NTLG FBT Sub-committee minutes - 18 May 2006

QC: 18857 Content revised: No Abstract revised: No

Abstract:

Minutes of the NTLG Fringe Benefits Tax ( FBT ) Sub-committee meeting held on 18 May 2006 .

Venue: NIA, Level 8, 12-20 Flinders Lane, Melbourne

Meeting commenced at 10.00am

Attendees:

Lee Beaver (Chairperson)

Tax Office

Evan Lancaster

TA

Maria Benardis

ICAA

Kevin Lock

TA

Lance Cunningham

NIA

Elizabeth Lucas

CPA Aust

Michelle de Niese

CTA

Paul Mather

NZICA

Joanne Dibetta

Tax Office

Andrew Purdon

CPA Aust

Richard Ferraro

FCAI

Stephen Quah

Tax Office

Apologies:

Graham Clarke

ICAA

Frank Klasic

LCA

Ray Conwell

LCA

Elsa Payne

TIA

James Deliyannis

NTAA

M Payne-Mulcahy

TIA

Paul Hockridge

CPA Aust

Karen Stein

ICAA

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 Australia

CPA Aust

Corporate Tax Association

CTA

The Federal Chamber of Automotive Industries

FCAI

Institute of Chartered Accountants in Australia

ICAA

Law Council of Australia

LCA

National Institute of Accountants

NIA

National Tax and Accountants Association

NTAA

New Zealand Institute of Chartered Accountants

NZICA

Taxpayers' Australia

TA

Taxation Institute of Australia

TIA

[H1]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. The chair welcomed Michelle de Niese representing the Corporate Tax Association (CTA) and Paul Mather representing the New Zealand Institute of Chartered Accountants (NZICA) to their first meeting of the sub-committee.

Apologies were received from Graham Clarke (ICAA), Ray Conwell (LCA), James Deliyannis (NTAA), Paul Hockridge (CPA Aust), Frank Klasic (LCA), Elsa Payne (TIA), Michaela Payne- Mulcahy (TIA) and Karen Stein (ICAA).

2 Confirmation of minutes of the 16 February 2006 meeting

The minutes of 16 February 2006 were accepted.

The Tax Office thanked members for accepting the change as noted in agenda item 2.1 in those minutes.

3 Items carried over from previous meetings

3.1 Joint submission on compliance issues

The outcome from the joint professional bodies Cost of Compliance submission, dated 4 August 2004, is noted at agenda items 6.1 and 6.2, with those agenda items having been submitted as a consequence of the Government's interim response to the Taskforce on Reducing the Regulatory Burdens on Business.

This item, given the Government's announced changes to the Fringe Benefits Tax Assessment Act 1986 (FBTAA) was accepted, for the purposes of this forum, as having been finalised.

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

This item was submitted for consideration at the 17 November 2005 meeting; refer agenda item 7. The submission included numerous hypothetical situations and facts. The submission stated that there had 'been numerous past questions raised at the NTLG FBT sub-committee meetings concerning the position of base values of novated leased cars, as variance from, or pertaining to, the position outlined in question 22, of car fringe benefit queries in Miscellaneous Taxation Ruling MT 2021'.

The submission contained a short analysis of the Tax Office position regarding leases, as considered relevant by Taxpayers Australia, and in particular reference was made to paragraphs 61 to 67 of Taxation Ruling TR 98/15. Reference was also made to Income Tax Ruling IT 28, Taxation Determination TD 93/142 and ATO Interpretative Decision ATO ID 2002/1004.

The submission contained three possible alternative views based on the analysis submitted and sought the Tax Office advice as to which outcome produces the correct FBT , GST and income tax outcomes, or if there was an alternate view by the Tax Office that was not addressed in the three situations noted.

Tax Office response:

In response to this action item, the Tax Office noted that given the breadth of the 12 hypothetical scenarios put forward, it was considered appropriate to provide a general response to the submission rather than specific responses to the varied issues raised as the matter appears to be based on possible variations to hypothetical arrangements.

The Tax Office restated the view expressed in MT 2021, at question 22. That is 'What is the cost price of a car where the employer acquires the car at a price which reflects a trade-in by some other person? Answer: The "cost price" is the amount of expenditure incurred by the employer in acquiring the car. If another person (for example, the employee who is to have the private use of the car) supplies a trade-in vehicle, the cost price to the employer would be the purchase price minus the trade-in allowed.'

The Tax Office has also previously acknowledged at this forum, for example, refer agenda item 6, minutes of meeting 19 May 2005, in determining whether a cash payment by an employee can be treated similarly to a 'trade-in', that cash payments by an employee needed to be considered in view of the actual contractual arrangement between the parties. Under the contract for sale the employer could be liable for the full purchase price in which case the full purchase price is the 'cost price' for FBT purposes.

The Tax Office acknowledged that in considering the issue of an up front cash payment by an employee in a novated lease situation, as opposed to a purchase by an employer, clearly the Tax Office position stated in the income tax rulings that deal with leases should be considered and, on the actual facts of each arrangement, be applied and followed. In particular, as noted in the Taxpayers Australia submission, that would include analysing the statements in TR 98/15, IT 28 and so on and reaching a conclusion based on the actual facts and circumstances as to whether there is a bona fide lease.

Also, as noted in Taxation Determination TD 95/63, Fringe benefits tax: where a car is acquired at the end of a lease, is the acquisition at the residual value an 'arm's length transaction' for the purposes of section 43 of the FBTAA 1986, as relevant for this discussion, the first question to be considered in each case is whether a bona fide lease exists. As indicated in paragraph 7 of Taxation Ruling IT 28, it is necessary to decide whether payments really are lease rentals or whether they are, in substance, consideration for sale of the goods purported to be leased.

It was further noted that where, on the facts of an arrangement, a bona fide lease does not exist, the employer may nonetheless still 'hold a car' for the purposes of the FBTAA. Reference was made to section 162; Holding of car. It may be arguable that the car, although not 'leased' is 'otherwise made available to the employer by another person'.

However, the 'cost price' in this situation would need to be ascertained in accordance with the definition of 'leased car value' in section 136(1). That definition applies, in such a case, where the car is held but not owned by the employer. As the car is not 'leased', the applicable value is the amount the employer could reasonably be expected to have been required to pay to purchase the car from the owner at the time under an arm's length transaction. That valuation mechanism is different to that used to determine the 'cost price' where there is a valid lease or the employer owns the car. The 'cost price' in a case where there is a purported lease that is not a bona fide lease may in fact be the full value of the car ignoring any cash contribution by the employee.

Employers and employees should consider carefully the implications of entering into such arrangements. Where they are not clear as to the application of the guidelines set out in the relevant public rulings as to whether there is a bona fide lease and/or the 'cost price' methodology discussed above in ascertaining the 'leased car value' where there is not a bona fide lease, they should lodge an application for private binding ruling. Such an application would be required to fully set out the details of the arrangement, including all contracts entered into between all parties to the arrangement.

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

4.1 FBT related taxation rulings, taxation determinations and law administration practice statements

The following FBT related draft taxation rulings have issued:

¦ Draft Taxation Ruling TR 2006/D6 - Income tax, fringe benefits tax and product grants and benefits: Public Rulings

This ruling outlines the system of public rulings following the enactment of the Tax Laws Amendment (Improvements to Self Assessment) Act (No. 2) 2005. In respect of public rulings, that Act inserted new divisions 357 (common rules) and 358 (public rulings) into Schedule 1 to the Taxation Administration Act 1953 (TAA), the provisions of which are referred to in this ruling.

¦ Draft Taxation Ruling TR 2006/D7 - Income tax, fringe benefits tax and product grants: Private Rulings

This ruling outlines the system of private rulings following the enactment of the Tax Laws Amendment (Improvements to Self Assessment) Act (No. 2) 2005. In respect of private rulings, that Act inserted new Divisions 357 (common rules) and 359 (private rulings) into Schedule 1 to the TAA, the provisions of which are referred to in the ruling.

The following income tax and fringe benefits tax rulings have been withdrawn:

¦ Taxation Ruling TR 92/1W - Withdrawal - Income tax and fringe benefits tax: public rulings - withdrawn as the Commissioner's views are set out in Draft TR 2006/D6.

¦ Taxation Ruling TR 92/20W - Withdrawal - Income and other taxes: guidelines on the use of date of effect paragraphs in taxation rulings and taxation determinations - withdrawn as the Commissioner's views are set out in Draft TR 2006/D6.

¦ Taxation Ruling TR 93/1W - Withdrawal - Income tax and fringe benefits tax: private rulings - withdrawn as the Commissioner's current views are set out in Draft TR 2006/D7.

