NTLG FBT Sub-committee Minutes 21 September 1995
Venue: ATO National Office, 2 Constitution Ave, Canberra
Attendees:
Amarjit Verick |
ATO (Chair) |
Evan Lancaster |
ATA |
Evan Bitmead |
ATO |
Lynette McPhee |
NIA |
Annamaria Carey |
TIA |
Geoff Miller |
ATO |
Geoff Cowen |
LCA |
Andrew Purdon |
ASCPA |
Michael Croker |
ICAA |
Veronica Rempe |
ATO |
Michael Evans |
ICAA |
Garry Sebo |
TIA |
Apologies: |
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|
Peter Achterstraat |
ATO |
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Peter McDonald |
ATA |
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Ray Conwell |
LCA |
(Geoff Cowen substituting for this meeting) |
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Margaret Gibson |
ICAA |
(Michael Croker substituting for this meeting) |
Secretariat: Greg Wild ATO
[H1]Disclaimer:
Please note:NTLG FBT subcommittee minutes and related papers are not binding on the ATO or any of the other bodies referred to in these papers. While every effort is made to accurately record the views expressed at the meeting, 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. |
1 Opening of meeting
The chairperson, Amarjit Verick, welcomed members to the meeting. He reminded members of the need to work together with a common goal of developing the best tax system possible. To promote robust and open discussion, he asked members to examine potential agenda items to ensure issues were clearly identified and of an appropriate level to warrant subcommittee consideration.
It was agreed that the secretariat should critically examine items submitted. If it is considered there is a more suitable way to respond this will be discussed with the body submitting the item and appropriate arrangements made. Like items submitted will be linked and also discussed, with the view of bringing them together as one issue. Case studies were recognised as a useful and practical way to present items, provided the total submission clearly and fully identified the issue to be considered.
2 FBT cell report
Since the last NTLG sub-committee meeting members of the FBT specialist cell have held 4 telephone conferences and 2 meetings. They will meet again from 27 - 29 September.
Some of the more important issues being considered by the cell include:
¦ The Granby decision and its application to FBT
¦ Child care centres - business premises
¦ FBT lodgement policy entertainment
¦ Registered clubs
Provision of food and drink to club employees
Tax exempt body entertainment
Principles of mutuality
¦ The "otherwise deductible rule" and 100% depreciation
¦ Section 155 issues
¦ Council rates - in house benefits
¦ PBIs - hospitals
¦ Salary sacrifice
¦ Technical clearance of the new FBT guide for employers booklets.
Along with the above list the cell has finalised:
¦ Draft ruling on entertainment
¦ Determinations on practice companies and incentive awards
¦ Draft determinations on frequent flyer and fly buys and on government bodies/associations.
Cell members have also had input into or provided technical clearance for:
¦ Ruling on deductibility of FBT
¦ Determinations on issues relating to fly-in-fly-out exemptions and insurance industry issues.
3 Issue of draft and final taxation determinations and rulings - since the meeting of the FBT subcommittee on 15 June 1995
Taxation determinations:
TD 95/34 issued 12/7/95 previously TD 94/D78
Fringe benefits tax: can practice companies to which Taxation Ruling IT 2503 applies, provide fringe benefits to employees?
TD 95/35 issued 19/7/95 previously TD 94/D116
Fringe benefits tax: if an employee (or an associate of an employee) receives an incentive award from an industry product promotion, will the award always be a fringe benefit provided under an 'arrangement' between the employee and the provider?
TD 95/38 issued 2/8/95 previously TD 94/D66
Fringe benefits tax: if a low or interest free loan is provided by an insurance company to an employee (or an associate of an employee) of an insurance agency, can the taxable value of the loan fringe benefit be reduced by the premiums paid on a life insurance policy held by the agency employee as a condition of granting the loan?
Draft taxation determinations
TD 95/D5 issued 15/6/95
Income tax: under the fly buys program and similar consumer award programs which apply primarily for private or domestic purchases, is any amount of the award assessable where some of the purchases are employer-paid transactions?
TD 95/D7 issued 6/7/95
Fringe benefits tax: can a government body be an association for the purposes of section 65J of the FBTAA?
TD 95/D8 issued 12/7/95
Fringe benefits tax: can administration entities or combined administration service entities to which Taxation Ruling IT 2494 applies, provide fringe benefits to employees who are also part of an associated partnership?
TD 95/D14 issued 6/9/95
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?
Taxation rulings
TR 95/24 issued 29/6/95 previously TR 95/D8
Income tax: when is fringe benefits tax (including instalments of fringe benefits tax) deductible under subsection 51(1) of the ITAA?
Draft taxation rulings
TR 95/D13 issued 29/6/95
Income tax and fringe benefits tax: entertainment by way of food and drink.
4 News from the ATO
The ATO provided a brief report on the progress of the Taxation Laws Amendment (FBT Cost of Compliance) Bill 1995. The Bill was passed by the House of Representatives on 20 September 1995. There were a number of minor, mainly technical amendments. Of particular note was the amendment to the proposed definition of "business premises" (agenda items 15 and 21 refer). The Senate Economics Legislation Committee will commence hearings on the Bill on 25 September 1995 and is to report by 16 October 1995.
5 Items carried over from previous meetings
5.1 Child care - meaning of "business premises" (240394/8)
A taxation ruling is currently being prepared dealing with the meaning of "business premises" for child care purposes. The representatives of the professional bodies were particularly concerned at the delay in finalising this matter, that private ruling requests were being held up pending issue of the ruling, the date of effect of the ruling and the possible need to reconstruct arrangements currently in place.
