issued since the last meeting.

The following FBT related taxation determination has been withdrawn:

¦ TD 2000/D5 - Income tax: can a foreign national who enters Australia on a working holiday maker visa qualify for living-away-from-home allowance fringe benefits?

The following FBT related class rulings have issued:

¦ CR 2005/82 - Fringe benefits tax: employer clients of Remunerator (Aust) Pty Ltd that make use of a credit card facility

¦ CR 2005/89 - Fringe benefits tax: employer clients of Remunerator (Aust) Pty Ltd that make use of a salary packaging dining card facility

The following income tax ruling has issued:

¦ Taxation Ruling TR 2005/16 - Income Tax: Pay As You Go: withholding from payments to employees

This Ruling provides guidance as to whether an individual is paid as an employee for the purposes of section 12-35, Schedule 1, Part 2-5 (Pay As You Go withholding) of the Taxation Administration Act 1953.

The Ruling was previously released as Draft Taxation Ruling TR 2005/D3 and is unchanged from the draft.

The following practice statements have issued:

¦ Law Administration Practice Statement PS LA 2005/19 - Approved forms

The purpose of the practice statement is to explain:

¦ what an approved form is;

¦ the requirements and procedures for the approval of approved forms; and

¦ basic administrative support arrangements to be followed once a form is approved.

¦ Law Administration Practice Statement PS LA 2005/20 - Signature requirements for approved forms lodged electronically or given by telephone

The purpose of the practice statement is to explain

¦ the signature requirements and the process for approving electronic and telephone signatures in approved forms; and

¦ basic administrative support arrangements to be followed once a signature is approved

4.2 FBT related ATO interpretative decisions

The Tax Office advised that no ATO interpretative decisions have issued since the last meeting.

The following ATO interpretative decision has been withdrawn:

¦ ATO ID 2001/716 - FBT : Exempt loan benefits

This ATO ID has been withdrawn because the Tax Office view as to what constitutes a member of the public is already expressed in TR 2000/10.

5 News from the Tax Office

5.1 Inspector-General of Taxation - review into the Tax Office's ability to identify and deal with major, complex issues within reasonable timeframes

Review of living away from home allowances (LAFHA)

On 31 October 2005 the Inspector-General of Taxation released the Terms of Reference and Consultation Plan for his review into the Tax Office's ability to identify and deal with major, complex issues within a reasonable timeframe.

There will be three case studies by which the Inspector-General will identify issues which, when addressed, will improve the Tax Office's handling of major, complex issues into the future:

¦ Research and development syndication arrangements

¦ Living away from home allowances (LAFHAs), and

¦ Service entity arrangements.

Each case study will focus on:

(a)	the timeframes to identify and deal with the issue;
(b)	the nature and cause of those timeframes, and if they were reasonable in the circumstances;
(c)	the extent and cause of uncertainty to affected taxpayers, including any initial Tax Office guidance or representations;
(d)	the Tax Office's approaches to the issue, the reasons for them, and if they were reasonable in the circumstances, including:
	(i)	its compliance, legal and resolution approaches; and
	(ii)	its communications with members of the community; and
(e)	the adverse impacts and costs that the Tax Office's approaches and timeframes may have had on businesses and other areas of the community.

Consultation processes

The Inspector-General will:

¦ publish a copy of the terms of reference for this review on his website at www.igt.gov.au ;

¦ take submissions on this review from members of the public generally;

¦ invite particular people and organisations to make submissions; and

¦ request the Commissioner of Taxation to provide information and/or documents relevant to this review.

Contacting the Inspector-General of Taxation

To ensure consideration, submissions should address the terms of reference and should be lodged by 30 December 2005 . The Inspector-General recognises that the timeframe for detailed submissions may coincide with taxpayers' and tax practitioners' business peaks. Therefore, the Inspector-General is happy to receive abridged oral submissions by telephone.

Submissions may be given:

By telephone:	(02) 8239 2111
By email:	complexissue@igt.gov.au
By post:	Tax Office's Complex Issue Review Inspector General of Taxation GPO Box 551 SYDNEY NSW 2001
By facsimile:	(02) 8239 2100

5.2 Cases

The AAT has recently handed down its decision in Crane v Federal Commissioner of Taxation ( 2005 ) AATA 872. This decision re-confirms the Tax Office position as contained in ATO ID 2004/706: Living-away-from-home allowance benefits: offshore oil and gas rig workers and hardlying allowance. Refer also Best v. Federal Commissioner of Taxation 2005 ATC 2184; [ 2005 ] AATA 560; ( 2005 ) 59 ATR 1151.

The Federal Court has recently handed down its decision in Caelli Constructions (Vic) Pty Ltd v Commissioner of Taxation [ 2005 ] FCA 1467. The court held that the employer's contributions to a redundancy fund on behalf of identifiable employee's was subject to fringe benefits tax. Note: contributions to an 'approved worker entitlement fund' are now exempt from FBT pursuant to subsections 58PA to 58PC of the Fringe Benefits Tax Assessment Act 1986.

The Tax Office noted that in Caelli, the Court followed and applied the reasoning in Essenbourne that, for a fringe benefit to arise, a particular employee must be identified. A further case where this issue will be considered has recently been heard by the Federal Court. The decision in that case is pending.

The Tax Office confirmed that its view following the decision in Caelli continues to be that contained in TR 1999/5.

5.3 Fringe benefits tax reporting exclusion

On 8 September 2005 , the Assistant Treasurer announced that employers who provide personal security services to employees who have received threats due to their line of work will not have to report these fringe benefits on the employee's payment summaries.

The reporting exclusion will apply from 1 April 2004 and Regulations to give effect to this announcement will be made as soon as practicable.

Meeting discussion CPA Australia expressed concern that this concession was being dealt with by Regulation and not by a change of legislation. The opportunity for submissions to be received and for the change to go through debate in Parliament is completely sidestepped. The CPA Aust noted that in the case of tax legislation, even when it is concessional, if there are weaknesses in the legislation there is no provision for the weakness to be exposed and addressed when the change is effected by Regulation.

5.4 FBT publications

¦ Fringe benefits tax: a guide for employers (updates)

This is a table detailing changes made to the electronic version of the publication Fringe benefits Tax: a guide for employers (Nat 1054) since its release in February 2005 . The table assists clients who have copies of the printed version of NAT 1054. The table has been updated to include changes made up to and including October 2005 .

The publication is available on ato.gov.au via the path:

Home/for tax professionals - tax professionals home page/tax topics explained/fringe benefits tax/publications

¦ Salary sacrifice arrangements for employees (Nat 7424)

A new version of the fact sheet Fringe benefits tax and salary sacrifice arrangements has been developed which is targeted towards employees. It is expected that the fact sheet will be released in printed form in early December 2005 .

Subsequent to the meeting the revised fact sheet has been finalised and will now be called 'Salary sacrifice arrangements for employees' with the same Nat number 7424. The fact sheet provides employees with an overview of salary sacrifice arrangements and the implications of entering into such arrangements. It is useful for employers who need to explain salary sacrifice arrangements to their employees. The revised fact sheet is now available on 'Product ordering distribution service' (PODS) and on ato.gov.au via the path: Home/for tax professionals/tax professionals home page/tax topics explained/salary sacrifice

¦ Fringe benefits tax and non-profit organisations

A new product is being developed which will be a guide to the most commonly provided fringe benefits for non-profit organisations. The publication, FBT for non-profit organisations, will be similar in format to FBT for small business. It is expected that the guide will be available in May 2006.

Discussion: Members asked that they be given the opportunity to review the guide and provide feedback before it goes for publication.

Action Item: The guide FBT for non - profit organisations to be provided to members for review prior to publication.

