Edited version of private ruling

Authorisation Number: 1011548089564

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Ruling

Subject: FBT - In-house residual fringe benefits

Issue 1

Question 1

Does a fringe benefits tax (FBT) liability arise to the employer where company A enters into a building contract with an employee of the employer for the building of a new house, on land owned by the employee, for a price that is 75% of the usual arm's length building price?

Answer

No

Question 2

Does a FBT liability arise to the employer where the employer and company A enter into a contract for the employer to pay company A 25% of the usual arm's length building price in respect of the construction of a new house for an employee of the employer and the employee subsequently repays that amount to the employer under the terms of a valid salary sacrifice agreement?

Answer

Yes

Question 3

Would the Commissioner of Taxation make a Determination under section 67 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) in respect of the scheme or any part of the scheme identified in this application for a private ruling?

Answer

No

This ruling applies for the following period

1 April 2009 to 31 March 2012

The scheme commenced on

1 April 2009

Relevant facts

Company A is a wholly owned subsidiary of the employer.

Company A offers project homes and house and land packages and offers contracts whereby it demolishes and rebuilds a person's home on land owned by that person.

The employer, through company A, is proposing to enter into arrangements with a particular employee of the employer whereby company A will demolish the employee's existing home situated on land owned by the employee and build a new home for the employee on that land.

The employee will enter into a contract with company A for the demolition of the employee's existing home and the construction of the employee's new home at a contract price that is 75% of the full arm's length price company A would normally charge the general public for such demolition and construction of a home identical to that being built for the employee.

The employee will subsequently pay company A, from the employee's own funds, the above contract price charged to the employee for the demolition of the employee's existing home and the construction of the employee's new home.

The employer will enter into a contract with company A whereby the employer will pay company A an amount equal to 25% of the full arm's length price that company A would normally charge the general public for the demolition of a home identical to the employee's existing home and for the construction of a home identical to the employee's new home. The aforesaid payment from the employer to company A will be done via an 'in-house' journal entry.

The employee will never have a personal obligation or liability to pay company A any amount other than that specified in the employee contract with company A, being 75% of the arm's length amount normally charged by company A in respect of the construction of the house.

However, alternatively, instead of there being two separate contracts drawn up as above between company A and the employee and between the employer and company A, the above arrangements may be incorporated into a single contract between all the relevant parties.

The employee will enter into valid salary sacrifice arrangements with the employer whereby the employee will salary sacrifice an amount equal to 25% of the full arm's length price that company A would normally charge the general public for the demolition of a home identical to the employee's existing home and for the construction of a home identical to the employee's new home.

An addendum will be made to the employee's employment contract whereby the employer can recover any amount not yet forgone in gross salary in respect of the above salary sacrifice arrangements should the employee leave the employ of the employer.

The proposed clauses to be inserted as an addendum into the above employee employment contract will state:

1. In the event that the employee leaves the employment of the employer and the employer has entered into a contract with company A relating to the construction of the employee's house, the employee will pay the employer the amount (if any) as determined by the following formula:

R = A - B

Where:

R = Amount to be paid by the employee to the employer upon leaving the employment of the employer;

A = Amount paid by the employer to company A;

B = So much of the discount allowed to the employee in respect of the construction of his/ her home as has already been earned by the employee prior to the employee leaving the employment of the employer, whereby B will not be greater than A.

2. For the avoidance of doubt, where the employee has earned all of the discount allowed to him/ her prior to the employee leaving the employment of the employer, the employee will not be liable to make any payment to the employer in relation to the discount allowed.

There are no other additional provisions to be inserted into the employee's employment contract nor are there any other enforceable contracts or agreements, or parts of any enforceable contracts or agreements, which will specify that the employee, or an associate of the employee, will incur a liability to pay either the employer or an associate of the employer any amount of interest whatsoever in respect of the 25 % payment made by the employer to company A.

The employee will be presented with a copy of a standard company A tender document (Tender) which will include the following details:

· That the Tender is in respect of a new house to be completed on the employee's land.

· That the List Price is for the 'selected home on a concrete slab'.

· Site costs.

· Council conditions costs.

· Price for the basic home including site costs and council conditions.

· Cost of total variations.

· Tender Total (comprising basic home price, site costs, council conditions and total variations).

