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Ruling

Subject: Fringe benefits tax - reimbursement of expenses

Question 1

In the event that the employer reimburses 100% of the employee's airfare,

a) Does an expense payment benefit arise under section 20 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) for the employer?

b) If the answer to 1a) is yes, does an expense payment fringe benefit arise as defined in subsection 136(1) of the FBTAA for the employer?

Answer

1a) Yes

1b) Yes

Question 2

In the event that the employer reimburses 50% of the employee's airfare,

a) Does an expense payment benefit arise under section 20 of the FBTAA for the employer?

b) If the answer to 2a) is yes, does an expense payment fringe benefit arise as defined in subsection 136(1) of the FBTAA for the employer?

Answer

Yes.

Question 3

Can the employer use the otherwise deductible rule under section 24 of the Fringe Benefit Tax Assessment Act 1986 (FBTAA) to reduce the taxable value of the expense payment benefit provided to the employee, being the payment and reimbursement of overseas travel expenses to nil?

Answer

No, but the taxable value of the expense payment fringe benefit can be reduced in part.

This ruling applies for the following periods:

1 April 2011 to 31 March 2012

The scheme commences on:

1 April 2011

Relevant facts and circumstances

1. The employee conducts research as a duty of their employment.

2. The employee will be attending a conference overseas for a period of two days. The conference runs annually, and is run in a different country each year. The employee has taken this opportunity to take annual leave, where they will take some time off in the country of the conference and then make their own way to another country for a week. If not for attending the conference, the employee would not be taking a holiday overseas.

3. The expenses the employer will be looking to reimburse the employee for are:

· Return airfares

· Accommodation while attending conference

4. The employee will be paying their own airfare from the country of conference to another country, and will also pay for their own accommodation while on annual leave.

5. In accordance with the employer's policy, a travel diary will be completed and submitted by the employee as per section 24 of the FBTAA to utilise the 'otherwise deductible rule'.

Relevant legislative 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 23.

Fringe Benefits Tax Assessment Act 1986 section 24.

Income Tax Assessment Act 1997 section 8-1.

Rulings and Determinations

Taxation Ruling TR 95/33. (ATO View)

Taxation Ruling TR 98/9. (ATO View)

Other References

Fringe benefits tax: a guide for employers (ATO View)

Relevant Cases

Ronpibon Tin v Federal Commissioner of Taxation (1949) 78 CLR 47.

No 3 Board of Review Case R13 84 ATC 168.

Ure v Federal Commissioner of Taxation 81 ATC 4100

Reasons for decision

Question 1: In the event that the employer reimburses 100% of the employee's airfare,

a. Does an expense payment benefit arise under section 20 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) for the employer?

b. If the answer to 1a) is yes, does an expense payment fringe benefit arise as defined in subsection 136(1) of the FBTAA for the employer?

Question 2: In the event that the employer reimburses 50% of the employee's airfare,

a. Does an expense payment benefit arise under section 20 of the FBTAA for the employer?

b. If the answer to 2a) is yes, does an expense payment fringe benefit arise as defined in subsection 136(1) of the FBTAA for the employer?

Summary

1. A 'fringe benefit' will arise from the airfares provided for the flight from where the employee is employed to overseas and return as it is a 'benefit' provided to an employee by the employer by reason of the employee's employment that does not come within paragraphs (f) to (s) of the 'fringe benefit' definition.

2. Where an employer reimburses an employee in relation to expenses in respect of the employees' employment that has both business and private purposes, then there is a fringe benefit provided to the employee and it will give rise to an expense payment under section 20 of the FBTAA.

Detailed reasoning

3. The employer will be providing the employee with overseas travel to attend a work related conference. The employer will be reimbursing the cost of the return overseas airfare to the employee. The employer will also reimburse for the accommodation for the days while attending the conference.