Subsequent to this meeting a draft copy of the guide was forwarded to members for review and feedback.

¦ GIC on FBT accounts

The Tax Office advised that the first automated monthly run of general interest charge (GIC) on FBT accounts commenced on 19 November 2005 with notices to issue on 26 November 2005 . In future the GIC will update on FBT accounts on a monthly basis.

¦ 2006 FBT return and return guide

The Tax Office advised that there are no changes to the 2006 FBT return.

The following changes have been made to the 2006 FBT return guide:

¦ The step-by-step instructions in the guide have been revised into two sections.

¦ The first section is for taxable and government employers. These instructions apply to most employers and contain worked examples to assist clients.

¦ The second section contains the step-by-step instructions for non-profit organisations including worked examples of how the various concessions available apply to the amounts shown on the return.

¦ The following addition has been made under Item 19 (Less instalment amounts reported on activity statements):

¦ If you have made a payment towards your 2006 FBT liability as part of a tax agent lodgment agreement this amount can be included at this item.

6 Salary Packaging Long Service Leave Award (CPAA)

Does the Tax Office accept that an employee is able to salary package an amount towards the provision of a long service leave award provided by their employer to the extent the total value of the award does not exceed the amount provided for under the provisions of section 58Q of the FBTAA.

A 'long service leave award' is a benefit provided to an employee solely to recognise a period of service by the employee in respect of employment.

Section 136 of the FBTAA states that a long service leave award benefit does not include the following:

¦ a payment of salary or wages;

¦ a benefit provided under a non-arm's length transaction; or

¦ a benefit provided under an arrangement which was entered into solely or predominantly for the purpose of enabling the employer to obtain the benefit of the application of section 58Q.

A benefit provided to an employee which meets the above conditions will be exempt from FBT if the taxable value does not exceed $1,000 for 15 years of service and an additional $100 per year from 1 April 2005 (subject to reduction as benefits are provided).

Practical Example

¦ ABC Pty Ltd service recognition policy states that after 15 years of service each employee will be entitled to receive a watch with a value of $250.

¦ ABC Pty Ltd propose to allow employees in receipt of such an award to further salary sacrifice an amount to be added to the $250 allocated in the firms policy so that a higher value watch can be awarded.

¦ Illustrated below:

– ABC Pty Ltd policy provides for an award of a watch valued at $250.

– Employee salary packages an additional $750 so that a better quality watch can be awarded.

– Total cost of the award is $1,000.

CPA Australia's view

Section 136 of the FBTAA states that an award will not constitute a long service leave benefit where it is provided under an arrangement which was entered into solely or predominantly for the purpose of enabling the employer to benefit from the exemption

In determining whether such an arrangement exists, regard must be had to the form and substance of the arrangement, the way the employee's period of service is calculated, and the eligibility of other employees to be awarded benefits

In the abovementioned example the employee has earned the right to be provided with an award in recognition of 15 years of service. The fact that an arrangement had been entered into to allow the employee to salary package an amount so that a higher value award could be provided in our opinion would not constitute the sole or dominant purpose of enabling ABC Pty Ltd to benefit from the exemption.

Instead, it is our opinion that the arrangement entered into between ABC Pty Ltd and the employee so that a higher award could be provided was for the dominant purpose of making the award more significant in the hands of employee and to suitably recognise such an important milestone.

The provision of awards to employees for recognition of continuous service will generally be a property fringe benefit under the FBTAA. The taxable value, calculated in accordance with the property fringe benefit valuation rules is equal to the awarded provided. However, an award provided to an employee which complies with the provision of 58Q of the FBTAA will be exempt from FBT if the value does not exceed a specified amount.

Accordingly, where the total value of the long service leave award does not exceed the amounts as set out in section 58Q of the FBTAA it is our view that the salary packaging of an amount by the employee to enable a greater value award to be made will not disqualify the award from the exemption provided by section 58Q of the FBTAA.

Meeting discussion: The CPAA noted that the employer in this arrangement is not trying to gain a benefit but the advantage is to the employee. TA noted that to meet the definition of the long service award benefit an employer would have to have a policy in place to allow all employees to salary package an amount so that they could receive a higher value award. Most employers would not have such an arrangement in place.

Tax Office response:

The Tax Office noted that Taxation Ruling TR 2001/10; salary sacrifice arrangements, states that an 'effective salary sacrifice' occurs where an employee agrees to forego part of his or her total remuneration, that he or she would otherwise expect to receive as salary or wages, in return for the employer providing benefits of similar value. Benefits provided by an employer of course can include 'fringe benefits' or 'exempt benefits'.

For the purposes of the response, the Tax Office noted that the relevant threshold tests in section 58Q have been, and must be, satisfied. That is years of service, value of the benefit, and so on. The issue raised is whether an employee can enter into an effective salary sacrifice arrangement with an employer to obtain a benefit of greater value than that which the employer is prepared to provide in the absence of a salary sacrifice arrangement.

As noted in the CPAA submission, the definition of 'long service award benefit' in subsection 136(1) sets out a number of further tests.

As a safeguard against exploitation of the exemption, the exemption would not apply, where having regard to the arrangement and the eligibility of other employees for awards it would be concluded that the arrangement was entered into for the purpose of enabling the employer to benefit from the exemption rather than to genuinely recognise long service. In addition the exemption would not apply to 'non-arm's length arrangements', an example may be an award granted to a director/shareholder of a private company and no other employees are entitled to such awards.

Accordingly, where an employer is genuinely recognising long service, has a policy in that regard such that all employees who satisfy the threshold long service tests would be so entitled, it is accepted that an employee can enter into an effective salary sacrifice arrangement in relation to a long service award benefit. An employer can in such situations, access the exemption provided by section 58Q.

The disentitling tests in the definition of 'long service leave award benefit' would not be triggered simply because of such an agreement between the employer and employee, unless a specific factual arrangement indicates otherwise.

7 Employee down payments on novated leased finance vehicles (TA)

Overview

There have been numerous past questions raised at the NTLG FBT sub-committee meetings, concerning the position of base FBT values of novated leased cars, as variance from, or pertaining to, the position outlined in question 22, of car fringe benefit queries in MT 2021.

Exact car example

Car cost GST inclusive including dealer delivery	$44,400
GST inclusive on road car cost	$ 1,600
Registration transfer stamp duty	$46,000

It is assumed the registration and compulsory third party insurance have been invoiced separately, resulting in a base FBT value of $44,400, at this stage.

The value for the motor dealer's tax invoice to the novated lease lessor, is reduced then by $10,000, due to any one of the following scenarios:

(i)	The employee pays the motor dealer $10,000 cash.
(ii)	The employee's associate pays the dealer $10,000 cash.
(iii)	The employee and associate between them pay the dealer $10,000 cash.
(iv)	The employee trades in a $10,000 unencumbered vehicle.
(v)	The associate of the employee trades in a $10,000 unencumbered car.
(vi)	The employee and associate trade in two unencumbered cars, with a total value of $10,000.
(vii)	The employee trades in a previous hire purchase/personal loan car, which has $10,000 equity after the finance contract is paid out.
(viii)	The employee's associate trades in a previous hire purchase/personal loan car, which has $10,000 equity after the finance contract is paid out.
(ix)	The employee and associate between them trade two previous HP/personal loan cars, that have a total of $10,000 equity, after both finance contracts are paid out.
(x)	The employee trades in a previously leased car, which has $10,000 equity after the lease is paid out.
(xi)	The associate trades in a previously lease car, which has $10,000 equity after the lease is paid out.
(xii)	The employee and associate trade in two cars, that were both previously leased, and the total equity is $10,000 after both leases are paid out, and in all 12 cases, the motor dealer, and not the employer receives the $10,000 cash or trade in equity.