· That the Tender is subject to the client entering into a Building Agreement with company A.

The Tender Total shown in the above Tender will be the full price normally charged to the general public for constructing a home identical to the employee's new home. However, the employee will never sign the above Tender.

The arrangements between the employee and company A will not incorporate any of the following schedules, conditions and clauses usually included in the standard company A building contract:

· Schedule 1. Particulars of Contract.

· Schedule 2. Progress Payments.

· Schedule 3. Excluded Items (as specified).

· Schedule 4. Warranty Insurance.

· Special Conditions.

· Written instructions.

The contracts that will be entered into, particularly the clauses in those contracts in relation to payment or a liability to make a payment under the contract will differ from those in the standard company A building contract, and will be tailored such that they reflect the objectives of the scheme and the obligations of the relevant parties. Otherwise, the employee will enter into the contractual conditions as specified in the standard company A building contract.

Assumptions

None

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 16

Fringe Benefits Tax Assessment Act 1986 Section 18

Fringe Benefits Tax Assessment Act 1986 Section 20

Fringe Benefits Tax Assessment Act 1986 Section 40

Fringe Benefits Tax Assessment Act 1986 Section 45

Fringe Benefits Tax Assessment Act 1986 Section 49

Fringe Benefits Tax Assessment Act 1986 Subsection 66(1)

Fringe Benefits Tax Assessment Act 1986 Section 67

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 Section 147

Fringe Benefits Tax Assessment Act 1986 Section 149

Fringe Benefits Tax Assessment Act 1986 Section 153

Fringe Benefits Tax Assessment Act 1986 Section 158

Fringe Benefits Tax Assessment Act 1986 Section 159

Reasons for decision

Issue 1

Question 1

Does a FBT liability arise to the employer where company A enters into a building contract with an employee of the employer for the building of a new house, on land owned by the employee, for a price that is 75% of the usual arm's length building price?

Detailed reasoning

Liability for FBT

Subsection 66(1) of the FBTAA states:

66(1)[Tax payable by employer]

Subject to this Act, tax imposed in respect of the fringe benefits taxable amount of an employer of a year of tax is payable by the employer.

Therefore, the liability for fringe benefits tax falls upon the relevant employer in respect of a fringe benefit received by an employee (or associate).

Type of benefit

Subsection 136(1) of the FBTAA contains the following definitions:

"benefit" includes any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under:

(a) an arrangement for or in relation to:

(i) the performance of work (including work of a professional nature), whether with or without the provision of property;

(ii) ...

"provide"

(a) in relation to a benefit - includes allow, confer, give, grant or perform; and

(b) in relation to property - means dispose of (whether by sale, gift, declaration of trust or otherwise):

(i) if the property is a beneficial interest in property but does not include legal ownership - the beneficial interest; or

(ii) in any other case - the legal ownership of the property.

Company A offers project homes and house and land packages and, as required, will demolish an existing house so that a new home can be built on land owned by the customer.

The provision by company A of the new home (and associated preliminary works) to the employee constitutes the provision of a benefit(s) for the purposes of the FBTAA.

Section 40 of the FBTAA states:

40 PROPERTY BENEFITS

Where, at a particular time, a person (in this section referred to as the ``provider'') provides property to another person (in this section referred to as the ``recipient''), the provision of the property shall be taken to constitute a benefit provided by the provider to the recipient at that time.

Section 45 of the FBTAA states:

45 RESIDUAL BENEFITS

A benefit is a residual benefit for the purposes of this Act if the benefit is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive).

Subsection 136(1) of the FBTAA includes the following definitions:

"property" means:

(a) intangible property; and

(b) tangible property.

"intangible property" means:

(a) real property;

(b) ...

(c) any other kind of property other than tangible property;

but does not include:

(d) ...

"tangible property" means goods and includes:

(a) ...

It is accepted that part of the business of company A is the building of residential housing, together with any associated necessary works such as the demolition of prior structures, and that company A in the furtherance of that building process normally enters into building contracts with third parties.

The building contract entered into between company A and the employee is for the provision of a new home (and also for necessary preliminary building works such as the demolition of the existing home of the employee).

