Edited version of private ruling

Authorisation Number: 1011513744401

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Subject: In house fringe benefits

Ruling

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are an organisation which provides a service to other organisations which provide a product.

You were established by an Act of Parliament.

The Act of Parliament:

· sets out your objectives;

· provides that you are not and do not represent the Crown;

· provides the Crown is not liable for any of your debts, liabilities or obligations;

· requires you to maintain financial records that accurately reflect and record your financial activities, provide the financial statements to Auditor General who audits the statements.

Your activities are regulated by another Act of Parliament. This second Act: provides:

· for the establishment of an economic regulatory framework for the industry;

· the establishment of a licensing regime;

· the regulation of prices, customer service standards and performance monitoring of the industry; and

· establishes a Regulator which administers the licensing system established under the Act.

You intend to offer your employees the opportunity to receive a reimbursement of the amounts paid to purchase the product supplied by those organisations that you service, as part of an effective salary sacrifice arrangement.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 20

Fringe Benefits Tax Assessment Act 1986 section 62

Fringe Benefits Tax Assessment Act 1986 subsection 62(1)

Fringe Benefits Tax Assessment Act 1986 subsection 62(2)

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Income Tax Assessment Act 1936 section 318

Income Tax Assessment Act 1936 subsection 318(2)

Income Tax Assessment Act 1936 subsection 318(6)

Income Tax Assessment Act 1997 subsection 995-1(1)

This ruling applies for the following period

Year ended 31 March 2010

Year ending 31 March 2011

Year ending 31 March 2012

The scheme commenced on

1 July 2009

Subject: In house fringe benefits

Is the fringe benefit that arises from the reimbursement of the amounts charged for the supply of a product as part of an effective salary sacrifice arrangement an eligible benefit for the purposes of section 62 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) where you provide the product to the employee?

Summary

Under the proposed arrangement you will reimburse an employee for the amount shown on an account.

The account may be from you. Alternatively, it could be from another entity.

The situation being considered is where an associate has provided the product to the employee.

The reimbursement will be an in-house expense payment fringe benefit where:

· the associate at or about the provision time carried on a business that consisted of or included the provision of identical or similar property principally to outsiders; and

· the employee provides documentary evidence of expenditure to the employer before the declaration date.

Both of these conditions will be satisfied if the employee provides you with the relevant documentation before the declaration date.

Detailed reasoning

Under the proposed arrangement you will reimburse an employee for the amount shown on an account.

The account will from another entity, and you therefore do not provide the product to the employee.

Subsection 62(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) states that:

Where one or more eligible fringe benefits in relation to an employer in relation to a year of tax relate to a particular employee of the employer, the taxable value of that benefit, or the sum of the taxable values of those fringe benefits, as the case may be, in relation to that year shall be reduced by:

(a) if the taxable value or the sum of the taxable values does not exceed $1,000 - an amount equal to the taxable value or the sum of the taxable values; or

(b) in any other case - $1,000.

Subsection 62(2) of the FBTAA details the fringe benefits to which section 62 applies.

Subsection 62(2) of the FBTAA states:

In this section, "eligible fringe benefit" means:

(a) an in-house fringe benefit; or

(b) an airline transport fringe benefit.

An in-house fringe benefit is defined in subsection 136(1) of the FBTAA to mean:

(a) an in-house expense payment fringe benefit;

(b) an in-house property fringe benefit; or

(c) an in-house residual fringe benefit.

In general terms, section 20 of the FBTAA provides that an expense payment benefit will arise where an employer either:

· makes a payment to a third party to discharge an obligation of an employee, or

· reimburses the employee for expenses incurred by the employee.

As you intend to reimburse expenditure incurred by an employee the benefit will be an expense payment benefit.

Is the reimbursement an in-house expense payment benefit?

An in-house expense payment fringe benefit is defined in subsection 136(1) of the FBTAA to mean:

(a) an in-house property expense payment fringe benefit; or

(b) an in-house residual expense payment fringe benefit.

