Edited version of private ruling

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Ruling

Subject: Fringe benefits tax: Minor benefits

Question 1

Will a fringe benefits tax liability arise from a reimbursement of expenses paid under the 'healthy lifestyle program' if the expenses were for 'entertainment' as defined in section 32-10 of the Income Tax Assessment Act 1997 (ITAA 1997) where:

a. the amount of the reimbursement is less than $300; or

b. the amount of the reimbursement is $300?

Answer

a. Yes

b. Yes

Question 2

Will a fringe benefits tax liability arise from the reimbursement of expenses paid under the 'healthy lifestyle program' if the expenses were not for 'entertainment' as defined in section 32-10 of the ITAA 1997 where:

a. the amount of the reimbursement is less than $300; or

b. the amount of the reimbursement is $300?

Answer

a. No

b. Yes

Relevant facts and circumstances

You are exempt from income tax.

As part of your enterprise bargaining negotiations you are considering reimbursing your employees for healthy lifestyle expenses incurred by each employee.

The payment will be to the employee for expenses incurred by them.

The benefit will be made available to all permanent and term (full time or part time) employees.

Each employee will be eligible to make one claim for reimbursement per year to a maximum of $300.

Where the amount of the expenditure is less than $300 an employee can claim for more than one purchase provided the total claimed is not more than $300.

You will reimburse the employee upon presentation of the appropriate receipts.

The items eligible for re-imbursement are gym membership, purchase of sports equipment and sporting footwear.

The reimbursement will be paid direct to the employee.

The proposed arrangement will be available for three years and is not subject to any salary sacrifice arrangement.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 20

Fringe Benefits Tax Assessment Act 1986 Section 38

Fringe Benefits Tax Assessment Act 1986 Section 58P

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Income Tax Assessment Act 1997 Section 32-5

Income Tax Assessment Act 1997 Section 32-10

Reasons for decision

Will a fringe benefits tax liability arise from a reimbursement made under the healthy lifestyle scheme?

Under the proposed arrangement you will make a payment of up to $300 to an employee. To determine whether a fringe benefits tax liability will arise from these payments it is necessary to determine:

a. whether the payment is a benefit that comes within the Fringe Benefits Tax Assessment Act 1986 (FBTAA); and

b. if it does, whether the benefit is a fringe benefit, or an exempt benefit.

a. Will the payments be a benefit that comes within the FBTAA?

In general terms, a payment that is an allowance will not come within the FBTAA, but the reimbursement of an expense will. Therefore, to determine whether the payments will be a benefit that comes within the FBTAA it is necessary to determine whether the payments are an allowance or a reimbursement.

Guidance for determining whether a payment is an allowance or a reimbursement is provided by Taxation Ruling TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement.

In explaining when a payment will be an allowance paragraph 2 of TR 92/15 states:

A payment is an allowance when a person is paid a definite predetermined amount to cover an estimated expense. It is paid regardless of whether the recipient incurs the expected expense. The recipient has the discretion whether or not to expend the allowance.

By contrast paragraph 3 of TR 92/15 explains when a payment will be a reimbursement. Paragraph 3 of TR 92/15 states:

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. A requirement that the recipient vouch expenses lends weight to a presumption that a payment is a reimbursement rather than an allowance. A requirement that the recipient refunds unexpended amounts to the employer adds further weight to that presumption.

The circumstances in which the payments will be made indicate the payments will be reimbursements as the employees are required to provide the relevant receipts to obtain a payment and the amount paid will be the amount shown on the receipts (subject to the $300 upper limit).

a. Will the payments be an exempt benefit?

In general terms, a fringe benefits tax liability may arise where a reimbursement is a 'fringe benefit'. However, a fringe benefits tax liability will not arise where a reimbursement is an exempt benefit. Therefore, in determining whether a fringe benefits tax liability will arise from a reimbursement it is necessary to initially consider whether the reimbursement is an exempt benefit.

The FBTAA specifies that certain benefits are exempt benefits. For the purpose of this ruling the relevant exemption is contained within section 58P of the FBTAA which provides that a benefit will be an exempt benefit when the specified conditions are met.