¦ Taxation Determination TD 93/34 - Income tax and fringe benefits tax: is there a withdrawal of a private ruling by a later inconsistent public ruling if the year of income or fringe benefits tax year to which the private ruling relates has (a) already ended or (b) commenced but not yet ended? - withdrawn as the Commissioner's current views are set out in Draft TR 2006/D7.

The following FBT taxation determinations have issued:

¦ Taxation Ruling TD 2006/13 - Fringe benefits tax: what are the rates to be applied on a cents per kilometre basis for calculating the taxable value of a fringe benefit arising from the private use of a motor vehicle other than a car for the fringe benefits tax year commencing on 1 April 2006 ?

¦ Taxation Ruling TD 2006/14 - Fringe benefits tax: for the purposes of section 28 of the Fringe Benefits Tax Assessment Act 1986 what are the indexation factors for valuing non-remote housing for the fringe benefits tax year commencing on 1 April 2006 ?

¦ Taxation Ruling TD 2006/15 - Fringe benefits tax: for the purposes of section 135C of the Fringe Benefits Tax Assessment Act 1986, what is the exemption threshold for the fringe benefits tax year commencing on 1 April 2006 ?

¦ Taxation Determination TD 2006/23 - Fringe benefits tax: for the purposes of Division 7 of Part lll of the Fringe Benefits Tax Assessment Act 1986, what amount represents a reasonable food component of a living-away-from-home allowance for expatriate employees for the fringe benefits tax year commencing on 1 April 2006 ?

¦ Taxation Determination TD 2006/24 - Fringe benefits tax: what is the benchmark interest rate to be used for the fringe benefits tax year commencing on 1 April 2006 ?

¦ Taxation Determination TD 2006/37 - Fringe benefits tax: for the purposes of section 39A of the Fringe Benefits Tax Assessment Act 1986 what is the car parking threshold for the fringe benefits tax year commencing on 1 April 2006 ?

The following law administration practice statement has issued:

¦ Law Administration Practice Statement PS LA 2006/2 - Administration of shortfall penalty for false or misleading statement

The practice statement explains how the Commissioner administers the administrative penalty on shortfall amounts (shortfall penalty) imposed under subsection 284-75(1) in Schedule 1 of the TAA for statements which are false or misleading in a material particular. It provides guidance on:

¦ when a statement will give rise to liability to the administrative penalty

¦ how penalty amounts are assessed

¦ when remission of the penalty under section 298-20 is warranted.

The practice statement applies to statements in so far as they relate to:

¦ income tax matters for the 2001 and later income years

¦ FBT matters for the year commencing 1 April 2001 and later years; and

¦ matters relating to other taxes for the year commencing 1 July 2000 and later years.

4.2 FBT related class rulings

The following FBT class ruling has issued:

¦ Class Ruling CR 2006/13: FBT and income tax: Employer contributions to the WA Construction Industry Redundancy (No 2) Fund

The following FBT related class ruling addendum has issued:

¦ Class Ruling CR 2001/1A2 - Addendum: Income tax: Class Rulings system

The addendum amends the class ruling to incorporate the recommended changes for public rulings stated in the Report on Aspects of Income Tax Self Assessment (ROSA Report). These changes were enacted under the Tax Laws Amendment (Improvements to Self Assessment) Act (No. 2) 2005. In respect of public rulings, that Act inserted new Divisions 357 (common rules) and 358 (public rulings) into Schedule 1 to the TAA, the provisions of which are referred to in this ruling.

4.3 FBT related ATO interpretative decisions

The following FBT ATO interpretative decisions have issued since the last meeting:

¦ ATO ID 2006/44: Fringe benefits tax - Exempt Benefits: work related item - notebook computer, laptop computer or similar portable computer;

¦ ATO ID 2006/52: Fringe benefits tax - Expense Payment Fringe Benefit: reduction of taxable value - education of children of overseas employees;

¦ ATO ID 2006/93 - Fringe benefits tax - Car parking fringe benefits: fee charged by a parking station for all-day parking - daily rate equivalent for periodic parking arrangements.

The following FBT ATO interpretative decision has been amended:

¦ ATO ID 2004/14 - Fringe benefits tax - Exempt benefits: Personal Digital Assistants (PDA's) - handheld and palm sized organisers

This ATOID has been amended by including the following note:

Note: From 1 April 2006 Personal Digital Assistants are made specifically exempt as an eligible work related item, under an amendment to subsection 58X(2) of the FBTAA

The following FBT ATO interpretative decision has been withdrawn:

¦ ATO ID 2002/609 - Fringe benefits tax - In-house residual fringe benefits

The ATOID has been withdrawn as the ATO view on this matter is dealt with in the Fringe Benefits Tax: A guide for employers.

5 News from the Tax Office

5.1 Legislation update

¦ Tax Laws Amendment (2005 Measures No. 6) Bill 2005 received Royal Assent on 29 March 2006 as Tax Laws Amendment (2005 Measures No. 6) Act 2006 - Act No 13 of 2006 .

The Bill amended the Income Tax Assessment Act 1997 (ITAA 1997) to ensure certain not-for-profit entities are not subject to tax on income as a result of the Federal Court of Australia decision in Coleambally Irrigation Mutual Co-Operative Ltd v Commissioner of Taxation [2004] FCAFC 250. The amendments effectively restore the longstanding benefits of the mutuality principle to those affected by the Coleambally decision.

¦ Tax Laws Amendment ( 2006 Measures No. 1) Bill 2006 was introduced into Parliament on 16 February 2006 and received royal assent on 6 April 2006 as Tax Laws Amendment ( 2006 Measures No. 1) Act 2006 - Act No. 32 of 2006 .

The Bill amended the ITAA 1997 to provide exemptions from Australian tax on non-Australian source income for individuals who are temporary residents of Australia for tax purposes.

The Bill includes a number of consequential amendments to various tax laws which refer to the term 'exempt visitor'. One of these amendments is to the Fringe Benefits Tax Assessment Act 1986 (FBTAA), subsection 136(1), sub-paragraph (j)(ii)(B) definition of 'fringe benefit', to change the references to the term 'exempt visitor'.

¦ Tax Laws Amendment ( 2006 Measures No 2) Bill 2006 was introduced into Parliament on 29 March 2006 . The Bill contains measures to make minor corrections and amendments and also some general improvements to the usability of the taxation laws.

The Bill will make the following amendments and technical corrections to the FBTAA:

¦ Subsection 136(1) of the FBTAA contains two definition of entity. Both definitions pick up the definition in section 960-100 of the ITAA 1997. The Bill will remove the less descriptive definition.

¦ Subsection 136(1) paragraph(e) of the definition of entertainment facility leasing expenses; insert after 1936, 'or the Income Tax Assessment Act 1997'

¦ Section 162B - When car is used for the purpose of producing assessable income; omit the outdated reference 'Income Tax Assessment Act 1936' and substitute the correct reference 'Income Tax Assessment Act 1997'

¦ Subsection 58PB(3) - Meaning of approved worker entitlement fund - declarations;

 

¦ omit 'in writing' and substitute 'by legislative instrument'

¦ repeal the second sentence.

¦ Tax Laws Amendment (Personal tax reduction and improved depreciation arrangements) Bill 2006 was introduced into Parliament on 11 May 2006 . Subsequent to this meeting the Bill received Royal Assent on 19 June 2006 as Tax Laws Amendment (Personal tax reduction and improved depreciation arrangements) Act 2006 - Act No. 55 of 2006 .

The Bill amends the Fringe Benefits Tax Act 1986 to reduce the rate of fringe benefits tax ( FBT ) from 48.5 per cent to 46.5 per cent.

¦ Fringe Benefits Tax Amendment Regulations 2006 (No 1) (Select Legislative Instrument 2006 No 103) were registered on 9 May 2006 to prescribe 3 more funds as 'approved worker entitlement funds' for the purpose of a FBT exemption under section 58PB of the FBTAA. The amending regulations also move the list of approved worker entitlement funds from regulation 6 to a new Schedule 3 Prescribed approved worker entitlement funds, of the FBT Regulations. The amendments are taken to have commenced on 1 April 2006 .

5.2 Government response to the report of the taskforce on reducing the regulatory burdens on business

The Prime Minister and Treasurer released a joint press release on 7 April 2006 to announce the Government's interim response to the Report of the Taskforce on Reducing the Regulatory Burden on Business.