It is essential to correctly characterise what company A is supplying when it builds the above home for the employee to determine what benefit(s) the company is providing. Is company A supplying a completed house or does the supply constitute the supply of materials and labour?

One of the leading Australian case on how materials should be characterised when used in construction is the decision of the High Court in Hewett v. Court (1983) 149 CLR 639. In that case a builder of transportable houses agreed to construct a house for a purchaser, transport it to the purchaser's site and stump it on that land. The High Court held that the contract was for work, labour and materials and not the sale of goods.

Wilson and Dawson JJ in their joint judgment stated that the erection and installation of an article such that it became a fixture resulted in the contract being one for work done and materials supplied in contrast to a contract for the sale of goods:

The ordinary tests which are applied to distinguish a contract for the sale of goods from a contract for work and labour draw a distinction between the degree to which emphasis is placed by the contract upon the exercise of skill in producing the end product and end product itself. The distinction is often artificial and difficult to draw. But there is a line of authority which establishes that where a contract is not only to supply an article but to erect or install it so that it becomes a fixture or part of the land, the contract is for work done and materials supplied. (at p.655).

Although the judgment of Wilson and Dawson JJ was a dissenting judgment the dissent concerned whether or not a lien applied and not the characterisation of the contract as one for the supply of labour and materials. Gibbs J agreed with Dawson and Wilson JJ in respect of the contract not being one for the sale of goods (647):

Although it does not appear from the contract itself in what manner the house was to be placed on the stumps, the fact that it was to be a home leads to the inference, in the absence of the evidence to the contrary, that it was intended to be annexed to the land in which the stumps stood, irrespective of the manner of it annexation: see Reid v. Smith (31). A contract to construct a house and erect it on the land which is intended to be its site is not a contract for the sale of goods. (at pp 646-647)

Murphy J similarly concluded that the contract is one for work and materials and is not a contract for the sale of goods. (at p.650)

The contract is one for work and materials, and not for sale of goods (see Aristoc Industries Pty Ltd v. RA Wenham (Builders) Pty Ltd (43). Hence the Sale of Goods Act 1895 (W.A) is not applicable.

It is our view that the building contract entered into between company A and the employee is a contract for the supply of work and materials.

The supply of the construction materials constitutes the provision of a property benefit and the associated application of labour and machinery to those construction materials represents a residual benefit.

However, section 153 of the FBTAA states as follows:

153 RESIDUAL BENEFITS TO INCLUDE PROVISION OF PROPERTY IN CERTAIN CIRCUMSTANCES

For the purposes of this Act, where:

(a) a person carries on a business that consists of, or includes, the entering into of contracts for the provision of property together with the provision of residual benefits;

(b) the person provides property (other than food or drink) and residual benefits to another person;

(c) but for this section, the provision would constitute a property benefit and a residual benefit; and

(d) the provision is made in the same, or substantially the same, circumstances as a provision of the kind mentioned in paragraph (a);

the provision of the residual benefit shall be taken to include the provision of the property and the provision of the property shall not be taken to constitute a property benefit.

Satisfaction of all the requirements of section 153 of the FBTAA will result in the relevant separate property and residual benefits being deemed to be residual benefits only.

The building of the house by company A and associated works meets the requirements of paragraph 153(a) of the FBTAA.

The requirements of both paragraph 153(b) and paragraph 153(c) of the FBTAA are also met. The provision of the building materials is a property benefit being provided to the employee and the application of the associated labour constitutes a residual benefit being provided to the employee and, in the absence of section 153 of the FBTAA, these two benefits would otherwise arise.

Paragraph 153(d) of the FBTAA requires that the provision of the relevant benefits are made in the same, or substantially the same, circumstances as the provision of the benefits mentioned in paragraph 153(a) of the FBTAA.

What comprises 'the same, or substantially the same, circumstances' is not defined in the FBTAA and, therefore, such expressions take their ordinary meaning in the context in which they are used.

The main differences between the house building arrangements normally offered by company A to its clients and the relevant house building arrangements between company A and the employee are that the arrangements between company A and the employee:

(a) concern an employee of the employer and the employer is an associated company of company A for the purposes of the FBTAA (per sections 158 and 159 of the FBTAA which, respectively, deem that a wholly owned subsidiary of another company is related to the holding company and, consequently, such companies are associates of each other);

(b) involve a tender document being presented to the employee stating the full arm's length price normally charged by company A for such building work but provided in the knowledge of both parties that there is no intention that the tender will ever be signed by the employee.