Section 58P states:

Where:

(a) a benefit (in this section called a ``minor benefit'') is provided in, or in respect of, a year of tax (in this section called the ``current year of tax'') in respect of the employment of an employee of an employer;

(b) the benefit is not an airline transport benefit;

(c) in the case of an expense payment benefit, a property benefit or a residual benefit - if the minor benefit were an expense payment fringe benefit, a property fringe benefit or a residual fringe benefit, as the case may be, in relation to the employer, the expense payment fringe benefit, the property fringe benefit or the residual fringe benefit, as the case requires, would not be an in-house fringe benefit;

(d) in the case of a tax-exempt body entertainment benefit where the provider incurs non-deductible exempt entertainment expenditure that is wholly or partly in respect of the provision of entertainment to the employee or an associate of the employee:

(i) the provision of entertainment to the employee or the associate of the employee, as the case may be:

(A) is incidental to the provision of entertainment to outsiders; and

(B) neither consists of, nor is provided in connection with, the provision of a meal (other than a meal consisting of light refreshments) to the employee or the associate of the employee, as the case may be; or

(ii) the entertainment is provided to the employee or the associate of the employee, as the case may be:

(A) on eligible premises of the employer; and

(B) solely as a means of recognising the special achievements of the employee in a matter relating to the employment of the employee;

(e) the notional taxable value of the minor benefit in relation to the current year of tax is less than $300; and

(f) having regard to:

(i) the infrequency and irregularity with which associated benefits, being benefits that are identical or similar to:

(A) the minor benefit; or

(B) benefits provided in connection with the provision of the minor benefit;

have been or can reasonably be expected to be provided;

(ii) the amount that is, or might reasonably be expected to be, the sum of the notional taxable values of the minor benefit and any associated benefits, being benefits that are identical or similar to the minor benefit, in relation to the current year of tax or any other year of tax;

(iii) the amount that is, or might reasonably be expected to be, the sum of the notional taxable values of any other associated benefits in relation to the current year of tax or any other year of tax;

(iv) the practical difficulty for the employer in determining the notional taxable values in relation to the current year of tax of:

(A) if the minor benefit is not a car benefit - the minor benefit; and

(B) if there are any associated benefits that are not car benefits - those associated benefits; and

(v) the circumstances surrounding the provision of the minor benefit and any associated benefits including, but without limiting the generality of the foregoing:

(A) whether the benefit concerned was provided to assist the employee to deal with an unexpected event; and

(B) whether the benefit concerned was provided otherwise than wholly or principally by way of a reward for services rendered, or to be rendered, by the employee;

it would be concluded that it would be unreasonable to treat the minor benefit as a fringe benefit in relation to the employer in relation to the current year of tax;

the minor benefit is an exempt benefit in relation to the current year of tax.

In considering whether the payments will be a minor benefit it is necessary to consider the following questions:

1. Is the benefit an airline transport benefit, or an in-house benefit?

2. Is the benefit a tax-exempt body entertainment benefit?

3. Is the notional value of the benefit less than $300?

4. Having regard to the factors listed in paragraph 58P(1)(f) is it unreasonable to treat the benefit as a fringe benefit?

1. Is the benefit an airline transport benefit, or an in-house benefit?

Paragraph 58P(1)(b) provides that an airline transport ticket will not be an exempt minor benefit. The benefit provided is not an airline transport benefit.

Paragraph 58P(1)(c) provides that an in-house benefit will not be an exempt minor benefit. In general terms, an expense payment benefit, a property benefit or a residual benefit will be an in-house benefit if the good or service is sold by the employer or an associate of the employer in the ordinary course of business to members of the public. The in-house provisions do not apply in relation to the other types of benefits.

Under the proposed arrangement you will reimburse the costs of gym membership, sports equipment and sporting footwear.

The reimbursement of a gym membership will not be an in-house benefit as it will be a tax-exempt body entertainment benefit. The reasons for concluding that the reimbursement of gym memberships will be a tax-exempt body entertainment are set out below.

Further, as you do not sell sports equipment and sporting footwear in the ordinary course of business to members of the public the other reimbursements will not be in-house expense payment benefits.

2. Is the benefit a tax-exempt body entertainment benefit?

Paragraph 58P(1)(d) provides that apart from two limited circumstances a tax-exempt body entertainment benefit will not be an exempt minor benefit.

Is the reimbursement a tax-exempt body entertainment benefit?

Tax-exempt body entertainment benefits are defined in section 38 of the FBTAA, which states:

Where, at a particular time, a person (in this section referred to as the "provider") incurs non-deductible exempt entertainment expenditure that is wholly or partly in respect of the provision, in respect of the employment of an employee, of entertainment to a person (in this section referred to as the "recipient") being the employee or an associate of the employee, the incurring of the expenditure shall be taken to constitute a benefit provided by the provider to the recipient at that time in respect of that employment.

The term 'non-deductible exempt entertainment expenditure' is defined in subsection 136(1) of the FBTAA to mean:

non-deductible entertainment expenditure to the extent to which it is not incurred in producing assessable income.