The recommendations aimed at reducing business red tape included the following FBT measures:

¦ The Government will increase the minor fringe benefits exemption threshold from $100 to $300, with effect from 1 April 2007;

¦ The Government will increase the reportable fringe benefits exclusion threshold from $1,000 to $2,000, with effect from 1 April 2007;

¦ The Tax Office should review and clarify its guidelines about what is considered 'irregular' and 'infrequent' for the purposes of the FBT minor benefit exemption; and

¦ The Tax Office should examine and implement administrative solutions to further reduce the compliance costs of calculating FBT on road tolls and better publicise the work it has already done.

5.3 Budget impacts FBT

In addition to the minor benefit threshold and the reportable fringe benefit threshold changes previously announced, the Government introduced several new measures in the Budget 2006-07 that impact on FBT .

¦ The Government will reduce the fringe benefits tax rate from 48.5 per cent to 46.5 per cent, with effect from 1 April 2006 .

This change will ensure that the FBT rate aligns with the top personal income tax rate (including the Medicare levy).

¦ The Government will broaden the fringe benefits tax definition of remote where the shortest practicable route involves travel over water, with effect from 1 April 2007.

The FBT definition of a remote location is based on the distance via the shortest practicable surface route between the remote location and the nearest population centre. This measure will broaden the FBT definition of remote by halving the required distance between a location and the nearest population centre, where the shortest practicable route involves travel solely over water. Where the shortest practicable route involves travel over both land and water, the broadened FBT definition of remote will allow for apportionment.

This will ensure that the FBT remote area concessions, such as those for certain housing related fringe benefits, recognise the special circumstances of employees who work in locations isolated from populated areas by a body of water.

¦ The Government will increase the in-house fringe benefits tax-free threshold from $500 to $1,000, with effect from 1 April 2007.

An in-house fringe benefit is a good or service provided to an employee that is identical or similar to those that the employer supplies to the public in the ordinary course of the employer's business.

This measure will result in employers not paying fringe benefits tax on the value of in-house fringe benefits provided to employees that do not exceed the new $1,000 threshold.

5.4 FBT employee declarations now approved forms

In accordance with Law Administration Practice Statement PS LA 2005/19 Approved forms, the FBT employee declarations and nomination of employer by a state or territory government are now approved forms under section 388-50 in Schedule 1 to the Taxation Administration Act 1953 with the various instruments of approval signed on 24 April 2006 . The declarations have not changed but the wording of the next edition of FBT a guide for employers will be changed to reflect that they are approved forms and not a suggested format.

5.5 Fringe benefits tax reporting exclusion for personal security services

On 8 September 2005 the Minister for Revenue and Assistant Treasurer announced in Press Release 078/2005 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.

On 11 April 2006 the Tax Office released its administrative treatment of this proposal. The Tax Office will enforce the existing law in the period between the announcement and enactment of the proposed law.

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

For tax professionals/Tax professionals home page/Rulings, legislation & law/New legislation/Fringe benefits tax/Fringe benefits tax reporting exclusion for personal security services

Subsequent to this meeting Tax Laws Amendment ( 2006 Measures No. 3) Bill 2006 was introduced to the House of Representatives on 25 May 2006 . This Bill includes the reporting exclusion for personal security services.

5.6 Publications

¦ Administration of Fringe Benefits Tax Better Practice Guide

A better practice guide for the management of FBT administration has been published by the Australian National Audit Office to assist Australian Government agencies to establish appropriate internal control frameworks for the effective management of FBT administration within their organisations.

Although aimed principally at government agencies, it is considered relevant to any large public or private organisations.

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

For Government/For Government home page/Key products for Government/Better Practice Guide

¦ Fringe benefits tax: A guide for employers

The Tax Office advised that the hard copy of the revised guide will be delayed due to the FBT changes announced in the Budget.

¦ Fringe benefits tax for non-profit organisations

This publication may also be delayed due to the FBT changes announced in the Budget.

¦ Taxation Statistics

The annual publication Taxation Statistics 2003-04 has been released and is available electronically on ato.gov.au. The publication reports fringe benefits tax statistics for the 2004-05 FBT year (1 April 2004 to 31 March 2005). Statistics in the FBT chapter are sourced from 2005 FBT annual returns processed by 31 October 2005. They are not necessarily complete and will continue to change as data from 2005 FBT returns processed after 31 October 2005 is included. When Taxation Statistics 2004-05 is published that edition will included data from FBT returns and amendments processed up to 31 October 2006 .

The statistics are available on ato.gov.au via the path:

For tax professionals/Tax professionals home page/Your tax practice/Administration essentials/Statistics

6 Report of the Taskforce on Reducing the Regulatory Burdens on Business - Rethinking Regulation

6.1  Government's interim response to a number of recommendations of the Report of the Taskforce on Reducing the Regulatory Burdens on Business (ICAA)

In a joint press release of 7 April 2006 , the Prime Minister and the Treasurer announced the Government's interim response to a number of recommendations of the Report of the Taskforce on Reducing the Regulatory Burdens on Business.

The Prime Minister and the Treasurer announced the formation of the taskforce on 12 October last year - its objective broadly being to identify practical options for alleviating the compliance burden, or 'red tape', on business from Government regulation. It covers tax and financial and corporate regulation and also areas related to health, labour, consumer protection, environment and building and trade regulation.

The government's interim response to the report addresses 86 (in full or in part) of the 178 recommendations made by the taskforce, with a final comprehensive response to all recommendations to be provided by the end of July 2006 .

In the area of FBT the following were recommendations were outlined in the report:

Recommendation 5.29

The Australian Government should limit reporting of fringe benefits to remuneration benefits only.

Recommendation 5.30

In the event that recommendation 5.29 were not accepted, the Australian Government should increase the threshold for FBT reporting from $1000 to $2000 and exempt a wider range of benefits from reporting.

Recommendation 5.31

The Australian Government should increase the FBT minor benefits threshold from $100 to $300.

Recommendation 5.32

The Australian Taxation Office should review and clarify its guidelines about what is considered 'irregular' and 'infrequent' for the purposes of the FBT minor benefits exemption.

Recommendation 5.33

The Australian Taxation Office should examine and implement administrative solutions to further reduce the compliance costs of calculating FBT on road tolls and better publicise the work it has already done.

Recommendation 5.34

The Australian Government should review the following areas of FBT with a view to reducing compliance costs:

a) interaction between FBT and GST; and

b) treatment of car parking.

Recommendation 5.35

The Australian Government should consider giving entities the option of submitting group FBT returns.

Recommendation 5.36

The Australian Government should give employers the same automatic extension to lodge FBT returns it gives tax agents.

Other FBT issues

A number of other FBT issues were raised that are outside the scope of this review, but would be candidates for consideration in a comprehensive review of FBT policy. They include:

¦ treatment adjustment of remote area benefit boundaries; and

¦ exclusion of some vehicles from the definition of a 'car'.

The Institute welcomed the report and was pleased to see that many of the issues outlined in the joint professional bodies cost of compliance submission had being considered. Some of the recommendations require the Tax Office to further examine certain areas with the view of making changes to reduce the cost of compliance to taxpayers.

Can the Tax Office please outline its strategy and plans for addressing these issues?

Could the Tax Office please provide an update in relation to its meetings with Treasury in relation to the Cost of Compliance submission. Has Treasury indicated the likelihood of further meetings to discuss the above recommendations and other issues raised in the cost of compliance submission?

6.2   FBT Cost of Compliance submission (TIA)

Is Treasury still considering the matters raised, or are they taking the view that having increased the minor benefits limit to $300, they are not looking at it further?

Meeting discussion:

The ICAA noted that they were very pleased with the outcome of the Taskforce review and Government's announcements however there remained a concern as to what will be done to address the remaining issues contained in the joint Professional Body submission that were either not addressed in the Taskforce report or announced in the Budget. The ICAA would like to move those remaining issues forward for further consideration. The ICAA also enquired as to whether there has been, or will there be, further meetings with Treasury to discuss the remaining matters.

There was general discussion on the Taskforce recommendations regarding road tolls and the Government's interim response.

CPA Aust noted that some employers would simply be returning all road tolls as a fringe benefit to avoid the compliance costs and they may be overpaying fringe benefits tax. Other employers are incurring a compliance cost and spending the time to identify road tolls that are subject to fringe benefits tax.

Tax Office response:

The Tax Office noted that an update in relation to the joint professional bodies Cost of Compliance submission has been requested at agenda items 6.1 and 6.2.

The Tax Office reminded members that the joint professional bodies Cost of Compliance Submission was submitted to the, then, Assistant Treasurer and Minister for Revenue in August 2004. Subsequently, and as noted at this forum previously, there was consultation between the professional bodies and The Treasury.