After any one of these twelve scenarios, the motor dealer invoices the novated lease lessor, for $34,400 GST inclusive plus $1,600 registration transfer stamp duty, or $36,000 in total, after the subtraction of the $10,000 trade in, trade ins, or cash, from the initial $46,000 on road cost, with lease rentals calculated on $36,000 (minus GST ITC) and an implied base FBT value of $34,400.

The car is not subject to an associate lease, where the leased value to the employer would be $46,000 in all twelve scenarios, assuming the associate is not registered for GST.

Applicable paragraphs contained in TR 98/15:

Paragraph 61: If the payments to the lessor on the replacement asset, are calculated by reference to the cost of the replacement asset minus the trade in credit, the credit constitutes a deposit, instalment, or down payment of a capital nature to acquire the asset'.

Paragraph 62: In addition, the payments under the lease would constitute instalments of a capital nature, because they are not payments, for hire of the asset, but payments to discharge the amount advanced by the lessor, under the arrangement to acquire the asset.

Paragraph 65: If a $40,000 trade in credit, is used to reduce the cost of an $80,000 asset, the lease rentals would normally be based on $40,000.

Paragraph 66: In these circumstances the arrangement would not constitute a lease. The lease payments would be less than would normally be payable in a commercial lease of the asset. Locked at another way, the lessee has already paid for part of the cost of the asset. In commercial terms the lessee has acquired some 'equity' in the asset.

Paragraph 67: In this situation the trade in credit, has been used to pay for part of the cost of the asset, and the lease payments are calculated by working out the interest payable on the difference between the reduced amount and the residual value of the asset at the end of the lease.

Paragraph 63: In any event the arrangement may not constitute a 'lease' as defined in paragraph seven for two reasons:

(i) The residual value under the lease is based on the net cost of the asset, and thus does not conform with IT 28 or TD 93/142 (or the later issued ID 2002/1004).

(ii) The lessee, in essence has an 'equity' in the asset.

Paragraph 78 to 82: Discuss the equity transfer on a replacement lease where again, the leased goods with equity in the goods, changes the lease to a purchase.

Whereas paragraph one of TR 98/15 states the ruling concerns trading a previously leased asset, for a replacement leased asset, paragraph seven, the meaning of the key terms in the ruling includes 'deposit or down payment' and 'trade in credit' which both may, or may not, have been created by equity in the traded in prior leased asset.

Paragraphs 61 to 67, do not state the equity solely came from a prior leased asset, so it could be assumed that the equity of $10,000 in any one of the twelve prior mentioned scenarios will turn the novated lease rentals, from a lease for tax purposes, into a purchase by the employee, but with a novated lease agreement attached.

It is assumed that the lease is over 48 months and the residual is set at 37.5% as per the ATO ID 2002/1004 minimum values linked to the change to an eight years effective life for a car from 1 July 2002.

Lease residual scenario one: Despite the 'leased value' before GST ITC, reducing to $36,000 after the $10,000 deposit, the 37.5% residual is tied to the $46,000 'no trade reduction' on road cost, or a GST inclusive residual of $ 17 ,250.

Lease residual scenario two: The 37.5% residual value is tied to the net of $10,000 deposit, $36,000 'leased value' and there is no well considered and fair estimate of a lower residual than 37.5% tied to the $46,000 value, as is required under TD 93/142. That is, the residual value is 29.35% GST inclusive of the $46,000 GST inclusive, no deposit leased value, and under the ATO ID 2002/1004 minimum, at $13,500 GST inclusive.

Lease and novated agreement wordings

N.B 1) The lease agreements state the lessor has taken into account it's depreciation deduction and has the right to adjust the net yield, if the deduction is disallowed.

This will occur if the lease with the equity via trade in or cash is deemed to be an employee purchase, as the contract is no longer a lease, where, with the lease, the lessor as owner, could depreciate the non luxury car, plus implications on the car GST input tax credit (ITC); claimed by the lessor.

N.B 2) The lease agreements state, that the employee leesee, is a bailee only, and has no right, title, or interest in the car, but this will occur with the $10,000 deposit situation.

N.B 3) The lessor, in the agreement, makes no representation, or warranty, regarding the lessee's deductibility or otherwise, of the lease rentals, which could be effected if the lease is now a purchase, and makes no representation or warranty on any other tax, that is, FBT increases, if the novated leased car with employee equity, is deemed to be an expense payment, and not a car fringe benefit.

N.B 4) The novation agreement states the employer assumes the rights and obligations of the employee.

N.B 5) The novation agreement states the employee is to reimburse the lessor for any loss of car input tax credits on the purchase by the lessor, which would occur if the lease by the employee with a $10,000 deposit was deemed to be a purchase by the employee, and not a lease by the employee, where the lessor purchased the car, and claimed car GST input tax credits.

N.B 6) The novation agreement also states that there is no employee or employer equity in the car.

View one

Despite TR 98/15, the novated lease, is still a car fringe benefit, with a base FBT value of $34,400 under statutory formula election, or the lower lease rental payments tied to the $36,000 net of deposit form part of the private use percentage FBT assessment, for operating cost election, as the 'lease' can somehow still be classified as a lease. Lease residual scenario two (29.35% of $46,000) will attract external property FBT on any future resale profit (TD 95/63).

View two

TR 98/15, has meant the employer is now paying a loan repayment on behalf of the employee, and the whole of the car operating costs are now an expense payment fringe benefit, and not a car fringe benefit, with a large increase in FBT now payable; due to no rights for the employer to novate a hire purchase agreement.

Even if the employee had 100% business use, the loan repayments due to the required split into depreciation and interest, are not immediately otherwise deductible, and thus would attract full non concessional FBT . The prior paid operating costs, even if subject to 100% business use, would still be subject to full FBT , as no declaration would have been received prior to the previous FBT return lodgments, due to the misconception, the car operating costs were being previously paid for by the employer, as a car fringe benefit.

View three

As the novation agreement states the employer assumes the rights and obligations of the employee, and assuming that the lease is now a purchase due to TR 98/15, the employer 'stands in the shoes' of the employee, and now supplies a car fringe benefit, but as a non leased employer provided car, with the employer claiming depreciation and loan interest, and running costs, and charging out car fringe benefits tax. The base FBT value for statutory formula election is $34,400, and the amount for deemed depreciation, and imputed interest, under operating cost election is $36,000.

Summary

The Tax Office view is sought as to which of the three scenarios produces the correct FBT , GST, and income tax outcomes, or if there is an alternate view by the Tax Office that has not been addressed in the prior three situations.

Tax Office response:

The Tax Office advised that this submission raises a number of issues and provides numerous examples and scenarios. The submission contains considerable detail, more so than that which has previously been raised at this forum on this issue and will require significant time to analyse fully.

The Tax Office has provided a number of responses at previous meetings in relation to the issue of what has been 'incurred' in determining the cost price of a car. The minutes of the meeting of this forum from 19 May 2005 also indicated that employers and employees entering into such arrangements needed to apply due care that in fact a valid lease existed.

As the main issue raised is clarification of the Tax Office's view in relation to whether such arrangements will constitute a valid lease, that issue has been referred to the appropriate area in the Tax Office to consider.

The Tax Office indicated that the matter will be further discussed at the next meeting, at which it is also expected that the Tax Office position will be available.

8 Section 58X and laptop computers (ICAA)

At present the section 58X exemption extends only to those items 'necessary for the basic operation' of the laptop and provides an example of a mouse. Therefore 'extras' that typically accompany a laptop and other items such as a protective carry bag, anti-virus software, external/attachable floppy disk and CD disk drives, extended warranties, modems and cabling to enable the 'remote' use of the laptop i.e. to be connected to a computer network, a phone line (to use the modem to connect to the internet) and cable to connect to a printer are not exempt from FBT .