(c) are for a direct building contract price that is 25% less than the normal full arm's length price charged by company A for such building work.

(d) incorporate only some of the conditions of the standard company A building contract in the building contract itself.

(e) have salient conditions, including the price for the building work, contained in separate documents between company A and the employee.

(f) are related to an arrangement being entered into between the employer and company A whereby the employer will pay company A an amount that is equal to 25% of the full arm's length price normally charged by company A for the relevant building work.

(g) are related to the employee entering into a valid salary sacrifice arrangement (Effective SSA) with the employer for the employee to forego a future salary amount equal to 25% of the full arm's length price normally charged by company A for the relevant building work.

The circumstances surrounding the arrangements for the provision of the relevant benefits to the employee are not exactly the same as those normally provided by company A to its clients. The major difference is the price reduction offered to employees. We do not, however, consider that the price difference is of sufficient weight to result in the circumstances not being substantially the same. The employee will be receiving exactly what members of the public received when entering into a contract with company A. The house provided to the employee is identical in nature to the houses which are provided to arm's length clients of company A.

The requirements of section 153 of the FBTAA are satisfied and the separate property benefits and residual benefits are deemed to be residual benefits only.

Type of residual fringe benefit

Subsection 136(1) of the FBTAA defines an 'in-house residual fringe benefit' as:

"in-house residual fringe benefit", in relation to an employer, means a residual fringe benefit in relation to the employer:

(a) where both of the following conditions are satisfied:

(i) the provider is the employer or an associate of the employer;

(ii) at or about the comparison time, the provider carried on a business that consisted of or included the provision of identical or similar benefits principally to outsiders; or

(b) ...

Therefore, an 'in-house residual fringe benefit' requires that:

(a) there is a residual fringe benefit in relation to the employer; and

(b) the provider of that benefit is either the employer or an associate of the employer; and

(c) at the relevant time, the provider carried on a business that consisted of the provision of identical or similar benefits principally to outsiders.

As determined above, residual fringe benefits are being provided in relation to the employer and the provider of the residual benefits, company A, is an associate of the relevant employer. Paragraphs (a) and (b) of the definition of 'in-house residual fringe benefit' are satisfied.

'Identical benefit' is defined in subsection 136(1) of the FBTAA as:

"identical benefit", in relation to the recipients benefit in relation to a residual fringe benefit, means another benefit that is the same in all respects, except for differences (if any) that are minimal or insignificant and do not affect the value of the other benefit.

For the reasons previously discussed it is considered that although the benefits provided to the employee cannot be said to be identical to those normally provided by company A to its clients, they are considered to be similar to the benefits normally provided by company A to its clients.

Consequently, the building of the new house by company A for the employee is an in-house residual fringe benefit.

A 'period residual fringe benefit' is defined in subsection 136(1) of the FBTAA as meaning 'a residual fringe benefit that is provided during a period'. Section 149 of the FBTAA provides the following meaning (as relevant here) of the provision of a benefit during a period:

149(1)

For the purposes of this Act, a benefit shall be taken to be provided during a period if, and only if, the benefit:

(a) is provided, or subsists, during a period of more than 1 day; and

(b) is not deemed by a provision of this Act to be provided at a particular time or on a particular day.

149(2)

...

As the provision of materials and labour for building of a house takes some time (and certainly more than 1 day), and no other part of the FBTAA would deem such construction process as being provided on a particular day, then the provision of such a benefit would be a 'period benefit' under paragraph 149(1)(a) of the FBTAA.

Therefore, the building of the new home by company A for the employee constitutes an in-house period residual fringe benefit.

Taxable value of in-house period residual fringe benefit

The taxable value of an in-house period fringe benefit is determined by section 49 of the FBTAA which states:

Subject to this Part, the taxable value of an in-house period residual fringe benefit in relation to a year of tax is:

(a) where, at or about the comparison time, identical overall benefits were provided by the provider:

(i) in the ordinary course of business to members of the public under an arm's length transaction or arm's length transactions; and

(ii) in similar circumstances and subject to identical terms and conditions (other than as to price) as those that applied in relation to the provision of the recipients overall benefit;

an amount equal to 75% of the lowest amount paid or payable by any such member of the public in respect of the current identical benefit in relation to an identical overall benefit so provided; or

(b) in any other case - an amount equal to 75% of the notional value of the recipients current benefit;

reduced by the amount of the recipients contribution insofar as it relates to the recipients current benefit.