The Tax Office is not able to comment further on the joint professional bodies Cost of Compliance submission and members were informed that they should liaise with The Treasury in the first instance. ICAA agreed, on behalf of members, to contact The Treasury to obtain an update on the submission.

In relation to the recommendations of the Taskforce, as noted in the ICAA submission, there are specific recommendations in relation to 'road tolls' and 'irregular' and 'infrequent' that require action by the Tax Office. The remaining recommendations require a Government response. Those not included in the interim responses will be included in a final comprehensive response to all recommendations (as per the Taskforce Report by the end of July 2006 ).

The Government's interim response to the Report of the Taskforce included the following:

1.1.3

Response concerning 'irregular' and 'infrequent'

'The ATO is reviewing its existing guidelines and will provide further clarification about what is considered "irregular" and "infrequent" regarding the minor benefit exemption.'

1.1.4

Response concerning 'road tolls'

 

'The ATO is reviewing the current administrative solutions which will reduce the compliance costs of calculating FBT on road tolls and will better publicise the work it has already done.'

The Tax Office indicated that it is proposing to prepare a fact sheet on 'road tolls', based on the collaborative outcomes of this forum as contained in the minutes of the meeting held in February 2000. The draft fact sheet will be provided to members for discussion at the next meeting of the sub-committee, which will provide an opportunity to discuss other possible administrative solutions that would reduce compliance costs associated with 'road tolls' that could be included apart from those identified in February 2000.

Action Item:

Tax Office to prepare a fact sheet on 'road tolls' and provide draft to members prior to the next meeting.

In relation to the recommendation in relation to 'irregular' and 'infrequent', the Tax Office noted that the Government has also announced that threshold test in section 58P(1)(e) will increase from less than $100 to less than $300 from 1 April 2007.

In reviewing the existing guidelines on minor benefits and considering the announcement that the threshold test will increase with effect from 1 April 2007, the Tax Office indicated that it will consider whether a public ruling on 'minor benefits' should be undertaken. The Tax Office will provide an update on the decisions taken in this regard at the next meeting.

7 Employee contributions by journal entries (ICAA)

Miscellaneous Taxation Ruling MT 2050 - Fringe Benefits Tax: payment of recipients contribution by journal entry, at paragraph 2 states:

Journal entries in an employer's accounts are a payment of a 'recipients contribution', 'recipients payment' or recipients rent' only if all of the following conditions are met:

(a) the employee has an obligation to make a contribution to the employer towards a fringe benefit;

(b) the employer has an obligation to make a payment to the employee;

(c) the employer and employee agree to set-off the employee's obligation to the employer against the employer's obligation to the employee.

Paragraph 8 outlines:

8. It is also necessary that the employer have an obligation to pay money to the employee. That obligation may be an existing debt such as salary due but unpaid, or the parties may agree that the employer is to lend an amount to the employee (Brookton Co-Operative Society Ltd v. FC of T 81 ATC 4346; (1981) 11 ATR 880 per Mason J at ATC 4354; ATR 889). For example, the employer and employee may agree that the amount of the employee's contribution is to become a loan to the employee which is to be repaid at a future date. (Re Associated Electronic Services Pty Ltd [1965] Qd R 36). We take the view that the existence and use by an employee of an employee's loan account is prima facie evidence that the employer has agreed to lend money to the employee.

Let us assume a scenario where the employees are directors/shareholders which are paid a salary. The loan accounts are debited for the equivalent value of their motor vehicle related FBT liabilities.

The Institute seeks clarity on how to satisfy:

(b) the employer has an obligation to make a payment to the employee;?

In the case where directors' loan accounts in the company financials have always been debit amounts that is; showing as an asset to the company, would a journal entry merely debiting the directors' loan account for the FBT contribution be sufficient without any corresponding offset for a liability owed by the employer?

Our reading of the MT would seem to indicate that this may not be sufficient without a corresponding offset for a liability owed by the employer.

Meeting discussion:

In view of the fact that MT 2050 has been the Tax Office view for many years, the Tax Office was interested in ascertaining why this was raised. The ICAA advised that this issue had been raised by its members as an issue arising in Tax Office audits.

The underlying issue is that if the employee can show that there is an agreement in place at the time the journal entry is made is that a valid recipient's contribution. Could the agreement be in the company minutes?

It was agreed that the issues raised by members with the ICAA would be very factual. The discussion and Tax Office response at the meeting is, on the other hand, general only in nature.

Tax Office response:

The Tax Office advised that where the requirements of Miscellaneous Taxation Ruling MT 2050 are satisfied, journal entries in an employer's accounts can be a payment of a 'recipients contribution', 'recipient's payment' or recipients rent'.

As noted in the submission, paragraph 8 of MT 2050 provides part of the explanation as to when obligations exist between the parties. It is stated that, 'We take the view that the existence and use by an employee of an employee's loan account is prima facie evidence that the employer has agreed to lend money to the employee.' The scenario put forward indicates that the employees are directors/shareholders who are paid salary.

Further at paragraph 10 of MT 2050, it is stated that, 'whether the employee's account has a debit or credit balance does not affect the taxable value of the fringe benefit in relation to which the contribution is made. However, if the account is in debit, both parties would need to have specifically agreed in advance that the employer would, in the circumstances, grant a further amount by way of loan through the employee's account.'

Where an employee's loan account is in debit, it is important that both the employer and employee have specifically agreed in advance that the employer would grant a further amount by way of loan through that account. That may be evidenced in company minutes.

The Tax Office stated that it is important to understand that MT 2050 must be read in its entirety to appreciate when journal entries in an employer's accounts will be a 'payment'; journal entries are only a record of underlying transactions, agreements and obligations.

8 Exemption for personal digital assistants (Tax Office)

This item was provided by the Tax Office for discussion at the meeting.

What are personal digital assistants (PDA's)?

If a device has both a phone and a PDA capability, is it a phone or a PDA?

Meeting discussion:

There was a general discussion by members about, in effect, the rapid pace of converging technologies that are, in one form or another covered by the separate provisions in section 58X of the FBTAA, including the specific exemption in relation to a PDA.

The convergence of technologies is moving at such a pace that, today, it is difficult to in fact determine what is a 'PDA' and what is a 'mobile phone'; with it being suggested that a basic PDA will not exist too far into the future.

It was also noted by members that a difficulty arises in that there are different tests that apply to different items, for example:

¦ for an item of software to be exempt it must be 'for use in the employee's employment';

¦ for a mobile phone to be exempt it must be 'primarily for use in the employee's employment';

¦ for a notebook computer to be exempt, there can only be benefits provided in any one year in respect of a single laptop;

¦ there is no 'business use' test applicable to the exemption in relation to laptops, portable printers or PDAs.

This inconsistency in approach to the exemptions provided creates compliance difficulties for employers in administering section 58X.

The CTA, in agreeing with the concerns raised by members, referred to its major submission to the Regulation Taskforce, in which it had identified compliance and other problems associated with the FBT regime. The submission identified that section 58X is inconsistent with its approach to certain work related items, most notably mobile phones ('primarily' test) and laptops (no 'primarily' test). The requirement that the function of a work related item be its 'primary function' (subsection 58X(2)) is very difficult to meet in light of convergent technologies and the demands of the modern workplace.

The CTA had suggested in its submission that a 'primary function' test in subsection 58X(2) should be replaced with a requirement that the item have a primary function of any combination of the items listed.

Tax Office response:

In discussing this issue, the Tax Office acknowledged that the convergence of technologies was moving forward at a rapid pace and that there will, at times, be difficulties in determining whether a benefit in respect of an 'eligible work related item', for example where an item has both mobile phone and PDA capability, is exempt specifically under:

¦ paragraph 58X(2)(a) - mobile phone; or

¦ paragraph 58X(2)(g) - PDA.

Further, paragraph 58X(3) - primarily for use in employee's employment, must be considered if the item is considered to be a mobile phone.

The explanatory memorandum (EM) to Tax Laws Amendment (2005 Measures No 1) Bill 2005 stated the following at paragraph 1.13;

Section 58X of the FBTAA 1986 provides an exemption from FBT for certain work-related items provided by an employer to an employee. An amendment is made to extend the FBT exemption available for electronic diaries or similar items to include 'a personal digital assistant'. A personal digital assistant is a hand held wireless device designed for use as a personal organiser which may or may not have other computing capabilities.

Today, the marketing surrounding electronic devices which includes PDAs, mobile phones and a combination of both is somewhat blurred. On one hand there is what a reasonable person would accept is clearly a mobile phone. There is also what could be referred to as a basic PDA, which is also easily identifiable.