The Tax Office is also stating that software is only exempt under section 58X(2)(f) of the FBTAA if it is pre-loaded when the laptop is purchased and not when it is an identifiable additional cost. This is often difficult to explain to employees who do not see what the difference is and why they are treated differently. This has also becomes a cost of compliance issue because these items are often not itemized rather they are included in one amount on the tax invoice. In many instances, 'included' software arrives in the box and you install it yourself. This however is not considered to fit within the exemption. Furthermore, if the software is charged separately on an invoice this will also make the item subject to FBT . If you were also to pay extra to upgrade some software for example Microsoft Office, the upgrade would be subject to FBT .

In relation to the modem the Tax Office has stated that where the modem is built into the laptop at an additional cost, it is not exempt because a modem is separate and distinct from the laptop and not necessary for its basic operation.

Similarly, a 'cradle' purchased separately when buying a personal digital assistant (PDA) (bought if your computer does not have Bluetooth), to synchronize the PDA with Outlook and files on your computer will not be exempt from FBT . We consider this an aspect of the PDA's functionality and what makes them so useful and 'necessary for its basic operation'.

This Tax Office position is in line with the views expressed in PBR number: 36456 where it states:

However, additional accessories, for example memory, cases, keyboard and warranty upgrades which do not form part of the basic feature of a notebook computer and PDA and are available at a separate charge or clearly identifiable additional cost will not fall under the scope of this exemption.

The Tax Office has broadened section 58X of the FBTAA to include portable printers designed for use with portable computers. Could the Tax Office please also consider broadening the exemption to include the following items:

¦ protective carry bag for a laptop

¦ software for example anti-virus software - including cases where the software arrives in the box and the employee installs it themselves and when itemized and paid separately on the tax invoice

¦ extended warranties for laptop computers

¦ a modem and cabling to enable the 'remote' use of the laptop and to connect to a printer

¦ external / attachable floppy disk and CD disk drives

¦ additional memory for the laptop, and

¦ a cradle for a personal digital assistant (PDA).

Tax Office response:

Section 58X was inserted into the FBTAA as result of, and in recognition of, cost of compliance issues raised with Government circa 1995. This was part of the 1995 cost of compliance changes. By way of background, the purpose of this provision can be generally stated as removing the need for an employer to obtain declarations for a range of what were considered to be predominantly employment-related benefits.

As noted in the submission, the issue of what constitutes a portable computer and how additional accessories are to be treated was extensively covered at the meeting of 13 June 1996 (being shortly after the provision became applicable). At that meeting it was advised that the view of the Tax Office was that any computer externals which are not necessary for the basic operation of the portable computer are not covered by the exemption under section 58X. Built-in internals such as modem and fax cards would form part of the computer and would be exempt.

In relation to software the Tax Office advised at that meeting that 'pre-loaded software forming part of the overall notebook, laptop or similar portable computer package (that is, not charged separately, no clearly identifiable additional cost) would be included under the paragraph 58X(2)(h) exemption which is the particular exemption for 'notebook computer, laptop computer or a similar portable computer'.

The ICAA submission has stated that the Tax Office had at the June 1996 meeting stated that software, and only pre-loaded software, would be exempt under paragraph 58X(2)(f). This is not correct.

What was stated was that pre-loaded software forming part of the portable computer package would be included under the paragraph 58X(2)(h) exemption. However, separate or subsequent software purchased would need to satisfy paragraph 58X(2)(f) for exemption. The paragraph 58X(2)(f) exemption applies to 'an item of computer software for use in the employee's employment'.

The Tax Office stated at this meeting that it should be noted that an item of computer software need only be for use in the employee's employment to be exempt under paragraph 58X(2)(f). This does not require a predominate or primarily test to satisfy the exemption. This exemption ensures software used by an employee in their employment is exempt however software not used by the employee in their employment is not. As a general observation the exemption would not apply to computer games. Accordingly, as an example, anti-virus software that is used by the employee in the employee's employment would be exempt.

The ICAA submission also states that the Tax Office has 'broadened section 58X of the FBTAA to include portable printers'. It is the Government that introduced legislative changes in 2005 to extend the section 58X exemption to specify in particular personal digital assistants and cover portable printers that are designed for use with a notebook computer, a laptop computer or a similar portable computer. The explanatory memorandum states that:

1.3 The existing FBT exemption for work-related items such as laptop computers is extended to include personal digital assistants and portable printers designed for use with portable computers. These amendments will ensure that the taxation laws do not inhibit the uptake of new technology.

History

S 58X(2) amended by No 77 of 2005 , s 3 and Sch 1 items 2 and 3, by inserting ,' a personal digital assistant' after 'an electronic diary' in para (g) and inserting para (i), applicable in respect of the 2006/07 FBT year and in respect of all later FBT years.

The Tax Office indicated, in broad terms, the views expressed at the meeting in June 1996 remain valid notwithstanding changes in the marketing of portable computers.

There are many ways in which a laptop can be purchased today; through a retailer, over the internet and so on. Practically speaking, it is acknowledged that items that form part of a computer but may be an 'upgrade' to basic specifications, should not alter the outcome that where they do form part of the laptop the exemption in section 58X(2)(h) should apply to the laptop inclusive of those 'upgrades'. It is no different, in effect from simply purchasing a model with better specifications at an increased cost.

Given the above, the Tax Office indicated that at the time a laptop has been purchased, additional memory, a hard drive upgrade, the addition of an internal modem or wireless LAN module or any other upgrade involving built-in internal components which are ordered and itemized on a single invoice (even at a separate cost) are clearly not peripheral items in relation to a laptop. They will form part of the laptop.

Accordingly, as those items mentioned form part of the laptop, the total cost of the laptop inclusive of those upgrades or additions will be exempt under section 58X(2)(h).

Similarly the exemption in paragraph 58X(2)(h) extends to items that are 'bundled' by a retailer as part of a special offer, that is at no additional cost. The special offer may include an extended warranty. It would be expected that such offers would also be reflected on a single invoice. It would also be expected that software that has no possible business application, for example games, would not be included in such an 'offer'.

It may be general practice or a special offer for a retailer to include in the cost price of a portable computer a protective carry bag. Where an employee chooses to upgrade the standard carry bag offered with the portable computer at an added cost and/or is separately invoiced, this would be a separate item that is not covered by the exemption.

Where the employee requests peripheral items such as cables, modems or cradles or an extension to the warranty that is offered and these come at an additional cost, the exemption in paragraph 58X(2)(h) will not extend to those items.

Where a particular item (benefit) is not covered by section 58X, the employer should consider the relevant 'otherwise deductible rule' and or, if appropriate, the minor benefit exemption.

9 Correct gross up rate (NIA)

The issue comes from a question regarding the correct gross up rate to be used when an employer reimburses an employee's credit card expenses but the employer does not obtain the tax invoice from the employee. The taxpayer has not been claiming the GST input tax credit on the basis that they are not entitled to because they do not hold the tax invoice.

The employer has been using the type 2 FBT gross up when calculating the FBT on the reimbursement on the basis that they do not have an entitlement to an input tax credit as they do not have a tax invoice.

The employer has received conflicting advice on whether they should be using the Type 1 or Type 2 FBT gross up in these circumstances.

It appears that this issue revolves around what is meant by the words 'is or was entitled to an input tax credit under Division 111 of the A New Tax System (Goods and Services) Act 1999' (GST Act) in the context of Section 149A(1) of the Fringe Benefits Tax Assessment Act (FBTAA).

Section 149A(1) of the FBTAA defines a GST-creditable benefit as a benefit which is provided in respect of an employee where the provider, or a person in the same GST Group, is entitled to an input tax credit under Division 111 of the GST Act in respect of the provision of the benefit.