5.2 Social club costs (160694/5)- salary cost of an employee to run a social club - employer contributions to social club
As most large employers have a full or part-time person to run a social club and/or have made contributions to the social club, it was agreed that a taxation determination should now be prepared.
5.3 Car parking - work related vehicles parked next to substations (160694/8)
A comprehensive ruling on car parking is being prepared by the Dandenong office. This issue will be referred to Dandenong office for inclusion in the ruling.
5.4 Public benevolent institutions (230395/4.2)-review of PBI status of public health organisations following the decision in Metropolitan Fire Brigades v FC of T
Review is continuing. Has become much larger than first thought, particularly in view of differences between the States Also the formation of local regional health authorities has further complicated the issue.
5.5 FBT lodgment program (230395/80, consolidated group FBT return (230395/10), FBT year end - 30 June or 31 March (230395/14.3), substituted accounting period for FBT (150695/5.1)
A project team has been formed in the Newcastle office to address each of the above items. The project team intends to consult extensively with the profession and with clients.
5.6 FBT tax agent visits (150695/4.1)
The ATO reported that the aim of the FBT tax agent visits is to discover the reasons for the gap between the lodgment of FBT returns to income tax returns where the income tax return includes claims for salary and wages and motor vehicle expenses. By talking to tax agents where this gap exists the ATO will be able to ascertain these reasons. Strategies can then be developed for addressing problems (if any) revealed by the project. This could be an appropriate mix of:
1. client education and assistance
2. publicity
3. law clarification and, if necessary
4. appropriate enforcement activity and/or
5. recommend law change.
The representatives of the professional bodies reiterated their concern that a sampling technique that focused on tax agents and which did not take into account industry factors was not considered appropriate.
As agreed at the subcommittee meeting of 15 June 1995 the ATO will continue to provide feedback to future meetings on the tax agent visits.
5.7 Booklet - updated employers guide (150695/4.2)
The ATO advised that the text is being progressively updated to incorporate the detail of the changes proposed by the 'cost of compliance' legislation. An interim product will be available to assist with the preparation of the 1996 annual returns. With the legislation still not finalised the ATO is working towards a product which will show the proposed changes highlighted. Depending on when the legislation is passed, the ATO may or may not have time before the end of the FBT year to edit the text to show only the actual situation.
Michael Croker ( ICAA ) offered to assist review the proposed booklet.
The representatives of the professional bodies used the booklet as an example of their concern with a 1 April 1995 date of effect of the Cost of Compliance Bill with the legislation still before Parliament.
5.8 FBT anomalies in superannuation (150695/6)- exempt visitor at the end of the year of income
Further examples of anomalies that arise in this area were provided to the ATO and forwarded to its superannuation area. The examples were:
¦ Where an employee ceases employment with an employer prior to 30 June, the employer is required to ascertain the employee's circumstances as at 30 June, irrespective of whether the employment relationship has been severed.
¦ Where the employer is required to lodge an income tax return or FBT return prior to 30 June, the employer is required to forecast the employee's circumstances as at 30 June.
¦ Where an employee is present in Australia for less than four years duration but more than four years after the date the earliest temporary entry permit was granted then the employee will not be considered to be an exempt visitor. Further, where an employee is granted extensions to their temporary entry permit which expire more than 4 years after the date the earliest temporary entry permit was granted then the employee will not be considered to be an exempt visitor for the whole period of the extended temporary entry permit as well as the period of the initial permit which occurs in the same income year as the extended permit. We are also aware that there are presently circumstances where the Immigration Department will grant a person a temporary entry permit for a period in excess of four years. Where this occurs, the person will fail the exempt visitor test for the full term of the person's stay in Australia.
It was not possible to obtain a reply by the meeting date. The representatives of the professional bodies flagged this as a major issue and were particularly concerned with the delay. They asked that the response be circulated as soon as it was obtained.
5.9 FBT and hire cars (150695/9)
This issue was raised by the ASCPA at the last subcommittee meeting and relates to the application of subsection 7(7) of the FBTAA. This subsection excludes cars hired on short term basis from being valued as car fringe benefits unless there is substantial continuity in the hiring of the car. If there is not substantial continuity of the hiring, the car must be valued as residual benefits.
Employees who are entitled to the use of a car as part of their salary package are sometimes provided with the use of a hire car while waiting for the delivery of the new car. The hire car may be provided for periods of two or three months at a time. The ASCPA asked what length of time constitutes substantial continuity in hiring a car.
The ATO agreed that where the hire period is for 12 week or more, it will constitute a car fringe benefit. Less than 3 months it is to be treated as a residual fringe benefit.
It was agreed at the last meeting that the issue in question had a number of different facets and was more general than the question originally raised. The ASCPA agreed to submit a further questions setting out additional fact situations for discussion at the September meeting.
The ASCPA submitted the following questions for consideration:
Will a car fringe benefit arise under any of the following circumstances?
1. An employee is awaiting delivery of a car which will be for that employee's exclusive use and a hire car is provided pending delivery of that vehicle for:
(a) 3 weeks
(b) 6 weeks
(c) 12 weeks
2. An employee's vehicle is in for extensive mechanical or panel repairs and the employee is provided with the exclusive use of a hire car until their own vehicle is repaired.