4. In general terms, the definition of 'fringe benefit' in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides that a fringe benefit will arise from the flights if the following conditions are satisfied:

(i) the flight is a 'benefit';

(ii) the 'benefit' is provided to an employee or an associate of an employee;

(iii) the 'benefit' is provided by the employer, an associate of the employer or a third party under an arrangement involving the employer or an associate;

(iv) the 'benefit' is provided in respect of the employment of the employee; and

(v) the 'benefit' is not one of the benefits specifically excluded from being a 'fringe benefit' by paragraphs (f) to (s) of the 'fringe benefit' definition.

(i) Is the flight a 'benefit'?

"Benefit' is defined in subsection 136(1) of the FBTAA to include:

any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility

As the provision of transport in an aircraft comes within this definition each of the flights will be a benefit.

(ii) Is the 'benefit' provided to an employee or an associate of an employee?

Each of the flights will be provided to an employee.

(iii) Is the 'benefit' provided by the employer, an associate of the employer or a third party under an arrangement involving the employer or an associate?

The flights will be provided by the employer.

(iv) Is the 'benefit' provided in respect of the employment of the employee?

'In respect of' is defined in subsection 136(1) of the FBTAA to include:

by reason of, by virtue of, or for or in relation directly or indirectly to, that employment

In considering the reason for the overseas travel being provided it is relevant to note that it is not provided to any person. Rather it is provided to an employee that is related to their work. In this case, the employee's primary purpose for travelling overseas is to attend a work related conference. This provides the necessary connection to the employment of the employee as they are receiving the benefit because they are an employee.

(v) Is the 'benefit' specifically excluded from being a 'fringe benefit' by paragraphs (f) to (s) of the 'fringe benefit' definition?

Paragraphs (f) to (s) of the 'fringe benefit' definition do not apply to the flights.

Expense payment benefit

5. Section 20 of the FBTAA provides that an expense payment benefit will arise in two ways:

· where the provider (in this case the employer) reimburses the (recipient) in this case the employee) for expenses they incur, or

· where the provider (in this case the employer) pays a third party in satisfaction of expenses incurred by the recipient (in this case the employee).

6. As the employer proposes to reimburse the employee for the cost of their overseas travel, as a result an expense payment benefit will arise. Therefore the benefit will be an expense payment fringe benefit.

Taxable value of expense payment fringe benefits

7. The taxable value of an expense payment fringe benefit is determined under Section 23 of the FBTAA which states as follows:

Subject to this Part, the taxable value in relation to a year of tax of an external expense payment fringe benefit provided during the year of tax is the amount of the payment referred to in paragraph 20(a), or the reimbursement referred to in paragraph 20(b), as the cases requires, reduced, in a case to which paragraph 20(a) applies, by the amount of the recipients contribution.

8. In simple terms, the taxable value of an expense payment fringe benefit is either the amount of payment made by the employer on behalf of the employee for an employee obligation or an amount of reimbursement paid by the employer to the employee for an obligation the employee has paid or incurred.

9. In this case, the employer has stated that the expense payment fringe benefit relates to reimbursements of overseas travel. Therefore the reimbursement of the employee's travel expenses gives rise to an external expense payment fringe benefit as set out in section 23 of the FBTAA.

Question 3: Can the employer use the otherwise deductible (ODR) rule under section 24 of the FBTAA to reduce the taxable value of the expense payment benefit provided to the employee, being the payment and reimbursement of overseas travel expenses to nil?

Summary

10. The application of the 'otherwise deductible rule' (ODR) in section 24 of the FBTAA will only apply to the extent that the expenditure would have been income tax deductible.

11. In this case the overseas travel expenses will have to be apportioned on the basis of one half business and one half of private pursuits. Therefore the ODR will be reduced to half of the cost of the overseas airfares.

Otherwise deductible rule

12. The taxable value of an expense payment fringe benefit may be reduced in accordance with the otherwise deductible rule (ODR) under section 24 of the FBTAA.