Non-deductible entertainment expenditure is also defined in subsection 136(1) as:

a loss or outgoing to the extent to which:

(a) section 32-5 of the Income Tax Assessment Act 1997 applies to it, or would apply if it were incurred in producing assessable income; and

(b) apart from that section, it would be deductible under section 8-1 of that Act, or would be if it were incurred in producing assessable income;

Section 32-5 of the ITAA 1997 states:

To the extent that you incur a loss or outgoing in respect of providing ^*entertainment, you cannot deduct it under section 8-1. However, there are exceptions, which are set out in Subdivision 32-B.

Therefore, a tax-exempt body entertainment benefit arises where the following conditions are satisfied:

(i) entertainment is provided to an employee (or an associate of the employee)

(ii) the expenditure incurred in providing the entertainment was not incurred in producing assessable income, and

(iii) section 32-5 of the Income Tax Assessment Act 1997 (ITAA 1997) would have prevented the person who incurred the expenditure from claiming an income tax deduction for the expenditure under section 8-1 of the ITAA 1997 if it had been incurred in producing assessable income.

(i) Did the expenses being reimbursed constitute the provision of entertainment?

Subsection 136(1) of the FBTAA states that 'entertainment has the meaning given by section 32-10 of the Income Tax Assessment Act 1997'.

Subsection 32-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines 'entertainment' as:

(a) entertainment by way of food, drink or recreation, or

(b) accommodation or travel to do with providing entertainment by way of food, drink or recreation.

'Recreation' is defined under subsection 136(1) of the FBTAA as;

(a) amusement;

(b) sport or similar leisure-time pursuits; and

(c) recreation or amusement provided on, or by means of, a vehicle, ship, vessel or aircraft.

The Macquarie Dictionary provides the following meaning of recreation:

1. refreshment by means of some pastime, agreeable exercise, or the like.

2. a pastime, diversion, exercise, or other resource affording relaxation and enjoyment.

3. the act of recreating.

4. the state of being recreated.

The Macquarie Dictionary provides the following definition of amusement:

1. the state of being amused; enjoyment

2. that which amuses; pastime; entertainment

3. a mechanical entertainment, as a merry-go-round at a fair.

In your application you provided three examples of expenses that are able to be reimbursed. Guidance for determining if these expenses constitute the provision of entertainment is provided by paragraphs 2 and 3 of Taxation determination TD 94/55: Income tax: when does providing an item of property constitute the provision of entertainment within the meaning of subsection 51AE(3) of the Income Tax Assessment Act 1936?

Paragraphs 2 and 3 of TD 94/55 state:

2. In determining whether providing an item of property constitutes the provision of entertainment, regard should be had to all the circumstances of the case. In particular, regard should be given to the character of the entertainment to be derived from the item of property provided. This character is distinct from the property itself and relates to the immediate and active use of the property.

3. In practice, the provision of entertainment can be determined by reference to the following characteristics:

· Timeliness

-  entertainment occurs soon after provision of the item of property;

-  the usefulness of the item of property expires after consumption; or

-  the item of property is returned at the completion of use.

· Direct Connection

 There should be a direct connection between the item of property and the entertainment:

-  the entertainment should arise from the use of the item of property;

-  the entertainment is the expected outcome of the provision of the property.

TD 94/55 provides examples of costs which generally will not constitute the provision of entertainment and costs that generally will constitute the provision of entertainment. The examples given are:

Example 1

Costs incurred in the giving of items of property, such as bottled spirits, groceries, games, TV sets, VCRs, computers, crockery, swimming pools, gardening equipment, etc; have an enduring character, and only an indirect nexus to any immediate entertainment. Consumption is usually delayed. The items of property usually require further steps before they can be consumed, and consumption can occur over a long period.

Hence, these items of property do not generally constitute provision of entertainment.

Example 2

Costs incurred in providing glasses of champagne, hot meals, theatre tickets, holiday accommodation, hired entertainers, and hired sporting equipment, have a dynamic and immediate character. Consumption can usually occur immediately. These items of property do not last beyond initial consumption (or are to be returned at the end of the hire period).

Hence, these items of property would generally constitute provision of entertainment.

In applying these examples, the gym membership fees will constitute the provision of entertainment, but the sporting equipment and footwear will be items of property that do not constitute the provision of entertainment.

(ii) Was the entertainment expenditure incurred in producing assessable income?

As you are not subject to income tax the expenditure will not be incurred in producing assessable income.

(iii) If the expenditure had been incurred in producing assessable income would section 32-5 of the ITAA 1997 have prevented an income tax deduction being claimed for the expenditure?