Division 111 of the GST Act amends the general provisions of the GST Act when an employer reimburses an employee for expenditure which the employee has incurred. In these circumstances Division 11 deems the employer to have made the creditable acquisition, and to deem the tax invoice received by the employee to be a tax invoice issued to the employer when the employee provides that tax invoice to the employer.

However, Division 111 does not directly provide entitlement to the input tax credit. It only deems the employer to have made a creditable acquisition. This then allows section 11-20 of the GST Act to make the employer 'entitled' to the input tax credit. There appears to be a technical problem with the interaction of section 149A of the FBTAA and Division 111 of the GST Act as the entitlement to the input tax credit is not provided under Division 111 but rather section 11-20 of the GST Act.

On this strict reading there would be no fringe benefits that fit the definition of a GST creditable benefit under section 149A of the FBTAA as the employer is not 'entitled' to an input tax credit under Division 111.

Therefore all fringe benefit reimbursements would be type 2 benefits (grossed up at the lower rate). We assume the Tax Office may not agree with this analysis but if this is the case we would appreciate it if the Tax Office could give comments as to why they consider this is not the correct analysis.

On the assumption that the Tax Office can establish that the employer becomes 'entitled' to claim an input tax credit in accordance with Division 111 of the GST Act, what happens when the employer reimburses the employee's expense without obtaining the tax invoice? Division 111 also deems the tax invoice received by the employee to be received by the employer when the employee provides the tax invoice to the employer. This then allows the employer to claim the input tax credit as section 29-10 of the GST Act will apply to allow the input tax credit to be claimed in the tax period in which the tax invoice is held by the employer. However if the employer has not received the tax invoice from the employee, from an administrative perspective, the employer can't claim the input tax credit until they receive the tax invoice from the employee, notwithstanding that they are otherwise 'entitled' to the credit.

It appears from this analysis that if the employer does not receive the tax invoice he will not be able to claim the input tax credit but the employer will have to use the Type 1 FBT gross up (grossed up at the higher rate). This effectively gives a double tax result for the employer.

It appears that there are a number of employers using the type 2 gross up in these situations on the basis that if they cannot claim the input tax credits they consider that they are not 'entitled' to the input tax credits and therefore do not fit into the definition of GST-creditable benefits. Can the Tax Office please confirm what is the Tax Office's interpretation of the correct treatment in these circumstances?

We did a search on the Tax Office website and we could not find any explanation of how to deal with this situation. We suggest that the Tax Office could provide an expanded discussion of this issue on their website to clearly state the position.

Tax Office response:

The issue raised in the NIA submission is what is the correct gross up rate to be used when an employer reimburses an employee's credit card expenses but the employer does not obtain the tax invoice from the employee. The taxpayer has not been claiming the GST input tax credit on the basis that they are not entitled to because they do not hold the tax invoice.

In the submission, it is suggested on the analysis put forward that 'there would be no fringe benefits that fit the definition of a GST-creditable benefit under section 149A of the FBTAA as the employer is not 'entitled' to an input tax credit under Division 111'. The Tax Office response to this statement is that the payment of credit card expenses can result in the expense payment being either a type 1 or type 2 benefit. It will depend on the arrangement between the employer and the employee.

The interaction of the GST relevant provisions and the FBT provisions, which can be complex, have previously been discussed at this forum, for example see minutes of meeting 22 February 2001, agenda items 10.2 and 11.1 and 21 June 2001, agenda item 6.1.4. Following is an extract from the 22 February 2001, agenda item 10.2 minutes:

An employer may commonly provide fringe benefits to employees in the form of reimbursements by way of cash payments or credits in response to the presentation of a credit card statement (bearing the employee's name) as evidence of expenditure. The payment or credit may be for the full amount of an expense or expenses or, a proportion of that amount.

In certain circumstances Division 111 provides that the reimbursements by way of cash or credits may be 'creditable acquisitions' of the employer. However, the payments themselves do not attract a GST liability, because they are expressly excluded from being a supply in their own right.

Division 111 requires the reimbursed expense to be a 'taxable supply' to the employee. But where the supply to the employee is an expense that is 'input taxed' for example an employee expense that is incurred in obtaining credit card finance, the reimbursement is not a creditable acquisition. After a creditor has lent money, the employee expense of being obliged to repay the loan is not an acquisition that is a taxable supply to the employee. This means that the reimbursement by the employer of this particular expense cannot be a creditable acquisition for the employer.

A credit card statement usually contains details of particular employee acquisitions, the total amount owing and a minimum payment amount. If the employer reimburses particular acquisitions listed on the credit card statement that were taxable supplies to the employee, these reimbursements can be creditable acquisitions because of the operation of Division 111.

However, if the reimbursement relates only to the employee's expense of being obliged to repay the credit card debt (that is, the card balance or a proportion of that balance) the reimbursement will not be a creditable acquisition for the employer. This is because the reimbursed employee expense, in this situation, was not a taxable supply to the employee. In this instance it is assumed that there is no agreement or understanding in place between the employer and employee to reimburse specific acquisitions.

It is important therefore for GST purposes, to examine the terms of the agreement between the employer and the employee to ascertain whether the employer is reimbursing the employee for specific reimbursements or to generally pay the employee's credit card debt.

It is also important to note that, notwithstanding the fact that where an entitlement to an input tax credit may arise because of Division 111, an employer should exercise care. To claim the input tax credit, the employer must, as appropriate, hold a 'tax invoice'.

GSTR 2000/26 provides guidelines relating to the use of corporate credit cards and provides that, where certain conditions are satisfied, a corporate credit card statement can be used as a 'tax invoice'. GSTR 2000/26 does not apply to 'private', that is, personal employee, credit cards. Therefore, although the personal credit card statement may evidence a specific transaction, the employer must obtain a 'tax invoice', as appropriate, to claim the input tax credit.

Example 1

An employer reimburses an employee as part of a salary packaging arrangement. The employer requires evidence of the specific expense being incurred. This can include an invoice or an expense listed on an employee credit card statement.

The employee purchases a watch for $299 by credit card from a registered supplier (a taxable supply to the employee). The expense is listed on the employee's credit card statement. The employer, in terms of the agreement with the employee, reimburses $299 (the full expense) to the employee. The reimbursement in this example would be, because of Division 111, a creditable acquisition to the employer who is entitled to an input tax credit where it obtains the necessary tax invoice from the employee. The employee's credit card statement is not, in this circumstance, a tax invoice.

Under section 149A of the FBTAA, as there is an entitlement to an input tax credit, the employer would use the type 1 gross-up rate, that is 2.1292, when calculating the FBT taxable value of this expense payment fringe benefit.

Example 2:

The employer agrees to reimburse employees in relation to personal credit card debt.

The employer has no stated policy as to the timing of 'reimbursing' employees, so the 'reimbursement' may take place after an employee has paid an amount. Alternatively, an employer might pay all or part of an employee's credit card debt.

Amounts for an employee's personal credit card liability (as opposed to a reimbursement of an identified expense paid for by credit card) are not creditable acquisitions.

Under section 149A of the FBTAA, as there is no entitlement to an input tax credit, the employer would use the type 2 gross-up rate, that is 1.9417, when calculating the FBT taxable value of this expense payment fringe benefit.

As division 111 does not operate to create a creditable acquisition in these circumstances, the employer does not need to 'hold' a tax invoice.

Employers and employees can arrange which expenses are to be reimbursed. In some cases there might be arrangements to reimburse certain expenses that do entitle the employer to credits plus expenses that will not create input tax credit entitlements for the employer.