13. Subsection 24(1) of the FBTAA permits a reduction of the taxable value of an expense payment fringe benefit under the otherwise deductible rule where all the necessary conditions of that section are met.

14. Broadly, this means that the taxable value may be reduced by any amount an employee would hypothetically been entitled to claim as an income tax deduction if the employer had not paid a third party or reimbursed the employee in satisfaction of an expense incurred by the employee.

15. However, the ODR only applies where the employee would have been entitled to a once-only deduction for the expenditure paid or reimbursed by the employer. A once-only deduction is defined, in subsection 136(1) of the FBTAA, to mean one that is wholly or partly allowable under the income tax law in only one year (for example, this would exclude deductions for depreciation expenses).

16. The question of whether or not the employer would have been entitled to an income deduction for the expense is irrelevant.

17. For an employer to reduce the taxable value of a fringe benefit under the otherwise deductible rule an employee would have had to incur the expense solely relating to the performance of their employment related duties and that expense would have to be wholly deductible to that employee for income tax purposes.

18. The employee must substantiate to the employer each year prior to lodgement of the relevant FBT return, the extent to which the expense payment fringe benefit would have been otherwise deductible to the employee. This can be supplied as a declaration in the approved form by the Commissioner. Based on the information provided the employee will be providing a declaration to you as the employer, therefore, this condition will be met.

Deductibility of expenses

19. Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or outgoing incurred in gaining or producing assessable income.

20. However, no deduction is allowed for losses or outgoings to the extent to which they are of a capital, private or domestic nature or are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible by a specific provision of ITAA 1997.

21. For any deduction to be allowable under section 8-1 of the ITAA 1997 you must be able to demonstrate that there is a real and direct connection between the outgoing and the gaining of your assessable income, so that the outgoing is incidental and relevant to the actual activities that gain assessable income.

22. The extent to which overseas travel expenses would be allowable income tax deduction if incurred by an employee is determined under the general deduction provisions in section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). An expense is deductible under section 8-1 of the ITAA 1997 when the essential character is that of an income producing expense. The essential character is to be determined by an objective analysis of all the surrounding circumstances (see Fletcher & Ors (199) 173 CLR 1 at 17; 91 ATAC 4950 at 4957 and 4958; (1991) 22 ATR 613 at 622).

23. As stated in TR 95/33 Income tax: subsection 51(1) - relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoings, expenditure will generally be deductible if its essential character is that of expenditure that has a sufficient connection with the operations or activities which more directly gain or produce the taxpayers' assessable income. The essential character of an expense is a question of fact to be determined by reference to all the circumstances. Apportionment of an expense is required if it has both an income producing purpose and another purpose.

24. In this case, the overseas travelling expenses incurred by the employee to attend a work related conference is in respect of their employment is incurred in gaining or producing assessable income and, therefore, an allowable income tax deduction under section 8-1 of the ITAA 1997. However, as the overseas travel related to both work related and private purposes, an apportionment of the expenses will be required.

Self-education expenses

25. The Commissioners view on the deductibility of self-education expenses is contained in Taxation Ruling TR 98/9 (TR 98/9). TR 98/9 examines the deductibility of self-education expenses.

26. Where your income-earning activities are based on the exercise of a skill or some specific knowledge and the subject of self-education enables you to maintain or improve that skill or knowledge, the self-education expenses are allowable as a deduction.

27. In accordance with TR 98/9, expenses of self-education will satisfy the requirements of section 8-1 of the ITAA 1997 if:

12. Self-education expenses are deduction under section8-1 where they have relevant connection to the taxpayer's current income-earning activities.

13. If a taxpayer's income-earning activities are based on the exercise of a skill or some specific knowledge, and the subject of self-education enables the taxpayer to maintain or improve that skill or knowledge, the self-education expenses are allowable as a deduction.

