Edited version of private ruling

Authorisation Number: 1011771053130

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Ruling

Subject: In house fringe benefits - taxable value reduction

What this ruling is about:

1. Is the fringe benefit that arises from the discount of amounts charged for utility services a part of an effective salary sacrifice arrangement an eligible fringe benefit for the purposes of section 62 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

2. Is the fringe benefit that arises from the discount of amounts charged a specific utility service a part of an effective salary sacrifice arrangement an eligible fringe benefit for the purposes of section 62 of the FBTAA?

3. If the fringe benefits that arise under the question above are not eligible fringe benefits for the purposes of section 62 of the FBTAA, is the taxable value of the fringe benefit determined with reference to the lowest price charged to a section of the public?

Ruling:

1. Is the fringe benefit that arises from the discount of amounts charged for the supply of utility services (that is, service charge) as part of an effective salary sacrifice arrangement an eligible fringe benefit for the purposes of section 62 of the FBTAA?

Yes.

2. Is the fringe benefit that arises from the discount of amounts charged for the use of specified utility service as part of an effective salary sacrifice arrangement an eligible fringe benefit for the purposes of section 62 of the FBTAA?

Yes.

3. If the fringe benefits that arise under the question above are not eligible fringe benefits for the purposes of section 62 of the FBTAA, is the taxable value of the fringe benefit determined with reference to the lowest price charged to a section of the public?

Not applicable.

Year(s) of income or period(s) to which this ruling applies:

Year ended 31 March 2011

Year ended 31 March 2012

Year ended 31 March 2013

Commencement date of scheme:

1 April 2007

The scheme that is the subject of the ruling:

The employer is a corporation that is a utility provider.

The Corporation holds an Operating Licence. The Operating Licence sets out the terms and conditions under which the Corporation operates and provides its services. It also prescribes the operating areas within which the Corporation can provide its services.

The Corporation's bill includes details of the service charge.

The Corporation intends to offer its employees discounts on their bills under prospective salary sacrifice arrangements. The amount of the discount will appear as a credit on the employee's bill.

Employees who will be eligible for the discount were detailed to us.

Relevant provisions:

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

Fringe Benefits Tax Assessment Act 1986 Section 20.

Fringe Benefits Tax Assessment Act 1986 Section 40.

Fringe Benefits Tax Assessment Act 1986 Section 45.

Income Tax Assessment Act 1997 Subsection 995-1(1).

Fringe Benefits Tax Assessment Act 1986 Section 42.

Fringe Benefits Tax Assessment Act 1986 Section 49.

Fringe Benefits Tax Assessment Act 1986 Subsection 62(1).

Fringe Benefits Tax Assessment Act 1986 Subsection 62(2).

Explanation: (This does not form part of the notice of private ruling)

Will the fringe benefit be an in-house fringe benefit?

Under the proposed arrangement the Corporation will as part of an effective salary sacrifice arrangement discount an employee's bill where the discount will appear as credit on the bill in respect to certain utility services.

It is agreed a fringe benefit will arise from the reduced amount paid for the provision of specified utility services. This ruling concerns the appropriate method to be used to value the resultant fringe benefits.

In general terms the valuation of a fringe benefit will depend upon whether it is an in-house fringe benefit, or an external 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.

Therefore, to determine whether the resultant fringe benefits are in-house fringe benefits it is necessary to initially determine whether the fringe benefits are an expense payment fringe benefit, a property fringe benefit, or a residual fringe benefit.

Is an expense payment fringe benefit being provided?

An 'expense payment fringe benefit' is defined in subsection 136(1) of the FBTAA as meaning a fringe benefit that is an 'expense payment benefit'. An 'expense payment benefit' is defined in subsection 136(1) of the FBTAA as meaning a benefit referred to in section 20 of the FBTAA.

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 the benefit is neither a payment to a third party, nor a reimbursement it will not be an expense payment fringe benefit.

Is a property fringe benefit being provided?

A 'property fringe benefit' is defined in subsection 136(1) of the FBTAA as meaning a fringe benefit that is a 'property benefit'. A 'property benefit' is defined in subsection 136(1) of the FBTAA as meaning a benefit referred to in section 40 of the FBTAA (and not falling within Divisions 2 to 10 inclusive of the FBTAA). A 'property benefit' is, in basic terms, a benefit where property is provided.

Property is defined in subsection 136(1) of the FBTAA to mean intangible and tangible property. Both of these terms are also defined in subsection 136(1).

Tangible property is defined to mean goods including:

(a) animals, including fish; and

(b) gas and electricity.

Guidance for determining whether the utility services provided are tangible property is provided by a specific Goods and Services Tax Ruling. It provides that the utility service in question is a provision of tangible personal property.

By applying this paragraph it can be concluded that utility service is tangible property and will be a property fringe benefit.

Is a residual fringe benefit being provided?

Section 45 of the FBTAA provides that where a benefit is provided that is not covered under one of the specific benefits by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive) then it will be a residual benefit.

As the provision of a right to the supply of the specific utility services do not fall within Divisions 2 to 11 of the FBTAA the benefits are considered to be a residual benefit as defined in section 45 of the FBTAA.

Are the fringe benefits in-house fringe benefits?

The terms in-house property fringe benefit and in-house residual fringe benefit are defined in subsection 136(1) of the FBTAA.

Where the employer provides the property the definition of an in-house property fringe benefit provides a property fringe benefit will be an in-house property fringe benefit if:

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

Similarly the definition of an in-house residual fringe benefit provides a residual fringe benefit will be an in-house residual fringe benefit if:

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;

Therefore, to determine whether the fringe benefits are in-house fringe benefits, it needs to be determined whether the employer is carrying on a business that consisted of or included the provision of identical or similar benefits principally to outsiders.

Is the employer carrying on a business?

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 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 construed broadly.

In its decision the Court stated that the entity 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 entity'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 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 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 than 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, and

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

In applying these indicators to the Corporation it is accepted that the Corporation is carrying on a business that included the supply of utility services.

Given the number of customers who are provided with utility services it is accepted that these services are provided principally to outsiders.

Accordingly, the specific utility services provided will be in-house property fringe benefits or in-house residual fringe benefits accordingly.

How will the fringe benefits be valued?

As it has been determined that the fringe benefits are in-house fringe benefits the taxable values will initially be determined under the relevant provisions of the FBTAA.

This value will then be able to be further reduced under subsection 62(1) of the FBTAA.

Subsection 62(1) of the FBTAA states:

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:

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

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

Subsection 62(2) of the FBTAA contains the 'eligible fringe benefits' applicable to section 62 of the FBTAA.

Subsection 62(2) of the FBTAA states as follows:

In this section, 'eligible fringe benefit' means:

(c) in-house fringe benefit; or

(d) an airline transport fringe benefit.

As the fringe benefits are considered to be in-house fringe benefits the reduction available under subsection 62(1) of the FBTAA is applicable as the benefits are considered eligible fringe benefits within the definition of subsection 62(2) of the FBTAA.

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