Example 3

An employer has invoices for 3 items on his or her personal credit card statement to the value of $300, but does not have invoices for a further $700 expenses listed. The total on the card statement is $1000. The employer and employee agree to two reimbursements. Firstly, there is a reimbursement of $300 for the identified expenses (as an entitlement arises, the employer can claim input tax credits for these). Secondly, there is a further $700 for reimbursement of the balance owing on the statement (the employer does not claim an input tax credit for this latter amount as no entitlement arises).

The important distinction between an 'entitlement' for the purposes of section 149A and the subsequent action to 'claim' a credit under the GST Act by an employer is set out above, that is 'It is also important to note that, notwithstanding the fact that where an entitlement to an input tax credit may arise because of Division 111, an employer should exercise care. To claim the input tax credit, the employer must, as appropriate, hold a 'tax invoice'.

Subsequent to the above minutes, the Tax Office also issued two public rulings and a fact sheet in which the above views are also expressed. Refer Taxation Ruling GSTR 2001/3; GST and how it applies to supplies of fringe benefits, at paragraphs 86 - 90 (noting paragraphs 89 and 90 are by addendum). Further, Taxation Ruling TR 2001/2; the operation of the new fringe benefits tax gross-up formula to apply from 1 April 2000, paragraphs 7, 17 , 18 and 35 - 46.

It was also noted that the Tax Office has issued a fact sheet which covers this matter in broad terms, Employee reimbursements and GST (Nat 7755-08.2004). The fact sheet can be found on ato.gov.au via the following path:

For business/business homepage/Tax topics explained/GST/Basis topics-input tax credits.

10 Application of section 58(P) of the FBTAA (CPAA)

Although the register of private binding rulings is only meant to be an historical record of an edited version of written binding advice (EV) issued by the Tax Office to specific taxpayers, many taxpayers refer to these EV's to assist them in making decisions which will be acceptable to the Tax Office should they be subject to Tax Office review. Taxpayers refer to the EV's to assist them to maximise compliance with the FBTAA whilst minimising red-tape and compliance costs that is, to minimise the time and cost of obtaining advice from advisors or lodging their own requests for rulings.

It is acknowledged that the Tax Office disclaims the EV's as not being an authority for the purpose for establishing a reasonably arguable position for taxpayers to apply to their own circumstances, however it is not unreasonable for taxpayers to accept that the EV's reflect the current interpretation of certain provisions by the Tax Office.

Given this as a background it is disconcerting that there seems to be conflicting interpretations of provisions by those writing the EV's and other areas of the Tax Office which gives guidance to taxpayers on current Tax Office legislative interpretations.

Many taxpayers find this important as they may have been relying on certain comments by the Tax Office in making decisions and in finding a variation in that interpretation need to satisfy themselves that EV's do not indicate a change of interpretation by the Tax Office which may result in exposure to taxes and penalties.

In particular, edited version of notice of private ruling, authorisation number 52680 has been published in respect of the application of section 58(P) of the FBTAA to:

¦ the reimbursement of parking expenses

¦ the provision of gift vouchers

¦ the provision of framed certificates

¦ the payment of e-tag tolls, and

¦ the provision of a mobile phone.

In the edited version, the Tax Office's position is that the exemption from FBT provided by section 58(P) of the FBTAA will not apply to any of the benefits provided other than the e-tag tolls incurred by an employee undertaken for private travel.

The interpretation of section 58(P) of the FBTAA in the EV seems inconsistent with previous guidelines published in the minutes of this sub-committee.

The EV seems to accumulate the value of each type of benefit provided to establish whether over the year the total value of that type of benefit is $100 or more in determining whether the provisions of section 58(P) of the FBTAA will apply to that type of benefit. In particular, the car parking benefits are stated to be the reimbursement of $5.00 car parking on 25 occasions during the year, the gift vouchers consisted of 10 vouchers at $30.00 each occasion, the framed certificate consisted of 10 certificates with a value of $15.00 for each frame, the certificate being given in recognition of performance and e-tag tolls being the reimbursement on 20 occasions of toll fees incurred by an employee for private travel.

In respect of the car parking expenses, gift vouchers and certificate frames, the Tax Office has calculated the value of these benefits over the year and in the EV stated that the total value of the benefits was a factor taken into account in arriving at the decision not to exempt the benefits from FBT under the provisions of section 58(P) of the FBTAA. It should be noted that the 20 e-tag benefits when totalled came to $66.00 and were accepted as being provided as a minor, infrequent and irregular benefit.

This certainly does not appear to give any credence to the number of times a benefit is provided as being relevant because for the e-tags 20 occasions appears to have been accepted by the Tax Office as being infrequent and irregular. It is just that the total did not exceed $100.00 that section 58(P) of the FBTAA applies. In respect of the gift vouchers and the framed certificates, these were only provided on 10 occasions however the value when totalled came to $100.00 or more and appears therefore not to have been treated as minor. It is however recognised that the gift vouchers and the certificate frames were given in recognition of performance.

In previous meetings of this sub-committee the Tax Office has agreed that the application of section 58(P)(1)(e) is that a benefit should be considered in isolation, not accumulative as has been indicated in this EV.

In particular we refer to the following FBT Sub-committee minutes:

¦ agenda item 7 'Minor benefits exemption' (17-2-2005)

¦ agenda item 14 'Minor benefit threshold' (15-11-2001), and

¦ agenda item 15 'FBT minor benefits and their accumulation' (15-9-1994).

The EV discusses the fact that the taxpayer did not identify any practical difficulties in determining the notional taxable value. In respect of most of the discussions in this forum on minor infrequent benefits, a cost per employee has been identified but all the other provisions of section 58(P) of the FBTAA have been or have assumed to have been met and therefore the provisions of section 58(P) of the FBTAA have been said to have applied.

As guidance in respect of the application of section 58(P) we provide the following examples to ascertain the Tax Office view in respect of the application of section 58(P) of the FBTAA:

A welcome gift to new employees consisting of a laptop backpack, a mug, a pen, a compendium, an umbrella and drink flask with a total value of $55.00 followed by a welcome lunch at a restaurant valued at $55.00 (total $110 to recognise the commencement of employment). Although minor in value, every employee receives such a gift on commencement with the organisation, and the cost is readily identifiable.

Employee health assessment program - a program which provides voluntary health assessments for all employees, the assessment is not necessarily work related and involves employees completing a medical questionnaire and attending an on-site assessment during an open health expo day held at each office location. The cost of this benefit is available to each employee is $39.00 per assessment which is readily identifiable.

The provision of meal entertainment on an adhoc basis 2-3 times per year where the cost of each lunch/dinner is less than $100.00 per employee each time (assume for the purposes of this agenda item the average cost of a meal is $75.00).

As in point number 3, the employees are provided with benefits the same number of times as the e-tag example in the edited version discussed above (that is, 20 times).

Tax Office response

This agenda item, in effect raises two issues. The first relates to the reliance that can be placed on edited versions of private binding rulings that are contained in the register of private binding rulings. The second concerns the application of the minor benefits exemption in section 58P.

The CPAA has, in relation to the first issue, provided a view as to how an edited version is viewed by taxpayers. The Tax Office position in relation to the status of an edited version is clear. Upon commencing a search of the Register of Private Binding Rulings, a disclaimer appears which requires one to 'cancel' or 'proceed' based on an acknowledgement that the disclaimer has been read and understood.

The disclaimer is clear and unambiguous. For purposes of the minutes, the whole of the disclaimer is included as follows:

The Register of Private Binding Rulings is an historical record of edited versions of written binding advice issued by the Tax Office to specific taxpayers. It exists to enhance the integrity and transparency of the Tax Office's decision making processes. In essence, it enables the recipient of written binding advice to confirm that it is official Tax Office advice.