14. If the study of a subject of self-education objectively leads to, or is likely to lead to, an increase in a taxpayer's income from his or her current income-earning activities in the future, the self-education expenses are allowable as a deduction.

28. The airfares for the return trip from the overseas business location will also be work related expenditure. However, where the trip has a private purpose, consideration has to be given to whether an apportionment of the airfare between business and private purposes will be warranted.

29. TR 98/9 sets out the circumstances in which self education expenses are allowable deductions. Paragraphs 63 to 70 of TR 98/9 discuss the application of the general deduction provision to overseas travel expenses.

30. TR 98/9 states that if the purpose of a study tour or attendance at a work related conference or seminar is the gaining or producing of assessable income, the existence of an incidental private purpose does not affect the characterisation of the expenses as wholly incurred in gaining assessable income.

31. TR 98/9 provides examples indicating that where overseas travel is undertaken voluntarily and is planned to be for business and private purposes equally, expenses of a single outlay that serve both purposes should be apportioned. The examples in paragraphs 67 to 70 of TR 98/9 are listed below:

67. Example: Glenn, a qualified architect, attends an eight-day work-related conference in Hawaii on trends in modern architecture. One day of the conference involves a sight-seeing tour of the island and a game of golf is held on the final afternoon of the conference. As the main purpose of attending the conference is the gaining or producing of income, the total cost of the conference (air fares, accommodation and meals) is allowable.  

68. The existence of private pursuits, such as the island tour and the game of golf, is purely incidental to the main purpose and does not affect the characterisation of the conference expenses as wholly incurred in gaining assessable income.  

69. Example: Jenny, a doctor, was holidaying in Cairns when she became aware of a work-related seminar on the current treatment of cancer patients. The cost of the half-day seminar was $200. Jenny is able to claim a deduction for the cost of the seminar because it is directly attributable to an income-earning purpose. However, no part of her air fare to Cairns or her holiday accommodation is an allowable deduction.  

70. Example: Francesco, a paediatrician, has 2 equal purposes when he decides to attend a five-day international conference on paediatrics in Singapore to be followed by a seven-day holiday in Thailand. The conference package is $2,500 ($1,000 return air fare, $500 for the cost of the conference and $1,000 for accommodation and meals at the conference venue). Francesco paid another $2,000 for accommodation, meals and car hire for the 7 day holiday in Thailand. Francesco is allowed a deduction of $1,500 for the conference cost and the accommodation and meals expenses at the conference. Only half of the return air fare ($500) is allowed as the expense was incurred for two equal purposes, one income-earning and the other private. The other expenditure of $2,000 relating to the holiday in Thailand is private in nature and not allowable as a deduction.

32. In this case, the employee undertook a work related overseas travel to attend a conference. Therefore the expenses are deductible under section 8-1 of the ITAA 1997.

33. The employer would be able to reduce the taxable value of the expense payment fringe benefit under the otherwise deductible rule, as the employee would be entitled to claim a deduction if they had incurred the expenses themself.

Apportionment of business and private

34. The airfares for the return trip from an overseas business location is work related expenditure. However, where the trip has a private purpose, consideration has to be given to whether an apportionment of the airfare between business and private purposes will be warranted.

35. In cases where the airfare relates to both work related and private purposes, an apportionment of the expense is required. TR 98/9 discusses the apportionment of travel expenses.

36. In TR 98/9 paragraph 64 states that 'If the purpose of a study tour or attendance at a work-related conference or seminar is the gaining or producing of income, the existence of an incidental private purpose does not affect the characterisation of the related expenses as wholly incurred in gaining assessable income'.

37. TR 98/9 at paragraph 65 further states that if travel to a work-related conference was mainly devoted to a private purpose, such as having a holiday, and the gaining or producing of income was merely incidental to the private purpose, only those expenses directly attributable to the income-earning purpose would be allowable.