Reference was made to ATO Interpretative Decision ATO ID 2004/14 as providing an indication of what a basic PDA is. It is noted that the ATOID was issued in January 2004 in an attempt to administer section 58X as to whether PDAs could be treated as an electronic diary or similar item or a notebook, laptop or similar portable computer. The ATOID stated that it was considered the best way of determining the classification of any particular item is to identify its primary function.

ATO Interpretative Decision ATO ID 2003/894 provides an indication of what a 'mobile phone' is, noting that this was issued in October 2003. This ATOID also stated that it was considered the best way of determining the classification of any particular item is to identify its primary function.

However, today numerous terms are used by both the manufacturers and retailers of electronic devices, and not necessarily with consistency, where mobile phone, PDA and other information technologies combine. Terms used include 'smartphones', 'PDA/phones', 'multimedia computers' and 'mobile offices'. It may not be readily apparent, given the marketing and advances in technology, as to what is the primary function of a combined device.

It was acknowledged that in most instances these combined devices are designed for, and are used for work purposes and include functions of a PDA, mobile phone and in particular 'push e-mail' capabilities. It was also accepted that employees can enter into a salary sacrifice arrangement to obtain a 'PDA' without any requirement that it is to be used for business purposes.

In view of the intent set out in the EM in relation to the exemption relating to PDAs, as noted above, given the reference to a PDA being 'a hand held wireless device designed for use as a personal organiser which may or may not have other computing abilities', it was acknowledged that a combined/converged device may be capable of being treated as a PDA or a mobile phone. This will ultimately depend on a number of factors which an employer may take into account. For example, in the following situations:

¦ where an employer provides a device to an employee which has both PDA and phone capabilities, or reimburses the cost of such a device, on the basis that it is primarily for use in the employee's employment, an employer could rely on the exemption provided in relation to a mobile phone.

¦ where it is not possible for an employer to determine which is the primary function of the device, but it is not provided primarily for use in the employee's employment, an employer could rely on the PDA exemption.

9 Living-away-from-home allowances (TA)

Taxation Determination TD 2006/23 sets out the amount that the Tax Office considers is a reasonable food component of a living-away-from-home allowance (LAFHA) for expatriate employees for the FBT year commencing 1st April 2006 . The amount considered reasonable for the food component of the LAFHA is based on whether the family member is an adult or a child.

The TD states that "'adults' for this purpose are persons aged 12 years or more" (see paragraph 1). However, at page 106 of the FBT : A Guide for Employers, it is stated that 'an adult is a person who had attained the age of 12 years before the beginning of the FBT year'.

The two definitions have different meanings and lead to different results. In the first, a family member would be treated as an adult in the year in which they have turned 12 years of age. In the second, they would not be treated as an adult unless they were 12 years of age before the beginning of the FBT year, so that even if they turned 12 years of age during the FBT year, they would not be regarded as an adult.

Can the Tax Office please advise:

¦ which definition of an 'adult' is correct?

¦ if the first is correct, is the family member treated as an adult from the date they turn 12 years of age?

Tax Office response:

The Tax Office advised that the definition in the FBT : A guide for employers is correct.

The relevant definitions are set out in section 136(1) 'statutory food amount'. Although the word 'adult' and 'child' are not used specifically, an 'adult' is a person who had attained the age of 12 years before the beginning of the year of tax.

Where a person ('child') turns 12 years after the start of the year of tax, they are not treated as an 'adult' until the following year of tax.

The Tax Office advised that this issue will be corrected by way of an addendum to Taxation Determination TD 2006/23.

10 Work related travel (TA)

The legislation

As a general rule an employer is liable for FBT on any motor vehicle held by the employer and which is provided to an employee or their associate for private use.

However, an exception exists under sections 8(2) and 47(6) of the FBTAA. Section 8(2) provides that a car fringe benefit is an exempt benefit in respect of certain cars, being:

¦ a taxi, panel van or utility truck, designed to carry a load of less than 1 tonne; or

¦ any other road vehicle designed to carry a load of less than one tonne (other than a vehicle designed for the principal purpose of carrying passengers),

provided that there was no private use of the car during the year of tax and at a time when the benefit was provided other than:

¦ work-related travel of the employee: and

¦ other private use by the employee or an associate of the employee, being other use that was minor, infrequent and irregular.

'Work related travel' is defined in section 136(1) to be:

 

(a) travel by the employee between:

 

(i) the place of residence of the employee; and

(ii) the place of employment of the employee or any other place from which or at which the employee performs duties of his or her employment; or

 

(b) travel by the employee that is incidental to travel in the course of performing the duties of his or her employment.

The words 'place of residence' in relation to a person are also defined in section 136(1):

place of residence in relation to a person, means -

(a) a place at which the person resides; or

(b) a place at which the person has sleeping accommodation'

whether on a permanent or temporary basis, and whether or not on a shared basis.

The issue

It is now fairly common for taxpayers from regional centres or country towns to have full-time long term employment in a state capital city such as Melbourne or Sydney. Quite a few of these employees do not commute daily between their home and place of employment, but have a place of residence in each centre. Typically, that would involve the family living full-time in the 'family home' in the regional centre or country town (the first residence), and the employee living in the major city (the second residence) for perhaps five days, returning to the regional centre at weekends.

The situation also arises when an employee accepts employment in another location (this may be with the same or a new employer) with the intention that the family move to the new location after the end of the school year. In the meantime the employee sets up a new home at the new location and returns to the family home at regular intervals.

The city residence may be owned or rented, and may be a house or apartment. In some cases short term accommodation such as a serviced apartment may be used.

The question is if such an employee uses an 'exempt vehicle', for example a utility, to travel between the second residence and his/her place of work during the week, and then uses that utility to travel between the place of employment and the first residence at the weekend, and the first residence and the place of employment at the end of that period, whether that travel is still 'work related' for the purposes of section 8(2).

For this purpose, it is assumed that the vehicle is not driven between the first and second residences, but only between a residence and the place of employment. It is also assumed that other use of the vehicle is for work related purposes and is not otherwise used for private purposes.

Discussion

The definition of 'work-related travel' refers to travel by the employee between 'the place of residence of the employee' and the 'place of employment of the employee'.

There is no definition of 'residence' provided in the FBTAA and the term therefore takes its normal or common meaning. The Macquarie Dictionary defines residence to mean 'the place, especially the house in which one resides; dwelling place; dwelling.'

The word reside is defined as 'to dwell permanently, or for a considerable time; have one's abode for a time'.

Paragraph 12 of Miscellaneous Taxation Ruling MT 2030 states that "a place of residence of a person is thus the place where he or she resides or has some form of sleeping accommodation. The customary meaning of the word 'reside' is to dwell permanently or for a considerable time, or have one's abode for a time. In turn 'residence' means the place, especially the house, in which one resides; a dwelling place; or a dwelling". In paragraph 13 it is stated that the words 'residence' and 'abode' may be taken as synonymous.

The question as to whether a dwelling constitutes a residence was considered in Koitaki Para Rubber Estates Ltd v FC of T (1941) 64 CLR 241 at paragraph 249. Williams J said-

The place of residence of an individual is determined, not by the situation of some business he is carrying on or owns, but by reference to where he eats and sleeps and has his settled or usual abode.

While the above is argued on the basis of an abode (singular) there is no reason why it would not refer equally to more than one abode, and more particularly more than one 'usual abode'. In the example above it would be a case of the usual abode being one place for part of the week and the other the usual abode for the other part.

Given that a dwelling need only be a place which the person occupies and where they eat and sleep, Taxpayers Australia Inc is of the view that an employer could accept, in the circumstances outlined, than an employee has two places of residence for the purposes of 'work related travel'.

Tax Office response:

The Tax Office noted that the scenario is based upon the following clearly stated assumptions;

'… the vehicle is not driven between the first and second residences, but only between a residence and the place of employment. It is also assumed that other use of the vehicle is for work related purposes and is not otherwise used for private purposes.'

The question put forward is as follows;

'… if such an employee uses an 'exempt vehicle', for example a utility, to travel between the second residence and his/her place of work during the week, and then uses that utility to travel between the place of employment and the first residence at the weekend, and the first residence and the place of employment at the end of that period, whether that travel is still 'work related' for the purposes of section 8(2).'

The Tax Office noted that, as contained in the submission, 'place of residence' is defined in section 136(1) to mean, in relation to a person;

(a) a place which the person resides; or

(b) a place at which the person has sleeping accommodation;

whether on a permanent or temporary basis and whether or not on a shared basis.

In the scenario put forward, the 'family home' is a 'place of residence' (referred to here as the first residence) and the city residence (referred to here as the second residence) is also a 'place of residence' while the employee is residing at that location. This does not require a consideration as to whether one of those places of residence is the employee's 'usual place of residence'. That is a different concept.