The hire vehicle is used for
(a) 3 week
(b) 6 weeks
(c) 12 weeks
3. An employee lives in one state (say Adelaide), but is required to work 3-4 days per week in another state (say Sydney) on a regular basis. The employee's position is stated as being in Sydney, accordingly we do not believe it could not be said the employee is travelling when working in Sydney. The employee is entitled to a company car to be made available for private purposes, however, by agreement with the employer, the employee chooses to use a hire vehicle similar to the company car he would otherwise be entitled. Under this arrangement the employee uses a hire vehicle in Sydney, leaves it at the airport and picks up a similar vehicle in Sydney, etc. Note that it is most likely a different vehicle each time
The ATO advised that in accordance with subsection 7(7) of the FBTAA, a car let on hire to the provider on a weekly or other short-term basis cannot be valued as a car fringe benefit. To answer the ASCPA 's questions:
1. An employee is waiting for delivery of a car which will be for the employee's exclusive use and a hire car is provided pending the delivery of that vehicle for 3, 6 or 12 weeks.
Answer: Anything less than 12 weeks is considered to be short term hire .
2. An employee's vehicle is in for extensive mechanical or panel repairs and the employee is provided with the exclusive use of a hire vehicle until their own vehicle is repaired.
Answer:Anything less than 12 weeks is considered to be short term hire .
3. An employee lives in one state (SA) and is required to work 3-4 days per week in another state (NSW) on a regular basis. The employee's position is stated as being in NSW so it could not be said that the employee is travelling when working there. By agreement with his employer he is provided with a hire car instead of a company car, meaning that he has a different car in each state for varying periods of time.
Answer: Not a car benefit as there is no substantial continuity.
5.10 Penalty for failure to furnish return (150695/11)
The previously advised review of penalty policy is continuing. The intention is to be consistent as much as possible (given the differences in the legislation and administration requirements) with income tax.
5.11 Granby's case (150695/12)
Draft Taxation Determination TD 95/D14 issued on 6 September 1995. (See also agenda items 19 and 20.)
5.12 Cost of compliance - declaration requirements (150695/13)
The ICAA advised a paper will only be prepared if considered necessary based on final declaration requirements in the Cost of Compliance Bill currently before Parliament.
5.13 NTLG action item
The meeting noted that it was agreed at the 6 June 1995 meeting of the National Tax Liaison Group (NTLG) that the NTLG would be provided with details of action items from NTLG subcommittees.
6 Employee declaration forms (ATA).
The Australian Taxpayers Association has raised the issue of the difficulty many employers have in getting declaration forms properly completed. In many cases, employees are not familiar with taxation law and may not know the relevant deductible percentage that relates to the expense. Examples given were trade school fees for apprentices, fees for employees completing self-education degree courses. It is assumed that these expenses would have been 100% deductible if incurred by the employee.
The ATA asks if the ATO will accept that the employer in appropriate circumstances complete the percentage part of the declaration form by pre-printing 100% on the form. The declaration would then be signed by the employee.
The ATA also asks, if the ATO accepts the above proposal, would the employer be required to seek ATO approval to use the procedure?
The ATO advised that FBT declarations form a fundamental part of the reduction in taxable value of fringe benefits allowed under the "otherwise deductible rule". When the legislation was drafted, declarations were considered to be a simple and concessional way of substantiating the percentage of business use of a benefit by the employee.
The requirement to get and keep declarations for every benefit that was eligible for a reduction in respect of the business use has become a cost of compliance burden to many employers. The cost of compliance review provided two new forms of declaration to relieve this burden. The recurring benefits declaration for similar benefits that have the same business component and the employer declaration for the reimbursement of business expenses only.
An annual no-private-use declaration may be provided by an employer who reimburses only employment related expenses or enforces a policy that benefits be used only for employment-related purposes. In this case the benefits will be exempt from FBT.
A recurring fringe benefit declaration may be used in the case where an employer provided a series of similar benefits that have the same "otherwise deductible" percentage. The proposed changes allow for only one declaration to be provided for the first benefit. This should significantly reduce the burden for employers in the sited examples.
The cost of trade school fees, given in the example, would be an exclusive employee expense payment fringe benefit and would, therefore, not require a declaration.
Where a declaration is required in cases other than those above, FBT legislation requires that the declaration in respect of the recipients expenditure be made by the recipient. In most circumstances where a declaration is required, it is hard to see how the employer would know the correct percentage to put on the declaration without first getting this information from the employee.
In those limited circumstances where the deductible percentage in respect of individual employees is clearly 100% and the concessions discussed above do not apply, the employer may assist the employee in the preparation of the declaration form as suggested. The obligation for the accuracy of the declaration rests with the employee when he or she signs it.
Both the employer and the employee should be aware of the consequence of making a false or misleading statement in a taxation document. FBT declarations are statutory evidentiary documents. When an employee signs a declaration they are stating that all the details in the declaration are true and correct. An employee will, therefore, need to be sure that the deductible percentage shown on the declaration is correct before signing it. The employer may be subject to a penalty under section 115 of the FBTAA if there is an understatement of tax because the deductible percentage printed by the employer on the declaration is wrong.
7 Loan benefits (ICAA)
The Institute of Chartered Accountants in Australia submits that as the benchmark interest rate for calculating the taxable value of loan benefits provided by an employer is currently higher than the market interest rates for home loans the discrepancy generates an FBT liability for employers in cases where, in fact, no benefit exists.
Employers cannot, easily, cash out loan benefits. The FBT benchmark interest rate is only adjusted annually - at the beginning of an FBT year. Alternative approaches that might ameliorate the fault identified above are as follows:
¦ the legislation could be amended to deem a loan benefit not to arise on any day where market interest rates are lower than the FBT benchmark rate. This approach was sought in a letter to the FBT specialist cell by the CTA on 27 June 1994;
¦ the FBT benchmark interest rate could be adjusted on a more regular basis - eg. monthly or quarterly;
¦ an employer might be given the option to link its "loan fringe benefits'' to a commercial rate offered by a particular bank and, to the extent that the interest charged is equivalent to that linked rate (whether fixed for a term or variable), no FBT liability ought arise.