The contents of edited versions of written binding advice in the register cannot be relied upon as precedent or used for determining how the Tax Office will apply the law in other cases because:

¦ the Commissioner is only bound by the advice provided to the specific taxpayer named in the written binding advice

¦ some material facts that formed the arrangement on which the actual advice was given may have been removed or altered for privacy or secrecy reasons

¦ the contents of edited versions in the register are not updated to reflect:

¦ changes in legislation

¦ changes in the application of the law by the Tax Office that may result from tribunal or court decisions

¦ changes to the Tax Office view on how the law applies, and

¦ changes to decisions resulting from review processes where taxpayers have disputed the decision made by the Tax Office.

Given this, a record in the register is not an authority for the purposes of establishing a reasonably arguable position for taxpayers to apply to their own circumstances.

The Tax Office provides a legal database which contains the Commissioner's view on how the law would apply in various circumstances. If you need to clarify how the law applies to your circumstances, you should seek expert advice or apply for a private binding ruling from the Tax Office.

The CPAA has expressed, in the submission, the concern that 'it is disconcerting that there seems to be conflicting interpretations of provisions by those writing the EV's and other areas of the Tax Office which gives guidance to taxpayers on current Tax Office legislative interpretations. Many taxpayers find this important as they may have been relying on the Tax Office in making decisions and in finding a variation in that interpretation need to satisfy themselves that the EV's do not indicate a change of interpretation by the Tax Office which may result in exposure to taxes and penalties'.

However, as clearly set out in the disclaimer, for the reasons expressed therein, the record in the register is not an authority for the purposes of establishing a reasonably arguable position for taxpayers to apply to their own circumstances. The Tax Office provides a legal database which contains the Commissioner's view on how the law would apply in various circumstances. If a taxpayer needs to clarify how the law applies to their circumstances, the taxpayer should seek expert advice or apply for a private binding ruling from the Tax Office.

Given the above explanation it is inappropriate to review the edited version referred to in the submission.

In relation to the second issue, that is the interpretation and application of the minor benefit exemption contained in section 58P, the Tax Office noted that the matter has been discussed numerous times at this forum (for purposes of clarification noting that section 58P contains a number of tests which are required to be applied against the facts and a judgement made as to whether it is unreasonable to treat the minor benefit as a fringe benefit).

The minutes in which the application of section 58P is discussed more recently include, 20 May 2005 (agenda item 13) and 17 February 2005 (agenda item 7). In particular the minutes of 17 February confirm the Tax Office interpretation of paragraph 58P(1)(e) and (f); that is the less than $100 threshold only applies to paragraph 58P(1)(e).

The CPAA submission also states that 'in respect of most of the discussions in this forum on minor infrequent benefits, a cost per employee has been identified but all the other provisions of Section 58(P) of the FBTAA have been or have assumed to have been met and therefore the provisions of Section 58(P) of the FBTAA have been said to have applied'.

The Tax Office noted that the above statement is not correct. It is only in relation to Christmas parties, as an administrative approach, that the Tax Office will accept that a Christmas party and associated benefits with a notional taxable value of less than $100 (or $125 if a band is included) is a minor benefit. In other circumstances, the less than $100 is not a requirement specified in paragraph 58P(1)(f). However all the factors in paragraph 58(P)(1)(f) are required to be considered.

Guidance is also provided in tax determinations and the FBT Guide for Employers (these being Tax Office precedential view documents which can be relied upon).

For example, Taxation Determinations TD 93/76 and TD 93/197 provide general guidance on the application of the tests contained in section 58P (noting that the threshold test is now less than $100). Further MT 2042, sets out the methodology that is contained in section 58P and which is applicable to the determination of whether a minor benefit is a fringe benefit or an exempt benefit. Minor benefits are also discussed in the FBT Guide for Employers at chapter 20.8.

In relation to the examples put forward by the CPAA, the following responses are provided, noting that there are in reality insufficient facts to properly determine the outcome as the information required to consider all the factors in paragraph 58P(1)(f) are not available:

¦ A welcome gift. It would appear that an employer could reasonably apply the minor benefit exemption.

¦ Employee health assessment. Again, it would appear that an employer could reasonably apply the minor benefit exemption. Are any other exemptions available?

¦ Meal entertainment on an ad-hoc basis 2-3 times per year, cost being less than $100 on each occasion with an average of $75. If there are no other 'meal entertainment' benefits provided to the employee, and other factors are satisfied, for example there is a practical difficulty for the employer in ascertaining the value of the benefit, it would appear that an employer could reasonably apply the minor benefit exemption.

¦ A benefit is provided 20 times per year. This example raises an underlying difficulty in relation to section 58P. It is not possible to simply state that a benefit can be provided a certain number of times per year as the other tests must be considered and then a judgment made. There may be different outcomes where a benefit is provided 20 times a year depending on a consideration and weighting of the other factors in paragraph 58(P)(1)(f). Certainly, the Tax Office view would be that if 'meal entertainment' benefits with an average value of $75 were provided 20 times per year, each benefit would be a fringe benefit. Section 58P would not be satisfied. In other situations, such as an e-tag toll, where the factors in paragraph 58P(1)(f) are considered, this could lead to a conclusion that each benefit is a minor benefit.

11 Social club contributions (ICAA)

The ICAA acknowledges that this issue has been discussed at the NTLG FBT sub-committee on many occasions. The ICAA would like to table additional information for further consideration by the Tax Office following many appeals in the courts.

Summary and views

The ICAA is of the view, that contributions to the social club should be treated as non-deductible entertainment expenditure. We believe in the light of the judgment in Essenbourne Pty Ltd v SF of T reported at 2002 ATC 5201 and the very strong comments in support in Walstern Pty Ltd v SF of T reported at 2003 ATC 5076 that the Tax Office position in TR 1999/5 as it applies to social club contributions is not supportable.

Considerations

Taxation Determination TD 96/D6 took the position without any explanation that contributions to the social club were subject to FBT . It is also noted that taxation determinations do not usually go into a detailed discussion of the legislative background.

The draft ruling was issued on 19 June 1996 and after much comment was withdrawn on 27 November 1996. Then ATO ID 2002/92 issued stating that the contributions were not subject to FBT . The ATOID issued on 30 January 2002 and was withdrawn two weeks later on 13 February 2002.

The matter has been raised regularly over the years and we appear to be no closer to a resolution.

The Tax Office now continually refers to its position in TR 1999/5 as the Tax Office position. This has been consistently referred to in the NTLG minutes since then.

The taxation ruling relates to employee benefit trusts specifically. We would derive that the application to social club comes from paragraphs 6 - 8 and 45 - 49 which refers to the application of section 148 and the interpretation of 'an employee'. The Tax Office comments in subsequent periods have never actually referred to what parts of TR 1999/5 relate to social clubs.

The views in paragraph 6-8 and 45-49 are contrary to the judgments in Essenbourne's case and the strong agreement with that position in Walstern's case both referred to above.

What the law appears to say

Provision of the benefit is subject to FBT where the benefit is provided to an employee or associate by any of several parties set out in the definition of fringe benefits in section 136(1). The providers can be the employer, associate of the employer, an arranger or another person who is neither the employer nor associate but is involved in a way that the employer or the associate knows or reasonably to know what is being done.

An associate of an employee is prescribed as being defined in section 26AAB(14)(a). We are of the view that the social club is not an associate of an employee. The social club is not in a position to be significantly influenced by an individual staff member.

However, section 148 broadens the definition of 'associate' and we consider the section has the effect of making a social club an associate of the employee by extending the definition of 'associate'. We would also refer to paragraph 6 of TR 1999/5 that refers to this.

The definition of fringe benefits provides that it is 'in relation to an employee, in relation to the employer of the employee…being a benefit provided to the employee or to an associate of the employee'.