It is not considered that the benefits provided to the employee are subject to identical terms and conditions (other than price) to those normally provided by company A to its clients. Therefore, paragraph 49(a) does not apply in this case

Accordingly, the taxable value of the in-house period fringe benefit is determined by paragraph 49(b) of the FBTAA. The 'notional value' will be the full arm's length contract price company A would normally charge the general public for building a house for the employee. Under paragraph 49(b) the taxable value is 75% of this amount less the recipients contribution.

As the employee will pay company A a contract price that is 75% of the full arm's length contract price, the taxable value is equal to the amount paid to company A less the recipients contribution, resulting in a nil taxable value.

Conclusion

No FBT liability will arise to the employer where company A enters into a building contract with an employee of the employer for the building of a new house, on land owned by the employee, in circumstances where the price is 75% of the usual arm's length building price and the employee's recipients contribution is the equal to this amount.

Question 2

Does a FBT liability arise to the employer where the employer and company A enter into a contract for the employer to pay company A 25% of the usual arm's length building price in respect of the construction of a new house for an employee, and the employee subsequently repays that amount to the employer under the terms of an Effective SSA?

Detailed reasoning

A SSA is generally considered effective if the arrangement is set up within the guidelines provided by Taxation Ruling TR 2001/10, Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements.

TR 2001/10 provides the following guidance concerning salary sacrifice arrangements:

19. 'Salary sacrifice arrangement' - in this Ruling, the term salary sacrifice arrangement means an arrangement under which an employee agrees to forego part of his or her total remuneration, that he or she would otherwise expect to receive as salary or wages, in return for the employer or someone associated with the employer providing benefits of a similar value. The main assumption made by the parties is that the employee is then taxed under the income tax laws only on the reduced salary or wages and that the employer is liable to pay FBT, if any, on the benefits provided.

20. ...

21. 'Effective SSA' - an effective SSA involves the employee agreeing to receive part of his or her total amount of remuneration as benefits before the employee has earned the entitlement to receive that amount as salary or wages.

22. 'Ineffective SSA' - an ineffective SSA involves the employee directing that an entitlement to receive salary or wages that has been earned (see paragraph 23 of this Ruling) is to be paid in a form other than as salary or wages.

An Effective SSA will be entered into between the employer and the employee as the employee will agree to forgo part of the employee's future salary up to an amount that does not exceed 25% of the usual arm's length building price paid by the employer to company A. The period over which the amount will be repaid has not been identified, but could foreseeable occur over several years.

Three types of benefits require consideration in the context of the proposed arrangements between the relevant parties:

(a) an expense payment benefit

(b) a loan benefit

(c) a residual benefit

(a) expense payment benefit

Section 20 of the FBTAA states that an expense payment benefit arises:

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

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

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

the making of the payment referred to in paragraph (a), or the reimbursement referred to in paragraph (b), shall be taken to constitute the provision of a benefit by the provider to the recipient.

To fall within paragraph 20(a) of the FBTAA the provider (in this case, the employer) must make a payment in relation to an 'obligation' of the recipient (in this case, the employee) in respect of expenditure 'incurred' by the recipient (in this case, the employee).

Subsection 136(1) of the FBTAA defines an 'obligation' as follows:

"obligation", in relation to the payment or repayment of an amount, includes an obligation that is not enforceable by legal proceedings.

However, the term 'incurred' is not so defined in the FBTAA. Nonetheless, some guidance on the meaning of the term is provided in Taxation Ruling TR 97/7, Income tax: section 8-1 - meaning of 'incurred' - timing of deductions, in the following paragraphs:

5. As a broad guide, you incur an outgoing at the time you owe a present money debt that you cannot escape. But this broad guide must be read subject to the propositions developed by the courts...

6. The courts have been reluctant to attempt an exhaustive definition of a term such as 'incurred'. The following propositions do not purport to do this, they help to outline the scope of the definition...