In New Zealand, where FBT is assessed quarterly rather than annually, the design fault evident in the Australian loan fringe benefits provisions is less likely to arise - at least for an extended period
Many loan fringe benefits are provided to employees who do not pay tax at the top marginal rate - a further inequity in the way FBT on loans is imposed.
The ICAA asks what action will the Commissioner support to address this position?
The ATO advised that the benchmark interest rate does not apply only to home loans. It applies to all loans provided to employees and also the valuation of car fringe benefits (operating cost method). The housing loan rate is generally the lowest commercial interest rate charged. Using this as the basis for the bench mark rate is concessional when compared to other loans rates.
Because of market fluctuations, there will be some periods when the benchmark interest rate is less than the market rate for home loans as well as some periods when it is higher.
Any move to make adjustments to the benchmark rate at quarterly intervals would increase the complexity and compliance costs for employers. Having to monitor the market rates throughout the year would mean even greater administrative complexity and compliance costs.
The representatives of the professional bodies felt that perhaps the employer should be given the option of accepting any such increases in complexity and/or compliance and administration costs. They also reminded the ATO that interest paid to the ATO recognises rate changes by being adjusted each six months.
It was agreed that the alternative approaches suggested would require legislative change which would necessitate industry representation to Government.
8 Benefits provided under "arrangements" or by associates
9 Benefits provided under "arrangements" or by associates
10 Benefits provided under "arrangements" or by associates
This issue was raised by a number of the members. The areas of concern are meal entertainment provided under an arrangement or by an associate and the provision of incentive awards.
The Taxation Institute of Australia say that TR 95/D13 highlights the practical problems for taxpayers and the ATO in complying with and enforcing the FBT arranger provisions as they apply to entertainment. It will be practically impossible for an employer to obtain the required documentation to calculate FBT liability where an employee is entertained by a client or associate. The amount of revenue involved is small and it does not justify the compliance costs.
The provision of entertainment should be specifically excluded from the arranger provisions. The ATO should consider joining with the professional bodies in seeking a legislative solution to the problem or alternatively an administrative solution.
The Law Council of Australia notes that there are numerous situations which can arise under current ATO rulings where the provider of a fringe benefit to an employee and the employer of the employee are unrelated parties. Under the ATO ruling it is the employer who must pay the fringe benefit and not the provider. In most cases, the person who ought to meet this liability is the provider of the benefit.
The LCA submits that the ATO either administratively or by sponsoring an amendment to the legislation, allow the provider of a benefit to meet the liability (if any) that would otherwise fall on the employer.
The Australian Taxpayers Association raised the issue of incentive awards and the FBT liability that rests with the employer as set out in TD 95/35. The employer does not know the value of the award and for various reasons the provider may be reluctant to provide this information. Cash flow problems may also occur because of the increased instalments payable in years subsequent to the assessment of an award. Variations are not possible because it is not known if other awards will be provided.
The ATA asks what administrative arrangements the ATO is prepared to put in place to allow the provider of the award to take on the FBT liability of the employer. Could the reasons for any objections to this proposal be advised.
There was also a late agenda item from the Institute of Chartered Accountants in Australia on behalf of the Australian Incentive Association raising concerns with the payment of FBT on benefits provided by third parties (distributors) to customers' (dealers) employees. A copy of this item was provided to members at the meeting. Having regard to TD 93/6 and TD 95/35, the association is seeking as a solution an amendment to the FBTAA to provide for the FBT arising in these circumstances to be paid directly by the distributor (the third party).
The ATO advised the definition of "arrangement" in subsection 136(1) of the FBTAA is very broad and covers most situations where a benefit is provided by a third party and the provision of the benefit is related to the employees employment duties. The Fringe Benefits Tax Assessment Act imposes the tax on the employer. This is fundamental to the scheme of the assessment act as it stands.
TD 93/6 deals with the tax consequences for a distributor who is provided with a non-cash business benefit which may be passed on to the distributor's employees.
TD 95/35 deals with benefits provided by promoters of incentive awards.
TR 95/D13 provides examples of the FBT and income tax consequences for an employer when meal entertainment is provided to employees by an arranger or by an associate of the employer.
It was noted that the TIA item was also on the agenda of the National Tax Liaison Group at its meeting of 5 September 1995. At that meeting the Commissioner recognised the difficulties for tax administration, taxpayers and practitioners. He suggested the ATO and the professional bodies work together to produce sensible solutions.
It was agreed to form a working party of the subcommittee with representatives from both the professional bodies and the ATO. The ATO will prepare, as a starting point for the working party, a paper bringing together items submitted to the subcommittee and comments submitted in respect of TD 95/35 (incentive awards) and TR 95/D13 (entertainment). The working party will report to the next subcommittee meeting on 23 November 1995.
11 Cost of compliance - meal entertainment fringe benefits arrangements and associates (ICAA AND ASCPA)
This item was raised by the ICAA and the ASCPA .
The proposed amendments to the FBTAA which allow a 50/50 split or a 12 week register method of calculating meal entertainment seem to give rise to a double taxation burden when expenditure is incurred in entertaining employees of a client or an associate of the employer.
This is because the expenditure incurred by the provider is only 50% deductible but the total expenditure is subject to FBT ie. the 50% FBT liability that is incurred by the provider and the liability that arises (under new section 37AF) to the client or associate.
Both the ICAA and the ASCPA provided examples of the kinds of outcomes that suggested double taxation arose under the 50/50 split method of valuing meal entertainment benefits.