Accordingly, based on the specific scenario and assumptions put forward, where an employee uses a 'utility' to travel between the second residence and his/her place of work during the week, and then uses that utility to travel between the place of employment and the first residence at the weekend, and the first residence and the place of employment at the end of that period, that travel will be 'work related travel' for the purposes of section 8(2).

11 Reimbursement of holiday accommodation at a major population centre provided to employees in remote areas (CPA Aust)

Many employers with operations in regional and remote areas of Australia find that to recruit and retain employees in these areas it is necessary to offer a range of incentives designed to compensate for some of the additional financial, social and other costs of residing in these locations.

Amongst other incentives it is common for the employer to contribute to the cost of an annual holiday for the employee and family to the nearest coastal city in Australia. In addition to paying for the cost of transport to the holiday destination, the employer may also reimburse some or all of the cost of accommodation at the holiday destination.

Issue

1. Assuming that all the other requirements of section 143(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) are satisfied could the reimbursement of the cost of accommodation at the holiday destination 'shall be taken to be in respect of remote area holiday transport' for the purposes of that section, and thus qualify for a reduction of taxable value under section 60A FBTAA?

Does the Tax Office agree with this interpretation?

2. Would the answer be the same if instead of reimbursing the actual cost of holiday accommodation (and in addition to providing airfares), the employer provided a 'remote area holiday allowance' to the employee or the employee's spouse or child of say $1,000, intended to help cover the cost of the holiday generally including any meals and accommodation on route to the holiday destination? In particular, could sections 143(1)(c) or 143(1)(d)(ii) FBTAA apply?

3. We ask the Tax Office to consider whether, in the instances, above, the provision of the fringe benefit would be an 'excluded fringe benefit' for the purposes of section 5E(3)(j) FBTAA, that is, it 'relates to occasional travel to a major population centre in Australia provided to employees and family members resident in a location that is not in or adjacent to an eligible urban area'.

Tax Office response:

The Tax Office referred to the explanatory memorandum(EM) to the Fringe Benefits Tax Assessment Bill 1986, where at clause 61 - Reduction of taxable value of certain fringe benefits in respect of remote area holiday transport, it is stated 'Clause 61 applies to reduce by 50% the taxable value of certain benefits relating to remote area holiday transport. 'Remote area holiday transport' is defined for these purposes in clause 143 and reference should be made to the notes on that clause. Broadly, however, it refers to arrangements whereby employees working in remote areas are, under the terms of an award, reimbursed for the costs of, or provided with, transport in connection with extended recreation leave……'

The Tax Office also referred to the EM to the Taxation Laws Amendment (Fringe Benefits and Substantiation) Bill 1987, where amendments were made to the original section 143 of the FBTAA.

It is stated there that 'The kinds of benefits eligible for the concession are also being extended to include a property fringe benefit in respect of meals en route and a residual fringe benefit in respect of accommodation en route.'

Section 143 specifies the circumstances in which a fringe benefit will be treated as being in respect of remote area holiday transport for the purpose of applying the 50% discount provided by sections 60A and 61 to the taxable value of the remote area transport fringe benefit.

In response to the first issue, the Tax Office did not agree with the CPA Australia interpretation. The cost of accommodation at a holiday destination does not qualify for a reduction in taxable value. The reduction only applies to the transport, and meals or accommodation en route in relation to a holiday for an employee and/or family.

Paragraph 143(c) covers expense payment fringe benefits where the recipient's expenditure is in respect of the provision of transport, or meals or accommodation in connection with transport. Paragraph 143(ca) covers property benefits where the recipients benefit consists of meals in connection with transport. Paragraph 143(d) covers residual fringe benefits where the recipients benefit consists of the provision of transport or accommodation in connection with transport.

The intent and purpose of the application of section 143 and the reduction provided in section 60A is that relevant remote area transport costs, including meals or accommodation provided en route in relation to the transport are included for concessional treatment. This view is supported by the EM and the words of the FBTAA in sections 143 and 60A.

In response to the second issue, which is a more factual problem, the provisions of section 143 would need to be considered on the basis of actual facts. However, as an 'allowance' is stated for the purposes of this issue as having been paid, paragraph 143(c) could not apply as it is not an expense payment fringe benefit.

Paragraph 143(d)(ii) treats the receipt of an allowance in respect of the cost of obtaining transport, or for obtaining meals or accommodation in connection with transport as a residual fringe benefit. As the allowance in the submission is stated as being $1,000 which is intended to cover the cost of the holiday generally including any meals and accommodation en route, the allowance would not satisfy paragraph 143(d)(ii). It was noted that in such a factual situation however, it is suggested that an application for private ruling may be appropriate.

In response to the third issue, the Tax Office stated that the fringe benefit mentioned in the above instances would also not be an excluded benefit under paragraph 5E(3)(j) as the benefit relates to holiday accommodation and not occasional travel to a major population centre.

12 What is a 'major population centre' for the purposes of determining whether a benefit is an 'excluded fringe benefit' under section 5E(3)(j) FBTAA (CPA Aust)

Many employers with operations in regional and remote areas of Australia provide employees and family members residing in those areas with transport to other towns or cities, for a range of reasons. To the extent that FBT applies to the benefit, it is necessary to determine whether it is a 'reportable fringe benefit'.

A fringe benefit 'that relates to occasional travel to a major population centre in Australia provided to employees and family members resident in a location that is not in or adjacent to an eligible urban area' is an 'excluded fringe benefit' pursuant to section 5E(3)(j) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA), and thus not reportable.

A key issue in applying section 5E(3)(j) is determining whether the town or city to which the employee or family member is travelling is a 'major population centre'. This term is not defined in the FBTAA or elsewhere, and there does not appear to be any directly relevant guidance available in this regard, nor is it a term used by the Australian Bureau of Statistics or in relation to defined local government area.

Particular considerations for employers with employees in remote areas include:

¦ Obtaining certainty in this regard is of particular importance, due to the industrial relations implications of an amount being determined as being reportable. (Bearing in mind the issue is not whether FBT applies, but simply whether it is a reportable fringe benefit).

¦ The concept of a 'major population centre' is a relative one - for people based in an isolated depot, the nearest town of a few thousand people would be seen as a 'major population centre'.

¦ Population demographics change over time. The size of a town 25 years ago as suggested by the 1981 Census (relevant to the test of whether a location is 'in or adjacent to an Eligible Urban Area') may no longer be a good indicator of its current size or significance as a population centre.

¦ Employees provided with remote area holiday travel incentives (subject to concessional FBT treatment) will invariably fly through a large city but their ultimate destination may have a smaller population. It is understood that the policy intent of section 5E(3)(j) is for the taxable value of the remote area holiday transport to be exempt. It would be unfortunate if an employee flying from a remote location in Queensland to Mackay were regarded as receiving an 'excluded fringe benefit', but not if they travelled on to Hamilton Island or some other small seaside town.

As acknowledged by the Tax Office in the minutes of the FBT Subcommittee meeting held on 16 September 1999 the concession should be interpreted widely. The minutes show:

The exclusions were discussed at the recent FBT Cell meeting and it was decided there would be a tax determination prepared on the 'cost of occasional travel to a major Australian population centre by employees and their families living in a remote area'. The determination will be prepared to define the terms 'occasional travel' and 'major Australian population centre'. These terms are not defined in the FBTAA. The interpretation of the terms will be fairly wide, as the exclusion is not meant to be restrictive.

We suggest that it should be accepted as applying to any location recognised as being a township (as distinct from simply a cluster of residential buildings).

In particular, it is suggested that the listing of towns and cities in Practice Statement PS 2000/6 - Fringe Benefits Tax Exemption on Remote Area Housing could be used as a guide, in that these locations have been recognised as a township. In fact, the minutes of the FBT sub-committee meeting held on 24 February 2000 indicate that the localities in PS 2000/6 each have a population of over 1000 as at the time of the 1996 Census. Such localities are sizeable towns. (We note that this is not mentioned in the practice statement itself.) As this listing is not comprehensive, current Census population data could be used to determine that other towns are of similar size and accordingly should also be regarded as a 'major population centre'.

Issue

Can the Tax Office:

(i) provide some guidance as regards how an employer might determine whether a town or city is a 'major population centre', and

(ii) confirm whether it would accept the approach suggested above, namely that all towns listed in PS 2000/06, and towns of a similar size based on recent Census population data, will be accepted as a 'major population centre'.