38. In Federal Court Case Ronpibon Tin v FC of T (1949) 78 CLR 47; 4 AITR 236 the Court expressed the view that there are generally two kinds of items of expenditure that require apportionment: those items that are capable of dissection; and those that cannot be dissected but should be apportioned on the basis that they serve more than one objective. The latter would clearly apply to an airfare purchased for both work and private purposes.

39. The question of apportionment was discussed in Case R13 84 ATC 168; 27 CTBR (NS) Case 64 (Case R13). In that case, a dentist spent six weeks overseas, five days of which were spent at a Dental Congress in Paris and the rest of the time was spent sightseeing. The trip was undertaken by the taxpayer with two objects in mind - attending the Dental Congress and having a holiday. The airfare served both objects, however only the first object qualified the expense as deduction.  The Commissioner apportioned the expenditure on the airfares on a time basis and allowed the taxpayer a deduction of 5/40ths of the air fare which represented the five days spent at the Congress. However, the Administrative Appeals Tribunal held that the proper method of apportioning the expense was to determine the degree of predominance attached to each object. In this case, each object was of equal weight and therefore, one-half of the airfare was allowed as a deduction.

40. From the facts provided, the employee attended a work related two day conference overseas followed by a private holiday for one week overseas.

41. The employer will reimburse the employee for the cost of the return airfare and the accommodation for the days while attending the conferences.

42. The employee was responsible for their own accommodation while taking annual leave after the conference.

43. You have stated that the employee's dominant purpose of the trip was to attend the work related conference.

44. If not for attending the conference, the employee would not be taking a holiday. The employer considered the holidays taken after the conference was incidental given the above reasons for the business travel and the majority of travel was in the service of the employer and that expenses incurred for this holiday are at the employee's expense. You consider that as the private purpose of travel is incidental, it will not affect the expense from being allowed in full which is confirmed in paragraph 64 of TR 98/9 which states as follows:

If the purpose of a study tour or attendance at a work-related conference or seminar is the gaining or producing of income, the existence of an incidental private purpose does not affect the characterisation of the related expenses as wholly incurred in gaining assessable income.

45. In this case the employee's purpose of the trip was to attend a work-related two day conference followed by a private holiday for one week. Where the private days are equal to or more than the period of conference we need to consider the factors in No 3 Board of Review Case R13 84 ATC 168 and Ure v Federal Commissioner of Taxation 81 ATC 4100 (Ure).

46. In No 3 Board of Review Case R13 84 ATC 168 the board of review looked at the purpose of an overseas trip to determine the apportionment of air fares. In his reasons for the decision Dr Gerber applied Ure and stated at page 170 'It is now clear beyond doubt that whether or not an outgoing has been incurred in gaining or producing assessable income demands an examination of the purpose for which the moneys were expended'. The board considered that the taxpayers motivation for travelling overseas was to attend the conference and to take a holiday. Consequently they apportioned the air-fare on the basis of one-half business and one-half private.

47. In the present case, it is considered that having a one week holiday after attending a conference is more than an incidental private purpose. There is a dual purpose to the trip, one relating to work and the other being private in nature. Consequently, it is necessary to apportion the airfare expenses incurred to determine the extent to which the airfares will be deductible.

48. It is considered that a reasonable apportionment would be to allow a deduction for half the cost of the airfares. Therefore, one half of the airfare expense incurred is deductible under section 8-1 of the ITAA 1997. However, where an expense is reimbursed, no deduction is allowable.

49. Therefore the taxable value of the expense payment fringe benefit will be cost of half the airfares and would be reduced to 50% under the 'otherwise deductible rule'.

50. The accommodation, meals and incidental expenses for when the employee has a holiday after the business travel is at the employee's own expense, therefore no fringe benefit has been provided or is applicable.

Conclusion

51. The application of the 'otherwise deductible rule' in section 24 of the FBTAA will only apply to the extent that the expenditure would have been income tax deductible, therefore the taxable value of the expense payment fringe benefit will be reduced to by half the cost of the airfares.

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