The ATO does not consider there is double taxation under the 50/50 method. This method determines, for a particular employer, the FBT payable and IT deductible for the total meal entertainment provided to employees and associates. The amount payable/deductible is an arbitrary amount and does not necessarily bear any resemblance to what may have been paid/deducted if the 50/50 method wasn't chosen.
The employer of the associate must pay FBT on the benefit given to its employee. That employer is not entitled to a deduction, as that employer has not expended any money. The deduction which would otherwise go to the original employer is subsumed within the 50/50 method.
Employers need to carefully consider their particular circumstances when deciding the method that best meets their particular requirements.
The meeting felt that the position was perhaps not as clear under the 12 week register method. It was agreed that this aspect be examined further and for the examples provided by the ICAA and ASCPA under this agenda item be referred to the joint working party on arrangements (see agenda item 8-9-10).
12 Cost of compliance - meal entertainment fringe benefits - "entertainment meals" (ICAA)
The ICAA submitted as an example details of an international accounting conference to demonstrate the difficulties of interpreting and applying the cost of compliance meal entertainment provisions, particularly in relation to seminars and the 50/50 split method of valuing meal entertainment. It was argued that eligible seminars should be excluded from the cost of compliance legislation.
It was agreed the ATO would examine the question of seminars, particularly longer seminars over a number of days where meals, gala dinners, some recreation and associated persons are involved, with the view to including a further seminar example in draft Taxation Ruling TR 95/D13.
13 Cost of compliance - living away from home allowance (ICAA)
This issue was raised by the Institute of Chartered Accountants in Australia . In the Cost of Compliance Bill the definition of "maximum residence period" sets out a table which contains 4 categories of employee, two of which have a maximum residence period of four years.
The first category is an employee who is an exempt visitor within the meaning of section 517 of the ITAA. The second category is an "overseas employee" who is a resident within the meaning of subsection 6(1) of the ITAA.
1. Which of the categories is intended to apply to a person being transferred to Australia on a temporary basis?
2. Will a New Zealander who comes to Australia for the purposes of work for a three year period be regarded as an "overseas employee" who is an Australian resident during that period? For the purposes of this example assume that the New Zealander travels to Australia with his wife and family, lets out the house he owns in New Zealand, takes out a lease on a rental property in Australia and transfer money to an Australian bank account. The terms of the appointment in Australia are for three years only at which time he will return to New Zealand to the position that he occupied prior to his secondment. What would the position be if the period of the posting was: two years; four years.
The ATO advised:
1. Depending on the facts, either category could apply. If the employee is not a resident they fall into the "exempt visitor" category. If the employee is a resident they fall into the "overseas employee" category.
2. Where the New Zealander is an Australian resident (the question of residency in any particular fact situation is outside the scope of this subcommittee), then they will usually be an overseas employee.
14 LAFHA more than 12 months (ATA)
This item was submitted by the Australian Taxpayers' Associations . Under the new FBT rules relating to living-away-from-home allowances, if the allowance is paid for a period of longer than prescribed periods (1 year, 2 years or 4 years as appropriate), the allowance is deemed to be no longer a LAFHA and the employee is assessed on the value.
If the allowance does exceed the statutory period, even though the original intention was to pay the allowance for less than that period, does this mean that the employee would need to amend appropriate returns to include the value, and the employer will be able to amend FBT returns already lodged to exclude any assessable value?
The ATO advised that the test for whether an allowance is a LAFHA occurs at each point when a contract is entered into. Provided that all the necessary conditions are met when the living away from home contract is entered into (eg. employer and employee declarations provided etc.), only those amounts paid after the end of the statutory period or beyond the term of the contract will be subject to income tax in the employees hands. If a new contract is entered into, and in light of that new contract, the total unbroken residence period exceeds the maximum period, any allowance paid from the date of that contract will not be a LAFHA. That is, it is always prospective in nature. Refer example at para 2.33 in the explanatory memorandum.
The question of whether MT 2030 now has any place in deciding if a "citizens of the world" is living away from a usual place of residence was raised. Section 30 (post cost of compliance changes) will still require a conclusion that the employee is living away. The changes only set an upper time for the concession. Accordingly, MT 2030 still has a place.
15 Cost of compliance - "business premises" (ICAA)
This issue was raised by the Institute of Chartered Accountants in Australia . The Cost of Compliance Bill contains a proposed amendment to the definition of business premises to exclude "other premises or facilities for the purpose of the provision of entertainment".
A number of examples of benefits which would be subject to FBT for the first time were provided and details of other significant repercussions were explained. An amendment to the FBT Cost of Compliance Bill during its passage through Parliament to exclude the proposed amendment to the definition of business premises was sought.
(Agenda item 21 - attachment q - case two provides another example where advice is sought to the amendment of the term "business premises".)
The ATO advised that amendments recently passed by the House of Representatives corrects these problems for all entertainment facilities other than corporate boxes.
16 Cost of compliance - deductibility of lease payments - corporate boxes (ASCPA)
Under changes in the Cost of Compliance Bill, lease expenditure in respect of corporate boxes will be able to be apportioned on the new 50/50 method or under the existing actual method . The issue raised by the ASCPA is the taxation treatment of lease expenditure when the corporate box is not in use. The character of the expenditure is directly related to the purpose for which the expenditure was incurred. Essentially, there are two methods that might be adopted to arrive at the appropriate proportion of lease expenditure that relates to employees (deductible/FBT) and non employees (non deductible) use:
¦ divide the annual fee by 365; or
¦ divide the annual fee by the number of days that the box is actually used.