The reference to an employee and the employee is the key.

Tax Office view

The Tax Office view in paragraph 45 of TR 1999/5 is that the words 'an employee' mean employees generally.

In our view, the indefinite 'an employee' means any employee singular not employees as a collective word.

Support can be seen in the 'otherwise deductible rule' which operates only if a specific employee can be identified to determine the deductibility of such expenditure, see paragraph 87 of the Walstern judgment.

The Tax Office approach also leads to an inequitable result with reportable benefits.

The employer would have to allocate the benefit of some basis to employees. The expenditure is a reportable benefit as it is not an excluded benefit under section 5E(3). We see the subscription to the social club as being the provision of an entertainment benefit, not meal entertainment, which is excluded from being reportable - section 5E(3)(a).

Presumably, the employer would have to work out which employees are members of the social club at the time each contribution is made to the club even though the club has not actually spent any of the money on anything. In addition, the employer might not be in a position to know who the members of the social club are as it might be something that the employer encourages but has no involvement in.

There would have to be adjustments to take into account that some employees are not members of the social club, some members of the social club might for example be partners of an employer partnership and perhaps there are even members of the social club who are not employees. It also becomes even more complex where the social club actually applies the funds to the benefit of the accompanying persons of the employees which could be different whether that is something that is expended by the social club after the contribution by the employer or before a contribution by the employer supporting for example a particular function.

The cases

The cases referred to regularly Pridecraft, Walstern and Essenbourne. They are considered briefly below.

Pridecraft 2005 ATC 4001

This is an employer paying bonus amounts to a trust to establish a fund to pay current and past employees discretionary bonuses. This occurred in the 1997 year, it was a case on section 51(1) and Part IVA and penalties under section 226 and so on.

Per paragraph 111 fringe benefits tax would have only been argued if the employer subscription to the trust had been deductible. Accordingly, FBT was not considered as the Commissioner had stated it would not argue the FBT position if the amount was not deductible.

The Commissioner challenged the correctness of the judgement of Kiefel in Essenbourne at 2002 ATC 5201 and Hill's comments in Walstern.

Perhaps, this is the approach for taxpayers to pick up the Commissioner's approach in Pridecraft which is the 2005 case. Therefore, if the amount is perhaps correctly not deductible the Commissioner will not impose FBT based on symmetry even though there is no exclusion from FBT just because something is not deductible.

These comments are at paragraph 111 and 112 of Pridecraft decisions.

Note that at paragraph 11 of Pridecraft the Tax Office specifically denies the requirement of a specific employee.

Walstern 2003 ATC 5076

This resulted as contributions to an offshore non-complying superannuation fund.

Fringe benefits tax is discussed at paragraph 84 and following at some length.

Hill concurred strongly with Kiefel's judgement on Essenbourne that for FBT to apply required the ability to identify a particular employee. Refer to paragraph 37 and 87 particularly the last sentence. This required a clear identification of employees for the operation of the otherwise deductible rules, which apply with property and residual benefits.

The Commissioner said that the benefit was provided at the time of the contribution (paragraph 84 and 89) even though at that time it was not allocated to specific employees and in fact until it was allocated to specific employees it was held on a resulting trust for the employer (paragraph 85).

The Commissioner's primary submission was that the fringe benefit was provided at the time of allocation to the employees (paragraph 89).

This seems to be a pedantic timing issue for FBT - the contribution was made 30 June 1997 and allocated 10 October 1997 (paragraph 19) so whichever date is correct it still fell into the 1998 FBT year anyway.

However, for social club subscription this is important.

Essenbourne 2002 ATC 5201

This was a contribution to employee incentive trusts.

The decision was that the contributions were capital and not deductible but not subject to FBT because FBT requires identification of a particular employee. At paragraph 49, the provision of the funds to the trust was taken by the Commissioner as the property/residual benefit and not the issue of the units in the underlying investment trust. At paragraph 51 to 56 Kiefel discusses the lack of identification of particular employees as fatal to the FBT position taken by the Commissioner. Paragraph 45 of TR 1995/5 directly addresses the issue although it did not describe it and denied by Kiefel at paragraph 54. The Commissioner argues that 'an employee' means 'employees' that is, some sort of generic term.

Tax Office response:

The Tax Office, as a general statement of milestones to date concerning employer contributions to social clubs, agreed with the matters covered in the ICAA submission under the heading 'Considerations'.

Subsequent to the ICAA submission being received, the Federal Court's decision in Caelli Constructions (refer agenda item 5.2) was handed down. The Court applied and followed the reasoning in Essenbourne relating to the requirement to identify 'an employee'.

However, the Tax Office position, as previously stated at this forum on a number of occasions, including the immediate previous meeting, remains as expressed in TR 1999/5.

As the Tax Office view is that expressed in TR 1999/5, the statements made at the meeting of this forum on 18 August 2005 (agenda item 10) remains applicable. Accordingly, the alternative interpretative positions and contentions put forward in the ICAA submission are a view that is available to the ICAA. That does not alter the fact that the Tax Office view in relation to those issues is as stated in TR 1999/5 (as noted in the ICAA submission, in particular paragraphs 6-8 and 45-49).

The minutes of the meeting of 18 August 2005 indicate that the 'external members were strongly of the view that the decisions in Essenbourne & Walstern could provide an employer with an arguable position that there would not be a FBT liability when a contribution is made to a 'social club' as individual employees were not identifiable at the time of the contribution. It was accepted however that the Tax Office view expressed in TR 1999/5 could result in a liability to FBT arising at the time the contribution is made to the 'social club'.

As previously advised at this forum, and noting the above, a review of employer contributions to social clubs will be undertaken once the wider review of the impacts of the decisions in Essenbourne, Walstern, Pridecraft and Caelli Construction, as to the fundamental issue of identifying 'an employee', is completed. As further cases before the Courts have meant that the wider review is yet to be completed and further decisions by the Court are likely, the review of 'social clubs' is not able to proceed at this time.

12 Other business

12.1 Disclosure of 'wash-up payment' on the FBT return form

CPA Australia would like to recommend the 'wash-up payment' due by 28 May of each year under recent tax agent extension arrangements be included within item 19 (instalment amounts reported on activity statements) of the FBT return form.

The 'wash-up payment' of any outstanding FBT liability is usually due by 28 May each year, in addition to the fourth quarterly instalment in April. Upon lodgement of the FBT return, the employer's FBT liability in the main would have generally been accounted for by the wash-up payment previously made.

The current method of not including the payment on the FBT return means that if any amount is due and payable or refundable on lodgement of the return is not commensurate to the amount shown as payable/refundable on the return form.

This has caused confusion with many employers and difficulty in reconciling incorrectly posted wash-up payments with the Tax Office and the employers records.

Recommendation

CPA Australia recommend for the Tax Office to consider inserting a new item on the FBT return form for employers to report the wash-up payment (if any) such that any final payment reconciles to the amount shown on the FBT return.

Tax Office response:

The Tax Office advised that a 'wash-up payment' due by 28 May under tax agent extension arrangements can be included within item 19 (instalment amounts reported on activity statements) on the 2006 FBT return form.

In response to the CPA Aust's proposal the following addition has been made to the 2006 FBT return guide under item 19:

If you have made a payment towards your 2006 FBT liability as part of a tax agent lodgment agreement this amount can be included at this item.

12.2 Meeting dates for 2006

Date	Host	Place
16 February 2006	Tax Office	Hurstville
18 May 2006	NIA	Melbourne
17 August 2006	TIA	Sydney
16 November 2006	CPA Australia	Melbourne

13 Close of meeting

The next meeting will be held on 16 February 2006 at the Tax Office, Hurstville.