Meeting discussion:

The Tax Office had noted that the statement in September 1999, that a tax determination would be prepared to define the terms 'occasional travel' and 'major population centre' did not proceed due to other priorities at that time. It was happy to reconsider the issue through the forum at this time.

In general discussion, there was agreement that a 'major population centre' would be indicative of a centre which was more than towns of, for example, 1,000 people. The term 'major population centre' would obviously include all capital cities.

The Tax Office indicated other centres could include places such as Wagga, Wollongong, Dubbo, Townsville, Gold Coast, Geelong, Ballarat, Devonport and Launceston. This was agreed by members as being a reasonable position to adopt.

Tax Office response:

The Tax Office acknowledged that at the September 1999 meeting of the forum it was stated that a taxation determination would be prepared to define the terms 'occasional travel' and 'major population centre', the exclusion from reporting having been recently introduced at that time. However, following that meeting, a decision was taken not proceed with the determination given other significant priorities at the time.

Paragraph 5E(3)(J) of the FBTAA states that an excluded fringe benefit is a fringe benefit:

'that relates to occasional travel to a major population centre in Australia provided to employees and family members resident in a location that is not in or adjacent to an eligible urban area; or'

Although the term 'major population centre' is not a defined term in the FBTAA, it will be obvious in many cases that a centre is a major population centre. Further, a major population centre is not restricted to capital cities and can include regional and provisional centres.

The CPA Australia submission states that the term is not defined in the FBTAA or elsewhere, and there does not appear to be any directly relevant guidance available in this regard, nor is it a term used by the Australian Bureau of Statistics or in relation to defined local government area.

The Tax Office acknowledged that the submission raises some valid considerations. However, the contention that the term 'major population centre' is a relative one and that for people in an isolated depot the nearest town of a few thousand people would be seen as a 'major population centre' was not agreed to. Nor is the suggestion that the term should be accepted as applying to any location recognised as a township (as distinct from simply a cluster of buildings). Also, an employer would need to be mindful of the fact that the exclusion only applies to occasional travel to a major population centre and not, for example, a 'holiday destination' that is not a major population centre, such as alluded to in the submission.

In relation to the first issue in which the Tax Office advice was sought, The Tax Office suggested that guidance as to whether a location is a 'major population centre' can be found in the Australian Bureau of Statistics, Year Book Australia, 2002. The listing there of major population centres is indicative of, and supports the position discussed, that major population centres will include capital cities and can include major regional and provisional centres only.

In relation to the second issue, the Tax Office stated that it was not appropriate to accept all towns listed in PS 2000/6, and towns of similar size based on recent Census population data, as being 'major population centres.

The following has been extracted from the Australian Bureau of Statistics, 1301.0 - Year Book Australia, 2002:

5.17 Estimated resident population in major population centres - As at 30 June(a)

 

1995

2000

1995-2000(b)

Major population centre

'000

'000

%

Capital City Statistical Division

 

 

 

Sydney

3,821.2

4,085.6

1.3

Melbourne

3,243.7

3,466.0

1.3

Brisbane

1,486.7

1,626.9

1.8

Adelaide

1,074.7

1,096.1

0.4

Perth

1,271.7

1,381.1

1.7

Hobart

195.0

194.2

-0.1

Darwin

80.4

90.0

2.3

Canberra

304.5

310.5

0.4

Other

 

 

 

Newcastle(c)

458.2

483.3

1.1

Gold Coast-Tweed(c)

340.7

404.3

3.5

Canberra-Queanbeyan(c)

341.2

350.1

0.5

Wollongong(c)

252.8

264.4

0.9

Sunshine Coast(c)

150.5

178.0

3.4

Geelong(c)

151.6

157.9

0.8

Townsville(c)

121.1

130.0

1.4

Cairns(c)

102.9

115.6

2.4

Launceston(c)

98.6

98.3

0.0

Albury-Wodonga(c)

92.0

94.8

0.6

Toowoomba City(d)

85.9

87.6

0.4

Ballarat(c)

78.5

82.0

0.9

Burnie-Devonport(c)

79.1

78.1

-0.3

Bendigo(c)

73.8

77.2

0.9

Bathurst-Orange(c)

71.2

74.2

0.8

La Trobe Valley(b)

76.3

73.4

-0.8

Mackay(c)

59.4

66.2

2.2

Rockhampton(c)

64.3

63.9

-0.1

Hastings(e)

56.1

62.9

2.3

Coffs Harbour(e)

56.2

60.5

1.5

Bundaberg(c)

53.0

56.3

1.2

Wagga(e)

55.9

55.7

-0.1

Mildura(c)

40.6

44.1

1.7

Greater Taree(e)

43.5

44.1

0.3

Shepparton(c)

41.1

43.3

1.0

Lismore(e)

43.6

43.0

-0.3

Gladstone(c)

36.5

39.6

1.6

Dubbo(e)

36.1

37.8

0.9

Tamworth(e)

35.7

35.7

0.0

Kalgoorlie/Boulder(e)

28.8

32.0

2.2

(a) Based on 2000 Statistical Local Area boundaries.

(b) Average annual growth rate.

(c) Statistical District

(d) Statistical Subdivision.

(e) Statistical Local Area

Source: Australian Demographic Statistics (3101.0).

13 Rental subsidy provided to employees in remote areas where lease is not in the employee's name (CPA Aust)

Facts

An employer provides housing assistance to its employees in regional and remote areas in the form of a rental subsidy, in circumstances that satisfy sections 60(2A) and 142(1A) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) and thus qualify for a reduction in the taxable value.

On occasions the lease of the accommodation in which the employee resides may not be in the employee's name, for example:

¦ The lease may be in the joint names of the employee and their spouse;

¦ The lease may be in the spouse's name; or

¦ The employee may reside in a 'share house' with one or more other individuals, who are not related to the employee and who may or may not be employed by the same employer. The lease may be in joint names with other 'flat mates' or the employee's name may not be on the lease at all.

Issue

Where the lease for the unit of accommodation in which the employee resides is not in, or not solely in, the employee's name we request the Tax Office confirm:

(i)

That this of itself does not alter the application of section 60(2A) FBTAA.

It is noted that section 142(1A) FBTAA, in relation to remote area housing rent, refers to rent or other consideration payable in respect of the subsistence of a lease or licence in respect of a unit of accommodation which the employee occupied as their usual place of residence, without any specific requirement that the lease or licence be held by the employee.

(ii)

If the rent is paid by someone other than the employee (for example by a spouse or flat mate), is there any criteria that the Tax Office regards as necessary for the section 60(2A) concession to apply.

(iii)

In particular, will the concession apply if the employer deposits an amount referable to the employee's 'share' of the rent into the bank account of the party who paid the rent? Or is it necessary that the employee pays an amount to the person who paid the rent and the employer then reimburses the employee for some or all of this amount?

It is suggested that the former will suffice and come within the meaning of an expense payment fringe benefit (section 20(a) FBTAA), even where there is no formally documented agreement between the employee and their spouse/flatmate requiring the employee to contribute to some or all the cost of the rent.

Tax Office response:

The taxable value of an expense payment fringe benefit can be subject to a 50% reduction where the recipients expenditure is in respect of remote area housing rent connected with a unit of accommodation; section 60(2A). The recipient must be provided an expense payment fringe benefit and the recipient's expenditure is in respect of remote area housing rent.

In relation to the matters raised, it is assumed that the 'common conditions' in section 142(2E) are satisfied. Section 142(1A) sets out what is remote area rent connected with a unit of accommodation. That includes, broadly, that rent or other consideration payable is in respect of the subsistence of a lease or licence in respect of the unit of accommodation where that is the employee occupied or used that unit of accommodation as his or her usual place of residence.

Where a lease for the unit of accommodation, which otherwise satisfies the required conditions, in which an employee resides is not solely in the employees name, an employer may still be able to apply the reduction under section 60(2A). This would be a question of fact as to whether the conditions of the relevant provisions are satisfied including whether the employee incurred expenditure for the purposes of an expense payment benefit. Where, for example, a lease is in joint names with a spouse or other persons, the intent and application of the provisions would be that the reduction is available as it would be concluded that the employee has 'incurred expenditure' under that lease.

Where the rent is paid by someone other than the employee, for example by a spouse or flat mate, it is a question of fact as to whether the employee has incurred any expenditure that would satisfy the requirements of section 60(2A) and section 142(1A). The submission discusses an example of an employer depositing an amount into the bank account of the party who paid the rent, not being the employee.

The Tax Office suggested that employers should have regard for the requirements of the relevant provisions and in a situation where it is not clear that the employee incurred such expenditure due to 'out of the ordinary' arrangements, such as 'no formally documented agreement between the employee and their spouse/flatmate requiring the employee to contribute to some or all of the cost of the rent', that an employer should seek advice from the Tax Office by way of application for private ruling.