On that basis, if a corporate box is used on say 50 days in the year and 20% of the attendees are employees, then effectively 20% of the entire leasing expenditure would be deductible and subject to FBT.
The ASCPA further submits that in respect of days when the corporate box is not in use, that no fringe benefit is being provided on that day and therefore the lease expenditure attributable to that day is non deductible pursuant to Section 51AE or 51AB of the ITAA. Accordingly, it is submitted that on days when the corporate box is not used, the lease expenditure constitutes non deductible entertainment because it is not incurred in respect of the provision of a fringe benefit (as none has in fact been provided). Further, the taxable value of the actual fringe benefit constituted by the attendance of employees at the corporate box must be ascertained under paragraph 50(a) of the FBTAA. This is because the benefit is an external non period residual fringe benefit as it is provided for a period of less than 1 day. Under paragraph 50(a) the taxable value is the actual amount paid or payable by the employer for the benefit. Thus the correct FBT value to adopt is that portion of the daily fee in respect of the leasing of the corporate box that is attributable to employees (or associates).
The ATO advised that the expenditure incurred in leasing a corporate box is treated as being an outgoing in respect of the provision of entertainment (except for the agreed percentage that it is accepted as being in respect of advertising - refer TD 92/162) under section 51AE(13). When determining how much of the expenditure is deductible and how much is non-deductible, the number of days (use) in the year is not relevant.
What is relevant is, the percentage that the Commissioner considers reasonable under subsection 51AE(13).
The proposed changes in the Cost of Compliance Bill allows an employer to claim a deduction for 50% of the costs over and above the advertising costs allowed but FBT must be paid on that amount. When determining the amount that is deductible using the actual use by employees, it is still a matter of determining the percentage of the leasing costs that relates to use by employees (and associates) that is relevant. The cost incurred by the employer in respect of the residual benefit provided to a particular employee on a particular day is also a percentage of the overall leasing cost of the corporate box.
Difficulties were recognised with the FBT calculation/valuation under subsection 50(a) of the FBTAA and with subsection 51AE(5AA) of the ITAA. The arranger aspects will be referred to the proposed joint working party (see agenda item 8-9-10).
The ICAA believes the ATO's analysis of this question is incorrect, that reliance on sub-section (13) is an incorrect interpretation of the law and, even if correct, would represent an improper exercise of the Commissioner's discretion, that the reference to TD 92/162 is clearly inappropriate and has submitted a further agenda item to the next meeting of the subcommittee.
17 Cost of compliance - valuation of car parking benefits (ASCPA)
This issue was raised by the ASCPA . Only a partial attempt has been made in the Cost of Compliance Bill, to reduce the administrative burden of employers providing large numbers of parking benefits on their own premises at various locations. These parking spaces are often shared between office, shift and part time workers as well as visitors.
Current law provides for the option of establishing an independent market value for each parking space. The new alternative statutory formula (clause 39DA of the Bill) allows an employer to assume 240 days availability of the benefit per year. However, the Bill denies the 240 day option to employers who make use of market valuations to determine taxable value. These employers must continue 12 week monitoring if they wish to rely on market valuations, whereas employers who use the commercial parking station average cost method can chose between statutory formula and 12 week monitoring.
The ASCPA recommends that the following changes could be made to the Bill to correct the omission and save considerable administrative cost for employers so effected:
Adding a clause to the Bill amending s.39D(2) FBTAA to read:
"(2) Subject to this Part, if an election is made under subsection (1) in relation to a car parking fringe benefit provided on a day in a year of tax, the daily rate amount for a parking space, in relation to a year of tax, of the fringe benefit is...."
and amending Clause 39FC in Schedule 3 of the Bill to read,
"39FC. The daily rate amount for a space is the amount that would be calculated under section 39D or 39DA as the taxable value of a car parking fringe benefit for the space, if there were no recipient's contribution."
The ATO advised that the market value method is inconsistent with the statutory formula method. The market value method values the benefit to an employee. The statutory formula method does not tax benefits to employees but car parking spaces. The statutory formula is arbitrary, its valuation is likewise arbitrary - but nevertheless it produces a simple method. If the use of this simple method does not produce the lowest taxable value, the employer can (as happens with the car statutory formula) choose a cheaper method.
18 Cost of compliance - section 37CF (ASCPA)
The ASCPA advises that the proposed section 37CF of the Cost of Compliance Bill is extremely harsh in its current format. It states that "a register is not valid if the register contains an entry that is false or misleading in a material particular". Therefore an honest mistake can conceivably make the register invalid. The section should be rewritten to ensure that honest mistakes by the taxpayer will not make their register invalid.
The ATO advised of the difficulty in testing for an "honest" mistake. The proposed wording is considered the only workable form, particularly as any mistake must be "false or misleading in a material particular" to effect the validity of the register.
19 Granby's case (ICAA) leased - arrangements (ICAA)
20 Granby's case (ICAA) leased - arrangements (ICAA)
The ICAA submitted two agenda items involving the acquisition of a vehicle at the end of a lease. It was agreed that both these items be addressed together and that TD 95/D14 which issued on 6 September 1995 covers the particular issues raised.
The reference to IT 28 in TD 95/D14 in determining whether a bona fide lease exists was discussed. Of particular concern was the date of original issue of IT 28 (6 July 1960), the word "implied" in para 8.1 of IT 28 and false or artificial residual values.
As agreed at the National Tax Liaison Group meeting of 5 September 1995 the ATO will consider the issue of prior year amendments in the final version of the determination.
Members were reminded that the last day for comments on the draft TD is 6 October 1995.