Both of these terms are defined in subsection 136(1) of the FBTAA.

In general terms an in-house property expense payment benefit arises relates to a reimbursement of the cost of purchasing 'tangible property'.

'Tangible property' is defined in subsection 136(1) of the FBTAA to mean goods, and includes:

(a) animals, including fish; and

(b) gas and electricity.

As the product is 'tangible property' the relevant definition to consider is the definition of 'in-house property expense payment fringe benefit'.

Is the reimbursement an 'in-house property expense payment fringe benefit?

Where the employee's expenditure is incurred in the purchase of tangible property from the employer or an associate of the employer, the definition of an in-house property expense payment fringe benefit provides that the reimbursement will be an in-house property expense payment fringe benefit where:

· the employer or an associate of the employer at or about the provision time carried on a business that consisted of or included the provision of identical or similar property principally to outsiders; and

· the employee provides documentary evidence of expenditure to the employer before the declaration date.

Are you an 'associate' of the provider?

When considering whether or not you are an associate of the organisations which provide the service, the relevant subsection is subsection 318(2) of the ITAA 1936, which states:

For the purposes of this Part, the following are associates of a company (in this subsection called the "primary entity"):

(a) a partner of the primary entity or a partnership in which the primary entity is a partner;

(b) if a partner of the primary entity is a natural person otherwise than in the capacity of trustee - the spouse or a child of that partner;

(c) a trustee of a trust where the primary entity, or another entity that is an associate of the primary entity because of another paragraph of this subsection, benefits under the trust;

(d) another entity (in this paragraph called the "controlling entity") where:

(i) the primary entity is sufficiently influenced by:

(A) the controlling entity; or

(B) the controlling entity and another entity or entities; or

(ii) a majority voting interest in the primary entity is held by:

(A) the controlling entity; or

(B) the controlling entity and the entities that, if the controlling entity were the primary entity, would be associates of the controlling entity because of subsection (1), because of subparagraph (i) of this paragraph, because of another paragraph of this subsection or because of subsection (3);

(e) another company (in this paragraph called the "controlled company") where:

(i) the controlled company is sufficiently influenced by:

(A) the primary entity; or

(B) another entity that is an associate of the primary entity because of another paragraph of this subsection; or

(C) a company that is an associate of the primary entity because of another application of this paragraph; or

(D) 2 or more entities covered by the preceding sub-subparagraphs; or

(ii) a majority voting interest in the controlled company is held by:

(A) the primary entity; or

(B) the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the other paragraphs of this subsection; or

(C) the primary entity and the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the other paragraphs of this subsection;

(f) any other entity that, if a third entity that is an associate of the primary entity because of paragraph (d) of this subsection were the primary entity, would be an associate of that third entity because of subsection (1), because of another paragraph of this subsection or because of subsection (3).

As a 'primary entity', you will be an associate of a company under sub-subparagraph 318(2)(d)(i)B, of the ITAA 1936, if you are sufficiently influenced by the controlling entity and another entity or entities.

Are you 'sufficiently influenced' by other companies?

Paragraph 318(6)(b) of the ITAA 1936 states:

For the purposes of this section:

(b) a company is sufficiently influenced by an entity or entities if the company, or its directors, are accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the entity or entities (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts); …

As the companies providing the benefits hold interlocking directorships, they are also to provide clear directions, instructions and wishes to you.

By holding dominant positions on your board, you are controlled by the various companies providing the service.

As your Board can be controlled by other companies, you are 'sufficiently influenced' by those companies, and are therefore an associate of those companies.

Does your associate carry on a business that consists of the provision of identical or similar property principally to outsiders?

The FBTAA does not define what constitutes carrying on a business for the purpose of the application of the in-house provisions.

It does however define 'business operations' in subsection 136(1) of the FBTAA as:

In relation to a government body or a non-profit company, includes any operations or activities carried out by that body or company.