(a) a taxpayer need not actually have paid any money to have incurred an outgoing provided the taxpayer is definitively committed...Accordingly, a loss or outgoing may be incurred ...provided the taxpayer is 'completely subjected' to the...outgoing...

(b) ...

Therefore, in basic terms, an expenditure is 'incurred' when the relevant person is 'definitely committed' or 'completely subjected' to the liability and, in other words, owes a debt from which they cannot escape.

The contract for the direct payment of an amount equal to 25% of the relevant arm's length building cost will be solely between the employer and company A (or where, alternatively, the various contract arrangements may be incorporated into a single document between all of the relevant parties that document will still state that the contractual responsibility for such a direct payment will be solely entered into between the employer and company A).

There will be no contract document drawn up for the employee to directly pay company A an amount equal to 25% of the relevant arm's length building cost.

The building contract between the employee and company A will not be entered into without a simultaneous contract being entered into between the employer and company A for the payment of an amount equal to 25% of the relevant arm's length building cost (and also the concurrent entering into an Effective SSA between the employer and the employee).

However, these arrangements taken together still do not alter the position that it is only the employer who is committed to paying an amount equal to 25% of the relevant arm's length building cost. The employee is under no contractual obligation to make such a payment to company A.

Therefore, paragraph 20(a) of the FBTAA does not apply as the payment of the amount equal to 25% of the relevant arm's length building cost by the employer is in relation to its own contractual obligation to company A and not the discharge of any direct contractual obligation by the employee to company A.

To fall within paragraph 20(b) of the FBTAA the employer must reimburse, in whole or part, an amount of expenditure incurred by the employee.

Subsection 136(1) of the FBTAA defines 'reimburse' as follows:

"reimburse" includes any act having the effect or result, direct or indirect, of a reimbursement.

Taxation Ruling TR 92/15, Income tax and fringe benefits tax: the difference between an allowance and a reimbursement, provides the following further guidance on the meaning of when a payment is a reimbursement:

3. A payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed. In general, the provider considers the expense to be its own and the recipient incurs the expenditure on behalf of the provider...

The payment of the amount equal to 25% of the relevant arm's length building cost by the employer is in relation to the employer's own contractual obligation to company A and not in the direct discharge of any contractual obligation by the employee to company A. The payment by the employer to company A is not a reimbursement of any expenditure incurred by the employee and, therefore, paragraph 20(b) of the FBTAA does not apply in this instance.

As neither paragraph 20(a) nor paragraph 20(b) of the FBTAA applies an expense payment benefit does not arise in respect of the payment by the employer to company A of an amount equal to 25% payment of the relevant arm's length building cost.

(b) loan benefit

Section 16 of the FBTAA states:

16(1) [Recipient under obligation to repay loan]

Where a person (in this subsection referred to as the "provider") makes a loan to another person (in this subsection referred to as the "recipient"), the making of the loan shall be taken to constitute a benefit provided by the provider to the recipient and that benefit shall be taken to be provided in respect of each year of tax during the whole or a part of which the recipient is under an obligation to repay the whole or any part of the loan.

16(2) ...

16(3) ...

16(4) ...

16(5) [No interest payable on loan]

For the purposes of this Act, where no interest is payable in respect of a loan, a nil rate of interest shall be taken to be payable in respect of the loan.

Subsection 136(1) of the FBTAA defines a 'loan' as follows:

"loan" includes:

(a) ...

(b) ...

(c) the payment of an amount for, on account of, on behalf of or at the request of a person where there is an obligation (whether expressed or implied) to repay the amount; and

(d) a transaction (whatever its terms or form) which in substance effects a loan of money.

The phrase 'on behalf of' is not defined for the purposes of the FBTAA. The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne defines the term 'behalf' or 'on behalf of' as

behalf n. on behalf of (or on a person's behalf ) 1 in the interests of (a person, principle, etc.). 2 as representative of ( acting on behalf of my client ).