21 FBT and non compulsory clothing (ICAA)
The ICAA submitted the following three examples of provision of clothing for consideration:
Case one
A company has a large workforce throughout Australia and supplies each member of its workforce with two cotton work shirts each year. The work shirts have the company logo emblazoned on them in a size, colour, and visibility required under the TCFDA guidelines. The wearing of the work shirt is not compulsory - or if it is, it cannot be reasonably enforced.
Assuming that the value of the shirts is greater than $50, is the employer liable to pay fringe benefits tax on the provision of the work shirts?
Case two
A hotel chain provides expensive gowns to its female staff acting as hostesses in its leading restaurant. The gowns remain the property of the hotel and the hostesses change to their own clothes before leaving the "business premises".
Given the amendment to the term "business premises", will the residual benefit become liable to FBT?
Case three
A hotel chain provides its staff with polo shirts encompassing the hotel's logo. The shirts are available for purchase by members of the public from the hotels reception area. Is the provision of clothing to employees a taxable fringe benefit?
The Approved Occupational Clothing Guidelines formulated under subsection 51AL(7) of the ITAA dated 7 June 1995 include:
¦ "Section 51AL of the ITAA has been enacted to regulate the deductibility of non-compulsory uniforms and wardrobes. The taxation law now only allows a deduction to employees for expenditure on uniforms or wardrobes where either:
(a) the clothing is in the nature of occupation specific, or protective clothing; or
(b) the wearing of the clothing is a compulsory condition of employment for all employees of that class and the clothing is not conventional in nature (compulsory occupational clothing); or
(c) where the wearing of the clothing is not compulsory, the design of the clothing is entered on the Register of Approved Occupational Clothing (the Register).
¦ In the vast majority of cases, clothing worn by an employee while at work will be of a conventional nature and expenditure on the clothing will only rarely be an allowable deduction under subsection 51(1) of the ITAA. One exception to this general rule concerns occupational clothing which is entered on the register.
¦ Where occupational clothing satisfies these guidelines and is registered by an employer, the expenditure incurred by an employee in the rental, purchase or maintenance of items of clothing from the registered design will be eligible for tax deductibility under subsection 51(1) of the ITAA.
¦ The availability of a deduction is also dependent upon how the registered occupational clothing is worn. Employees must be aware that the clothing should be worn as an entirety, or set, rather than as individual pieces. The constant wearing of occupational clothing items in conjunction with conventional clothing may lead to the conclusion that the clothing is simply a collection of ordinary conventional clothing.
¦ The result of such a conclusion would be that tax deductions relating to the clothing would be denied. In addition, where an employer has supplied the clothing without cost or at a reduced cost to employees a FBT liability may arise for the employer.
¦ Single items of occupational clothing, other than full body garments (such as dresses), will not be admitted to the register. Consequently, expenditure on such items is ineligible for deductibility under subsection 51(1) of the ITAA.
¦ An identifier must appear at least once on the external surface of each item of occupational clothing including accessories. In addition, the occupational clothing must be designed to ensure that when two or more items are worn together at least one 'stand alone' identifier or an approved identifier pattern be plainly visible to the casual observer. Furthermore, the clothing must not, after the addition of identifiers, be available for rental or purchase by the general public."
Whilst the question of deductibility of expenditure on single items of compulsory clothing will be determined on the basis of the facts of each case, the ATO considers the essential character of single items of compulsory clothing is work-related, and consequently expenditure would be deductible in accordance with subsection 51(1), where the following criteria are met:
¦ The clothing must be a compulsory condition of employment and the employer restricts non-work use of the clothing;
¦ The clothing must be sufficiently distinctive and unique so that the wearer may be identified as an employee of a particular organisation. In most instances this would necessitate the clothing bearing a permanently attached identifier (e.g., logo, business name). The size and colour of the identifier must be such that it is clearly visible to the casual observer;
¦ Compulsory clothing that is a specific colour, but lacks an identifier would not be sufficiently distinctive and unique;
¦ Variations in the garment (such as style, length, colour or material) must be very limited as increasing numbers of variations would reduce the clothing's distinctive and unique appearance;
¦ The clothing must be worn solely for work purposes in the employment of the identified employer. However, incidental usage of the clothing, such as travel to and from work would not operate to deny a deduction;
¦ The clothing must be unavailable to members of the public. For example, some tourist attractions sell items which are so similar to those worn by staff that employees are not clearly and easily distinguished from members of the public. Clothing of this type is not considered to be sufficiently distinctive and unique.
In view of the above, the employer in the example provided would be liable to FBT on the provision of the shirts in Cases One and Three unless the shirts can be characterised as an exempt minor benefit (of small value and it would be unreasonable to treat as a fringe benefit - see TD 93/197).
In Case Two the concern with the definition of "business premises" in the Cost of Compliance Bill has been removed by the amendments recently passed by the House of Representatives (see also agenda item 15).
22 Overseas business travel - residual benefits "otherwise deductible rule" (ASCPA)
23 Foreign income - otherwise deductible (ICAA)
It was agreed to consider these two items together. They involve the overseas posting of an employee for a continuous period of less than 91 days. Section 23AG exemption does not therefore apply. Employer meets expenses applicable to overseas posting. In addition, costs of business travel and accommodation in the foreign country are also met by the employer.
The issue is if the deduction which would have been available to the employee is a foreign income deduction (subsection 160AFD(9) of the ITAA), the foreign income deduction exclusion in subsection 52(1) of the FBTAA denies the otherwise deductible reduction to the taxable value of the residual fringe benefit to the employer.