In discussing the meaning of the term 'business operations' paragraph 9 of Taxation Ruling TR 2000/4 Fringe benefits tax: meaning of business premises (TR 2000/4), states:

The term 'business operations' in the definition of 'business premises' includes a wide range of activities. The activities include those undertaken by a person in the ordinary course of carrying on a business. They also include those activities that, although not undertaken in the ordinary course of carrying on a business, are nevertheless undertaken in the course of carrying on a business. Profit making activities that fall short of being a business are also included in 'business operations' if they have a business or commercial character.

The term 'business' is also defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as:

A business includes any profession, trade, employment, vocation or calling, except the occupation as an employee.

The Macquarie media dictionary describes to 'be in business' as:

To earn a living from a commercial activity; to be carrying out an activity, enterprise, etc., successfully.

These definitions indicate the requirement to be carrying on a business for the purpose of the FBTAA is capable of having a wide meaning.

Support for this conclusion was provided by the High Court decision in NT Power Generation Pty Ltd v Power and Water Authority [2004] HCA 48; 219 CLR 90; 210 ALR 312; 79 ALJR 1, where the phrase 'carrying on a business' was constructed broadly.

In its decision, the Court held at paragraph 52, that the Power and Water Authority was carrying on a very substantial business. In making this statement, the Court referred to the references to carrying on a business contained within the Power and Water Authority's internal documents, its annual report which discussed indicators like rate of return on assets, the debt to capital ratio and the sales revenue.

Further, at paragraph 66 in the Power and Water Authority case, the court stated:

While the word "business" in any particular context takes its meaning from that context, normally it is a "wide and general" word. Its meaning in the Act [Trade Practices Act 1974] is widened by s 4(1), since "business" includes "a business not carried on for profit".

In the earlier decision of NT Power Generation Pty Ltd v. Power & Water Authority [2001] FCA 334, Mansfield J stated at paragraph 236:

Whether or not a business is being carried on is a question of fact, having regard, for example, to the nature of the activities carried out, and their continuous or repetitive character: Smith v Capewell (1979) 142 CLR 509; Fasold v Roberts (1997) 70 FCR 489.

Paragraph 13 of Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11), also provides a number of indicators which are relevant to determining whether a person is carrying on a business for income tax purposes. The indicators are as follows:

· whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators

· whether the taxpayer has more that just an intention to engage in business

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

· whether there is repetition and regularity of the activity

· whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business

· whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit

· the size, scale and permanency of the activity

· whether the activity is better described as a hobby, a form of recreation or a sporting activity.

In applying these indicators to your associate companies, it is relevant to note the following characteristics of those organisations:

· your associates and you are separately established entities

· the primary objectives of you and your associated companies include the objective of being a successful business that maximises sustainable returns to your members

· your shareholders have an expectation that you will operate as a commercial entity and be results orientated

· your shareholders have set a benchmark for you to adopt a distribution target of net profit after tax

· you have a policy which determines your pricing structure and recovery of expenditure

· your associated companies have obtained the necessary licences

· the repetition and regularity of your activities in the provision of your services

· your activities are planned, organised and carried on in a businesslike manner such that it is directed at making a profit

· the amount of anticipated revenue to be generated from the activities

· the population served; and

· the value of your net assets.

Based on these factors, it is accepted that you are carrying on a business.

As the services are provided by your associates to the residents in your state, it is accepted that you associates are providing services principally to outsiders.

Will the employee provide documentary evidence of expenditure to the employer before the declaration date?

The declaration date is defined in subsection 136(1) of the FBTAA as being the date of lodgement of the return of the fringe benefits taxable amount, or such later date as the Commissioner allows.

This condition will be satisfied if the employee provides the necessary documentation to you by the date of lodgement of the return.

Therefore, if the relevant documentation is provided, the reimbursement of an account that will be an in-house property expense payment benefit that comes within section 62 of the FBTAA.

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