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Edited version of private ruling

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Ruling

Subject: Fringe benefits tax - relocation expenses

Question 1

If the employer reimburses relocation expenses incurred by the employee, will the benefits that arise from the reimbursement be provided under an arm's length arrangement for the purposes of sections 58B and 58C of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes

This ruling applies for the following period:

1 April 2010 to 31 March 2011

Relevant facts and circumstances

A large proportion of the work in the employer's business was in relation to a small number of customers and a significant proportion from one customer. It became evident that the work for that one significant customer was unlikely to continue, and this would have an impact on the ongoing viability of the business.

After discussions with the customer, the director of the company decided to explore the option of moving the business interstate. He found that he could secure a contract for work in another state which was sufficient to ensure the ongoing viability of the business and with scope for extra work the business could be more profitable. Other factors influencing the decision were that there was less competition meaning that the company would be able to charge a higher rate for work and would have a more consistent quantity of work. He decided that he would move the business.

This meant that the director would also need to move to operate the business. The director and the director's spouse sold their house and moved with their children to the new location. The company took up the new contract and its profitability has increased significantly.

Expenses were incurred by the director and the director's spouse in relocating including the removal of household effects and sale and acquisition of dwellings as a result of the relocation.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 58B,

Fringe Benefits Tax Assessment Act 1986 subparagraph 58B(1)(d)(ii),

Fringe Benefits Tax Assessment Act 1986 section 58C,

Fringe Benefits Tax Assessment Act 1986 paragraph 58C(2)(e),

Fringe Benefits Tax Assessment Act 1986 paragraph 58C(3)(h) and

Fringe Benefits Tax Assessment Act 1986 subsection 136(1).

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

If the relocation expenses incurred by the employee are reimbursed by the employer, the benefits that arise from the reimbursement will be provided under an arm's length arrangement for the purposes of sections 58B and 58C of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Detailed reasoning

Where an employer reimburses an employee for expenses that are incurred for the removal or storage of household effects or incidental to the sale or purchase of a home by the employee, the expenses may be exempt benefits under section 58B, subsection 58C(2) and subsection 58C(3) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) respectively.

One of the conditions to be met in relation to each exemption is that the benefit is not provided under a 'non arm's length arrangement'. The condition is identically worded in subparagraph 58B(1)(d)(ii), paragraph 58C(2)(e) and paragraph 58C(3)(h) of the FBTAA.

Subsection 136(1) of the FBTAA defines a 'non arm's length arrangement' as an arrangement other than an arm's length arrangement.

The FBTAA does not define 'arm's length arrangement' however 'arm's length transaction' is defined under subsection 136(1) of the FBTAA to mean:

Taxation Ruling TR 2002/2 looks at the meaning of 'arm's length' for the purpose of subsection 47A(7) of the Income Tax Assessment Act 1936.

The term 'arm's length' is used in both tax and non-tax legislation. However, variations exist in the way in which the term is used and judicial interpretations have varied accordingly. The case Pontifex Jewellers (Wholesale) Pty Ltd v FCT [1999] FCA 1822, 43 ATR 643 contains a useful summary of case law on the different meanings of the term 'arm's length'. Comments that follow are drawn from that summary.

The case law draws a distinction between two uses of the term 'arm's length'. One refers to the relationship of the parties to a transaction (i.e. whether the parties are related in some way) and the other refers to the terms of a transaction between the parties (i.e. whether they are those that could be expected to arise between independent parties).

The relevant judicial decisions turn on both the language used and the context in which the term 'arm's length' appears. When a statute refers to parties dealing at arm's length or to a specific transaction being at arm's length, the arm's length test is generally taken to refer to the terms of the transactions such as would be entered into between independent parties.

Subparagraph 58B(1)(d)(ii), paragraph 58C(2)(e) and paragraph 58C(3)(h) of the FBTAA require a determination as to whether the arrangement by which the employer will reimburse the employee with certain expenses was not a non-arm's length arrangement.

It is not unusual for employers to bear the cost of relocation expenses for employees who are required to change their job location.

Although the relationship between the director and the employer is not arm's length, the business operated by the employer was relocated for sound commercial reasons which also made it necessary for the director and the director's family to relocate.

The facts describing the circumstances under which expenditure incurred by the director will be reimbursed do not indicate that a reimbursement would not be provided under an arm's length arrangement.

Therefore, if all other conditions of sections 58B and 58C of the FBTAA are met, subparagraph 58B(1)(d)(ii), paragraph 58C(2)(e) and paragraph 58C(3)(h) of the FBTAA would not prevent the benefits that arise from the reimbursement of the director's relocation expenses from being exempt benefits.

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