14 Accommodation for accompanying spouse (CPA Aust)

Where an employee travels on business and has a spouse accompany him/her, is there any FBT on accommodation for the spouse in the following circumstances?

1. The cost of accommodation for the employee only would be $100, but the cost including the spouse as well is $120.

2. The cost of accommodation for the employee only would be $100 and there is no additional cost for the accompanying spouse.

CPA Australia view

The view of CPA Australia is that a taxable value of $20 arises in scenario 1 and no taxable value arises in scenario 2.

If the benefit(s) were provided by way of expense payment to the employee, the amount that would otherwise be deductible to the employee would be $100 in both cases, resulting in the taxable values outlined above.

If the benefit(s) were provided by way of residual benefits (for example, through payment using a corporate credit card), the cost of the benefit provided to the employee is $100, which is otherwise deductible. The cost of the benefit provided to the spouse is $20 in the first scenario and nil in the second scenario. Therefore, in the second scenario it is necessary to look at the notional value of the benefit. This would be nil, since no reasonable person would be willing to pay an amount for such accommodation when there is no additional charge for it.

Meeting discussion:

There was general agreement that this scenario can arise in practice, however today it is common practice in the accommodation industry to have a standard rate for accommodation that allows for two persons to share the accommodation and there is no difference in the rate whether it is one or two persons who use the accommodation.

The agenda item concerns stays at hotels on short interstate trips.

CPA Australia also raised the possibility of the application of section 138(3), as set out in ATO Interpretative Decision ATO ID 2005/219, which applied the decision of Ryan J in National Australia Bank v Federal Commissioner of Taxation (NAB Case).

Tax Office response

The Tax Office noted that the application of the otherwise deductible rule will ultimately depend on the deductibility outcomes that hypothetically would be available to the employee if he/she was to claim an income tax deduction.

Also, where a spouse accompanies an employee, for example interstate or overseas, section 26-30 of the ITAA 1997 may apply to deny any deduction to an employee. ATO Interpretative Decision ATO ID 2001/331 refers to section 26-30 and states that deductions are not allowed for expenses attributable to the travel of a relative where the relative simply accompanies the employee and does not perform substantial duties as an employee and it is reasonable to conclude that they will still accompany the employee even if they did not have a personal relationship with that person.

In response to the first circumstance put forward, that is an additional cost for the spouse over and above the cost that the employee would otherwise incur, it was agreed that the $20 would generally be a taxable fringe benefit amount for the reasons expressed in the CPA Australia submission.

In response to the second circumstance, where there is no additional cost for the spouse as the room rate covers both single and dual occupancy, it was agreed that there would generally not be a taxable fringe benefit in relation to the spouse for the reasons expressed in the CPA Australia submission.

Whether section 138(3) can be relied upon will be a question of fact as to whether there has been a joint benefit, as that term was considered in the NABcase, in any particular situation.

15 Travel insurance (CPA Aust)

Where an employee takes out a travel insurance policy in his/her own name for a period when he/she will be travelling on business, and the employer reimburses the expense, is the benefit treated as otherwise deductible, or is it of a private nature and therefore subject to FBT ?

The type of events normally covered by such travel insurance would include, loss of baggage, fare costs for cancelled flights, certain medical costs or compensation for personal injury or death and so on.

CPA Australia view

The cost incurred by the employee would seem to meet the first test of deductibility, being incurred in respect of producing assessable income. The CPA view is then that the expenditure is not of a private or domestic nature. This is because if it were not for the requirement to travel on business, the insurance would not be required. Therefore, even though something such as medical costs would normally be of a private or domestic nature, where the medical attention is required solely because the employee is travelling on business, the CPA Australia view is that insurance to cover this event is not of a private or domestic nature. Hence the insurance cost should be treated as otherwise deductible, with no FBT impost.

Tax Office response:

The Tax Office advised that the cost of a travel insurance policy taken out by an employee in his/her name when he/she will be travelling on business is expenditure that is private in nature.

The Tax Office view on whether a taxpayer is entitled to a deduction for travel insurance under section 8-1 of the ITAA 1997 is contained in ATO Interpretative decision ATO ID 2001/615. The decision in ATO ID 2001/615 is based upon a decision of the Administrative Appeals Tribunal (AAT).

In Case T78 86 ATC 1094 the AAT allowed a deduction to a barrister for airfares to attend a work related course. However, the Tribunal held that his claim for travel insurance was expenditure of a private and domestic nature. Expenses such as insurance policies invariably cover items that are generally private in nature, for example illness, loss of baggage, and theft or damage to belongings.

Accordingly, where an employer reimburses an employee for the cost incurred in obtaining travel insurance, the employer could not rely on the 'otherwise deductible rule' to reduce the taxable value of the expense payment fringe benefit.

16 Benefit provided in relation to a deceased employee (NIA)

An employer paid for the cost of the funeral of a long serving employee.

Is there any FBT applicable in this situation?

View

It is the NIA view that there is no FBT liability.

There would be a fringe benefit if the benefit is provided to an employee or an associate of an employee. The benefit of paying for the funeral costs would usually be seen as being provided to the deceased employee's estate or their family. An employee's family or a trust under which the family can benefit would usually be included in the definition of the employee's associates. However, we consider that the deceased employee does not fit the definition of an 'employee' at the time the benefit is provided.

Although the definition of 'employee' includes 'former employee', the definition of former employee refers to a 'person who has been a current employee'. It is our opinion that once a person dies they cease to be a 'person' and therefore cannot fit the definition of 'former employee.

Therefore the deceased estate or family members would not be associates of an employee and therefore the benefit would not be fringe benefit.

Tax Office response:

The Tax Office advised that Taxation Ruling TR 1999/10A - Addendum - Income tax and fringe benefits tax: Members of Parliament - allowances, reimbursements, donations and gifts, benefits, deductions and recoupments sets out the treatment of benefits provided to the spouse of a deceased employee. The addendum amended the ruling to correct the ruling in regard to the treatment of benefits provided to the spouse of a deceased employee. Further, the addendum states that the fringe benefits tax system does not apply to benefits provided to relatives of deceased employees.

However, it was acknowledged that this position may be difficult to locate and relate back to FBT generally. The issue has also been raised a number of times through both internal and external enquiries.

The Tax Office also referred to comments made by, as a matter of record for the minutes of this meeting, the then Treasurer in the Historic House Hansard Database of 27 May 1987. There at page 3458 Question No 4745 the following is recorded:

(Question No. 4745)

Mr Hodgman asked the Treasurer, upon notice, on 9 October 1986:

(1) Do the provisions of the fringe benefits tax legislation require an employer to pay tax on (a) employer contributions to the cost of funerals of employees, including employees killed on the job (b) employer payments for incidental funeral expenses, including hire of hearse and mourning cars, insertion of death notices on behalf of management and staff and the provision of wreaths and (c) employer provision of 'free funerals' to employees of undertakers and funeral directors.

(2) Will payments under State Workers' compensation legislation for funerals of deceased employees attract fringe benefits tax.

(3) Is it a fact that the fringe benefits tax will apply to certain employer expenses incurred in respect of deceased employees.

Mr Keating -The answer to the honourable member's question is as follows:

(1), (2) and (3). No. The fringe benefits tax legislation has no application to benefits provided in respect of a deceased employee.

The Tax Office view remains consistent with the answer above, that is FBT does not apply to benefits provided in respect of a deceased employee and the provision of a funeral for a deceased employee will not give rise to a fringe benefit.

The Tax Office indicated that it will consider publishing an ATO interpretative decision to capture the above and set out the reasons why the payment of an employee's funeral expenses are not made in respect of the employment of an employee.

17 Review of stakeholder forums

The Tax Office advised members that a review of stakeholder forums is being conducted. The key point of the review is that the Commissioner wants to build the fundamentals of collaboration, consultation and co-design into all our interactions with the community and ensure that participation in our forums has value for both the Tax Office and the representatives. As an important stakeholder, forum members will be given the opportunity to provide input into the review.

A draft corporate management practice statement (CMPS) on committee management has been developed to build a structure around the governance of forums. A copy of the draft CMPS was provided to all present. The Tax Office advised that there has been extensive consultation with the NTLG (the peak consultative forum for tax professionals) and various other forums. Feedback on the draft CMPS was to be forwarded to the secretary of the forum before 31 May 2006 .

18 Close of meeting

The next meeting will be held on Thursday, 17 August 2006 , at the TIA, Level 2, 95 Pitt Street, Sydney.