In Cuthbertson & Richards Sawmills v. Thomas (1999) 93 FCR 141 the meaning of the phrase 'on behalf of' was discussed. It was stated that the phrase does not have a strict legal meaning. The court referred to R v. Toohey; Ex parte Attorney General (N.T.) (1980) 145 CLR 374 at 386 where Stephen, Mason, Murphy and Aickin JJ referred to the phrase in these terms:

...it bears no single and constant significance. Instead it may be used in conjunction with a wide-range of relationships, all however, in some way concerned with the standing of one person as auxiliary to or representative of another person or thing.

...Context will always determine to which of the many possible relationships the phrase "on behalf of" is in a particular case being applied; "the context and subject matter" (per Dixon J in R v. Portus; Ex parte Federated Clerks Union (1949) 79 CLR 428) will be determinative.

As noted previously, the building contract between the employee and company A will not be entered into without a simultaneous contract being entered into between the employer and company A for the payment of an amount equal to 25% of the normal arm's length building cost. At the same time arrangements will be entered into between the employee and the employer for exactly the same amount to be forgone from the employee's future salary.

Further, it is intended that the amount equal to 25% of the arm's length building cost to be salary sacrificed by the employee will be initiated in the same year in which the new home is constructed and there will be an addendum to the employee's current employment contract whereby the employer can recover any amount not then forgone per the effective SSA should the employee leave the employ of the employer.

These circumstances demonstrate that the payment by the employer to company A of an amount equal to 25% of the normal arm's length building cost will be made by the employer on, at least, 'the behalf of' the employee (if not also 'on account of', or 'at the request of' the employee depending on the conditions of the finalised arrangements) for the purposes of paragraph (c) of the subsection 136(1) of the FBTAA definition of a 'loan'.

As noted previously, subsection 136(1) of the FBTAA defines an 'obligation' as follows:

"obligation", in relation to the payment or repayment of an amount, includes an obligation that is not enforceable by legal proceedings.

Section 147 of the FBTAA states:

147 OBLIGATION TO PAY OR REPAY AN AMOUNT

For the purposes of this Act, a person shall be deemed to be under an obligation to pay or repay an amount notwithstanding that the amount is not due for payment or repayment.

The meaning of the term 'repay' is not defined in the FBTAA but the Macquarie Dictionary, on-line version 5.0.0, defines 'repay' as:

repay

...

verb (t)

1. to pay back or refund (money, etc.).

2. to make return for: repaid with thanks.

3. to make return to in any way: feel; repaid for sacrifices made.

4. to return: repay a visit.

verb (i)

5. to make repayment or return.

In view of the above information there is a clear obligation on the part of the employee to repay the employer and the payment by the employer to company A qualifies as a loan benefit to the employee under section 16 of the FBTAA.

(c) residual benefit

In basic terms, a residual benefit is a benefit that does not fall within one of the other more specific benefit types contained in the FBTAA.

As the payment by the employer to company A constitutes a loan benefit a residual benefit does not arise.

However, it should be noted that due to the very wide breadth of what may constitute a 'benefit' the relevant payment by the employer to company A may, if for some reason the payment to company A was held not to be a loan fringe benefit, constitute a residual benefit under section 45 of the FBTAA.

Loan fringe benefit

A loan fringe benefit is defined in subsection 136(1) of the FBTAA as meaning a fringe benefit that is a loan benefit.

The requirements for being a fringe benefit in this instance is met as follows:

(a) There is a loan benefit (as determined above).

(b) The benefit will be provided either in respect of a year of tax or at any time during a year of tax and is, otherwise, in relation to a year of tax.

(c) The benefit will be being provided by the relevant employer and is, otherwise, in relation to that employer.

(d) The benefit will be in relation to the employee in that the loan value is to be calculated as 25% of the arm's length building cost of the new home to be built for the employee.

(e) The benefit will be in respect of the employment of the employee as evidenced by the Effective SSA entered into between the employee and the employer (including the proposed addendum to the employee's employment agreement in respect of the repayment should the employee leave the employee's employ).

(f) The loan benefit is being provided to the employee.

Therefore, a loan fringe benefit will arise in this particular instance.

Loan fringe benefit taxable value

Section 18 of the FBTAA states that the taxable value of a loan fringe benefit is:

Subject to this Part, the taxable value, in relation to a year of tax, of a loan fringe benefit provided in respect of the year of tax is the amount (if any) by which the notional amount of interest in relation to the loan in respect of the year of tax exceeds the amount of interest that has accrued on the loan in respect of the year of tax.