The ATO advised that some aspects of this matter have been considered previously. For example, the ICAA asked for the policy reasons why "foreign income deductions" were excluded from the operation of the "otherwise deductible rule" in section 19 of the FBTAA. In the minutes of meetings of 1 December 1994 and 23 March 1995 the ATO advised that foreign income deductions have been excluded from all otherwise deductible rules and not just interest. At the meeting of 1 December 1994 the TIA sought clarification of a person receiving exempt income under section 23AG and the FBT implications.
Whilst a practical solution may be in how the employer actually pays for or meets the costs involved having regard to the actual period overseas (eg as a travelling allowance, as a living-away-from-home allowance or as a non-cash living-away-from-home allowance - see MT2030 for further details and, in particular, the declarations required), this clearly does not resolve or detract from the importance of the issue raised.
As initial research indicates that the otherwise deductible reduction may be denied, it was agreed to refer this matter to the FBT Cell for further examination.
24 Property fringe benefits- section 155 (ASCPA)
This issue was raised by the ASCPA . It relates to section 155 and how this section is to be applied in the two situations provided by way of the following examples:.
Example 1.
An employer provides a car to be used by an employee on the understanding that ownership of the car will pass to the employee at the end of 3 years. As a result, the provision of the car to the employee may result in the provision of two separate benefits ie. the right to use the car and the right to buy the car. If section 155 deems the car to be a property benefit from day one, is the use of the car valued as a car fringe benefit or as an expense payment fringe benefit?
Example 2.
An employer provides an employee with a house rent free with an understanding that at the end of five years the employee will purchase the house at the original price paid by the employer. Again the provision of the house may give rise to two benefits, a housing fringe benefit and a property fringe benefit. Under section 155, the property fringe benefit is assessed in the year that the house is provided, however, the employee does not make a contribution by way of purchase price until 5 years later. In this case subsection 74(4) would prevent the employer amending the original assessment to take account of the employee contribution.
The ASCPA asks the ATO to confirm that the above is not the way section 155 was intended to operate and how the double taxation imposed on essentially one transaction might be removed. It also asks for confirmation that subsection 74(4) will not disallow an amended assessment in the second example.
The ATO advised that the FBT cell currently has section 155 matters under consideration. The meeting agreed to refer these two examples to the FBT cell. matters that arose in discussion included:
¦ section 155 deems title to have transferred "at the time when the use of the property was obtained by the person."
¦ "will or may"
¦ type of benefit(s) provided - expense payment, loan
¦ timing of any employee contribution.
25 Tax exempt employer - provision of travel abroad (LCA)
This issue was raised by the Law Council of Australia who advised that conflicting answers have been given by the ATO on the FBT treatment of a recreational overseas trip (eg to see a stage show) provided by a tax exempt employer to an employee and associate.
The employer may pay for the trip as a package or pay separately for airline tickets, accommodation, the theatre tickets, etc. One ATO view is that only a "package holiday" will constitute entertainment and if individual items are paid separately only the theatre tickets are entertainment. Another view presented by the FBT cell is that each component of the trip paid by the employer constitutes the provision of entertainment.
The LCA asks the ATO to clarify the circumstances where travel for recreational purposes provided by a tax exempt employer will constitute entertainment and where the deductibility of the expenditure is a critical factor.
The ATO advised that the provision of a holiday as described is considered to be the provision of recreation and therefore entertainment as defined. The definition of "entertainment" in subsection 51AE(3) includes the provision of accommodation or travel for the purposes of facilitating the entertainment (ie. the recreation) as also being the provision of entertainment. Whether the trip is paid for as a package or as separate components, the expenditure is incurred on the provision of entertainment.
For the purposes of section 38 of the FBTAA it would be non-deductible entertainment expenditure. Even if any of the components of the trip described were not tax exempt body entertainment they would still be subject to FBT as either a residual or expense payment fringe benefits and there would be no "otherwise deductible" component.
26 Entertainment meals TR 95/D13 (ASCPA)
This issue was raised by the ASCPA and refers to example (d) (6) of the table in TR 95/D13. It is considered that this reference is evidence that the ruling is saying that it is the nature of the payment that determines whether or not a meal is entertainment and not the facts of the situation. It also asks if a same sex partner is an associate of an employee.
The ATO advised that the item referred to in the table is cross referenced to paragraphs 86 and 87 of the draft ruling. These paragraphs say:
86. What is the situation if an employee is travelling but dines with an employee who is not travelling? Only the cost of the travelling employee's meal is reimbursed by the employer.
87. In this case both meals are entertainment meals. This is because the presence of the non-travelling employee attaches more of the characteristics of entertainment to the meal, ie social interaction leading to diversion or amusement.
Example 8.1 (paragraph 88 of the draft ruling) goes on to explain that if only the employees meal costs are met by the employer then the taxable value of the fringe benefit is reduced to nil by the operation of paragraph 51AE(5)(g) of the ITAA. This paragraph allows a deduction for the cost of entertainment that would have been deductible but for s 51AE(4) (such as for an employee who is travelling on business) but only when the cost incurred does not relate to the provision of entertainment to a person other than the recipient (in this case the travelling employee).
Where the employer meets the costs of both the travelling employee and the non-travelling employee, paragraph 51AE(5)(g) does not apply to the outgoing.
The draft ruling clearly states that the meals are entertainment meals in both cases and it is only the operation of paragraph 51AE(5)(g) that makes the difference.
In the circumstances described, the same sex partner is deemed to be an associate of the employee by the operation of subsection 148(2) of the FBTAA.
27 Close of meeting
The next meeting will be held on 23 November 1995 at ICAA Sydney.