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Ruling

Subject: Tax treatment of a bonus paid in a form other than cash

Question 1

Would frequent flyer points issued to an employee, as part of their bonus, be a fringe benefit as defined under subsection136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)?

Answer

No

This ruling applies for the following periods:

Year ended 31 March 2011

Year ended 31 March 2012

The scheme commences on:

1 April 2010

Relevant facts and circumstances

The employee as per their employment agreement was entitled to a bonus on the anniversary of their commencement date, subject to satisfactory performance. This agreement specified that the bonus would be a cash bonus.

On the anniversary date in question, the employee's employer approved payment of the bonus. A few days after the bonus was approved, the employee approached the employer and requested that part of the bonus be provided in frequent flyer points.

Copies of relevant clauses within the employee agreement and a copy of correspondence approving payment of the bonus was provided.

Relevant legislative provisions

FBTAA section 136(1)

ITAA 1936 section 23L

ITAA 1997 section 6-5 or 6-10

Reasons for decision

Summary

The bonus component that was paid as frequent flyer points is not a fringe benefit as defined under subsection136(1) of the FBTAA, as they form part of a payment of salary or wages.

Detailed reasoning

Under paragraph 136(1)(f) FBTAA, the definition a fringe benefit specifically excludes payments to an employee that are in the nature of salary or wages. Therefore before we can apply the FBTAA we must look at the transfer of frequent flyer points as part of the bonus arrangement to see if it is a payment of salary or wages.

Salary or wages is also defined under subsection 136(1) of the FBTAA as a payment from which an amount, which may or may not be withheld under a provision in Schedule 1 to the Taxation Administration Act 1953 (that is, PAYG withholdings), is made to an employee.

The employment agreement specifically stated that the employee was entitled to a 'cash bonus' and a payment of cash to an employee is characterised as salary or wages.

However an employee can, in agreement with their employer, modify their remuneration entitlement at any time. This would include a situation where they enter into a salary sacrifice arrangement (SSA), providing it is an effective SSA.

How the Commissioner determines if a SSA is an effective SSA is addressed in Taxation Ruling TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements and paragraph 21 states than 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'. Therefore whether a SSA is effective or not is determined by the timing of the arrangement.

In addition paragraph 28 to 31 of TR 2001/10 states:

28. Benefits provided to or on behalf of an employee under an effective SSA may be derived as ordinary or statutory income by the employee. Any such benefits that are convertible to money are derived by the employee as ordinary or statutory income. However, these benefits are not assessable income of the employee under section 6-5 or 6-10 of the ITAA 1997 because they are exempt income under section 23L of the ITAA 1936. Leave that will accrue from the provision of future services may be the subject of an effective SSA. Similarly, the taking of leave that accrued prior to the commencement of the SSA in the ordinary course of employment will not cause the SSA to be ineffective.

29. An entitlement to a bonus or other performance remuneration may be the subject of an effective SSA, provided the SSA is entered into prior to the employee earning the entitlement to be paid the bonus.

30. An effective SSA has the same effect for tax law purposes in relation to benefits provided, as noted at paragraph 28 above, even though it may provide that any residual amount not taken as expense payment fringe benefits can be received as cash. Any such residual cash receipts would be assessable as salary or wages to the employee under section 6-5 or 6-10 of the ITAA 1997 when they are received by the employee. Where the residual amount is otherwise applied or dealt with on behalf of the employee the amount may constitute a fringe benefit.

31. An employer's contributions under an effective SSA to a superannuation fund on behalf of an employee is not assessable income of the employee under paragraph 26(e). The sums contributed have not been allowed, given or granted to the employee, but are paid to the administrators of the fund. Also, the scheme of superannuation and taxation law is such that the contributions are not assessable income of the employee.

This explains that benefits under an effective SSA would not be assessable income of the employee under section 6-5 or 6-10 of the Income Tax Assessment Act ITAA 1997 (1997). However this is solely because of the application of section 23L of the Income Tax Assessment Act 1936 (ITAA 1936) which in order to avoid double taxation of a benefit excludes from an employee's income payments that constitute a fringe benefit. In other words the benefit is only non-assessable to the employee because the employer is subject to fringe benefits tax (FBT) on the same benefit.

However if the benefit is salary or wages it is specifically excluded from the definition of a fringe benefit. This would mean that section 23L of the ITAA 1936 will not apply to this payment.

In respect of a bonus payment and whether it is salary or wages or is being paid in another form under an effectible SSA, paragraph 97-98 of TR 2001/10 states:

97. An entitlement to a bonus under an employee performance payment plan may be satisfied by the provision of salary or wages by the employer or the provision of other benefits. Bonuses under such plans that will be paid in the form of salary or wages, or for which the choice exists for payment to be made in such a form, may be the subject of an effective SSA, provided that an entitlement to be paid the bonus does not yet exist. An entitlement to be paid a bonus which is payable where certain conditions are met exists once those conditions are met. Where a bonus is discretionary, the decision to pay a bonus creates an entitlement to be paid salary or wages. In accordance with the position stated at paragraph 77 above, benefits provided in exchange for bonuses payable in the form of salary or wages under an effective SSA do not form part of the assessable income of the employee under section 6-5 or 6-10 of the ITAA 1997.

98. Once there is an entitlement to be paid a bonus, which under the employment contract is to be paid as salary or wages, then such an amount cannot be the subject of an effective SSA. That the bonus is not paid for a period of time may effect the time of derivation of income but does not affect its nature as assessable income. If the bonus is held in any reserve or account until released at the direction of the employee, it will be taken to have been received by the employee under subsection 6-5(4) of the ITAA 1997. Any provision of benefits in lieu of payment would be an ineffective SSA and the amount of the benefit would have the character of salary or wages.

Once again we can see that whether the payment is made under an effective SSA depends on the timing of the arrangement.

In this case, the entitlement to the bonus was authorised on date X, and a few days later, the employee requested a portion of that bonus to be paid in a form other than cash.

In following paragraph 97-98 of TR2001/10, this arrangement would be an ineffective SSA, as the entitlement to receive the cash payment had existed prior to the request to receive part in frequent flyer points. As a result, the payment still maintains its character as salary and wages, and cannot be considered as a fringe benefit as defined under subsection 136(1) of the FBTAA.

As section 23L of the ITAA 1936 does not apply, the employee will need to include the value of the points received in their assessable income. Generally, the value would be the market value at the time of receipt.

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