The expression 'notional amount of interest' is defined in subsection 136(1) of the FBTAA as meaning:

"notional amount of interest", in relation to a loan in relation to a year of tax, means the amount of interest that would have accrued on the loan in respect of the year of tax if the interest were calculated on the daily balance of the loan at:

(a) ...

(b) ...

(c) ...the statutory interest rate in relation to the year of tax.

The expression 'statutory interest rate' is also defined in subsection 136(1) as meaning:

"statutory interest rate":

(a) in relation to a year of tax, means the benchmark interest rate in relation to the year of tax; or

(b) ...

As advised in paragraph 1 of Taxation Determination TD 2009/10, Fringe benefits tax: what is the benchmark interest rate to be used for the fringe benefits tax year commencing 1 April 2009?, the benchmark interest rate for the FBT year commencing 1 April 2009 is 5.85% per annum.

Subsection 16(5) of the FBTAA states that where no interest is payable in respect of a loan a 'nil' rate of interest is deemed to be payable in respect of that loan. In this particular instance, in the absence of advice to the contrary, no rate of interest is to be specified for the grant of the loan so the deemed rate of interest is 'nil'.

Therefore, the taxable value of the loan fringe benefit will be (for example, for the 2010 FBT year) the sum of the products of the loan principal still outstanding each particular day times the interest rate of 5.85% all divided by 365 for each of the relevant days in that FBT year.

Conclusion

A FBT liability does arise to the employer in respect of a loan fringe benefit, where the employer and company A enter into a contract for the employer to pay company A an amount equal to 25% of the relevant usual arm's length building price.

Question 3

Would the Commissioner of Taxation make a Determination under section 67 of the FBTAA in respect of the scheme or any part of the scheme identified in this application for a private ruling?

Detailed reasoning

Section 67 of the FBTAA uses the term 'arrangement' as opposed to scheme. Due to the very wide ambit of the term 'arrangement', as defined in subsection 136(1) of the FBTAA, it is considered that the arrangement encompasses:

(a) Company A entering into a building contract with the employee for the building of a new house, on land owned by the employee, for a price that is 75% of the usual arm's length building price.

(b) The employer and company A entering into a contract for the employer to pay company A an amount equal to 25% of the usual arm's length building price in respect of the construction of the new house and the employee concurrently entering into an Effective SSA for exactly the same amount.

(c) The combination of the circumstances outlined in both points (a) and (b) given that neither will happen without the other simultaneously occurring.

One of the requirements for the application of section 67 of the FBTAA is the identification of a tax benefit in connection with an arrangement. Subsection 67(2) of the FBTAA specifies that a tax benefit is obtained when an amount is not included 'in the aggregate fringe benefits amount of the employer of the year of tax in respect of that benefit where the amount would have been included, or could reasonably be expected to have been included, in that aggregate fringe benefits amount if the arrangement had not been entered into'.

There is a reasonable expectation that the employee would have opted to pay full consideration to company A for the demolition and house construction if the arrangement had not been entered into in the way proposed. In other words the employee would have been in the same position as a member of the public, paying full price, and no payment would have been made by the employer to company A. In such circumstances a liability for fringe benefits tax does not arise due to there being a nil taxable value. The taxable value is nil because a zero amount arises after the recipients contribution is taken away from the value of the benefit provided.

In addition to identifying a tax benefit in respect of an arrangement section 67 of the FBTAA requires a person(s) to have entered into the arrangement for the sole or dominant purpose of obtaining a tax benefit. It is our view that the dominant purpose of the arrangement is to provide the employee with an opportunity to salary sacrifice the debt owed to the employer, which allows the employee to exclude salary from his or her assessable income. In view of this conclusion it is not considered that the sole or dominant purpose of the arrangement is to exclude an amount from the aggregate fringe benefits amount of the employer.

Accordingly, section 67 of the FBTAA does not apply to the arrangement or any part of the arrangement described above.

Further issues for you to consider.

It should be noted that the position regarding the possible application of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) to all or any part of the arrangement has not been considered in this ruling. Our views on the potential application of Part IVA of the ITAA 1936 in respect of an employee who enters into the proposed arrangement are contained in a letter provided with this ruling.

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