The tables in sections 32-30 to 32-50 of the ITAA 1997 set out the situations in which section 32-5 does not prevent a deduction being claimed for entertainment expenses. For example, item 1.5 of the table in section 32-30 enables a deduction to be claimed for providing a facility for recreation on property you occupy, if the facility is mainly operated for your employees to use. However, this exception does not apply if the facility is for accommodation or dining or drinking (unless it is a food or drink vending machine).

As the expenditure incurred in relation to the gym membership fees does not come within any of the exceptions the reimbursement of the gym membership fees will constitute the provision of a tax-exempt body entertainment benefit.

Will the reimbursement of the gym membership fees come within the two situations in which a tax-exempt body entertainment benefit can be an exempt minor benefit?

Paragraph 58P(1)(d) provides that the minor benefits exemption can only apply in relation to a tax-exempt body entertainment benefit if the provision of entertainment is:

· incidental to the provision of entertainment to outsiders and does not consist of a meal, other than light refreshments; or

· provided on eligible premises of the employer solely as a means of recognising the special achievements of the employee in a matter

Neither of these dot points will apply for the reimbursement of the gym membership fees as the reimbursements are only paid to employees and are not paid as a means of recognising the special achievements of the employees.

Therefore, as the reimbursement of the gym membership fees will be a tax-exempt body entertainment benefit that will not satisfy the requirements of paragraph 58P(1)(d) it will not be an exempt minor benefit.

3. Is the notional value of the benefit less than $300?

Paragraph 58P(1)(e) requires the notional value of the benefit to be less than $300. This requirement will be met where the reimbursement is less than $300, but it will not be met where the amount of the reimbursement is $300.

2. Having regard to the factors listed in paragraph 58P(1)(f) is it unreasonable to treat the benefit as a fringe benefit?

There are five (5) criteria which need to be considered when deciding if it would be unreasonable to treat the minor benefit as fringe benefit, pursuant to paragraph 58P(1)(f) of the FBTAA. Guidelines for considering these criteria are provided by Taxation Ruling TR 2007/12 Fringe benefits tax: minor benefits.

(i) The infrequency and irregularity with which identical or similar associated benefits are expected to be provided

Paragraph 200 of TR 2007/12 states:

The first criterion to be considered is the frequency and irregularity with which associated benefits, being benefits that are identical or similar to the minor benefit or benefits that are given in connection with the minor benefit, are provided, or can reasonably be expected to be provided.

A reimbursement for the purchase of sports equipment and sporting footwear will only be paid once a year. As no other identical or similar associated benefits are expected to be provided during the year the benefits will not be frequently provided. However, the benefits may be regularly provided each year.

(i) The amount that is, or might reasonably be expected to be, the sum of the notional taxable values of the minor benefit and any associated benefits, being benefits that are identical or similar to the minor benefit, in relation to the current year of tax or any other year of tax

Although an amount of $299 may be reimbursed for several years the sum of the reimbursements will not be significant.

(i) The amount that is, or might reasonably be expected to be, the sum of the notional taxable values of any other associated benefits in relation to the current year of tax or any other year of tax

There are no other associated benefits provided in connection with the reimbursement of the sports equipment and sporting footwear expenses.

(i) The practical difficulty in determining the notional taxable values

As the notional taxable value of the payment is the amount you pay for each employee respectively, there is no practical difficulty in determining the notional taxable value.

(i) The circumstances surrounding the provision of the benefit

This criterion requires consideration of the circumstances surrounding the provision of the minor benefit. Without limiting the generality of the circumstances to be considered surrounding the provision of the benefit, it is necessary to consider specifically whether the benefit was provided as a result of an unexpected event and whether or not it could be regarded to be provided wholly or principally as a reward for services rendered or to be rendered, by the employee.

In considering these two circumstances, a reimbursement will not be provided as a result of an unexpected event. Nor will it be provided as a reward for services rendered by the employee.

Conclusion

In summarising each of these criterion:

(i) the reimbursements will not be frequently provided, but they may be regularly provided;

(ii) the value of the reimbursements in the current year as well as in other years will not be substantial;

(iii) there are no other associated benefits;

(iv) there is no difficulty in determining what would be the notional taxable value of the minor benefit and any associated benefits; and

(v) the payment is neither provided as a result of an unexpected event, nor as a reward for services rendered by the employee.

On balance, having regard to the various criteria in subparagraphs of 58P(1)(f)(1) - 58P(1)(f)(v) of the FBTAA, it can be concluded that it would be unreasonable to treat the minor benefits provided under the reimbursement of sports equipment and sporting footwear expenses as a fringe benefit.

Accordingly, a reimbursement for the purchase of sports equipment and sporting footwear will be an exempt minor benefit under section 58P of the FBTAA where the reimbursement is less than $300.

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