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Ruling

Subject: FBT and compensation payments to employees

Question 1

Is a payment to an employee to compensate for a loss they incur in relation to the sale of a property based on a real estate agent appraisal, a residual benefit that is incidental to the sale of the interest or right for the purpose of subparagraph 58C(2)(a)(ii) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No

Question 2

Is a payment to an employee to compensate for a loss they incur in relation to the Sale of a property based on a valuation by a registered valuer, a residual benefit that is incidental to the sale of the interest or right for the purpose of subparagraph 58C(2)(a)(ii) of the FBTAA?

Answer

No

Question 3

Is a payment to an employee to compensate for a loss they incur in relation to the sale of a property based on the purchase cost, a residual benefit that is incidental to the sale of the interest or right for the purpose of subparagraph 58C(2)(a)(ii) of the FBTAA?

Answer

No

This ruling applies for the following periods:

Year ended 31 March 2012

Year ended 31 March 2013

Year ended 31 March 2014

The scheme commences on:

1 April 2011.

Relevant facts and circumstances

As part of its business the employer may require certain employees to relocate for work purposes. Employees required to transfer within Australia are provided with relocation assistance which includes assistance where an employee sells what was their principal residence at their old locality.

Assistance is provided in the form of a cash payment based on the shortfall between an agreed valuation of the property and the actual sale price, The compensation is capped at a percentage of the agreed valuation unless prior approval is obtained from the employer. The property is also required to be sold within six months of the agreed valuation.

The agreed valuation is an average market valuation of the particular property on the basis of two valuations.

The agreed valuation can also be based on two real estate agent appraisals arranged for by the employee.

In the case of a sale by auction the employer will compensate the employee for the shortfall between the agreed valuation and the sale price in comparison with a percentage of the reserve price to the agreed valuation.

An alternative approach is that the compensation would be based on any loss incurred relative to the sale price and the cost incurred by the employee in purchasing the property being sold.

Relevant legislative provisions

FBTAA section 20

FBTAA section 40

FBTAA section 45

FBTAA subsection 47(8)

FBTAA section 58

FBTAA subparagraph 58C(2)(a)(ii)

FBTAA subsection 136(1)

FBTAA subsection 141A(2)

FBTAA paragraph 141A(2)(a)

FBTAA subsection 148(2)

Schedule 1 to the Taxation Administration Act 1953 (TAA) section 12-35

Reasons for decision

Summary

The compensation payments are property benefits as defined in section 40 of the FBTAA and not residual benefits as defined in section 45 of the FBTAA

In addition a cash payment to an employee is not incidental to that sale of the interest or right in a dwelling as it does not have the same characteristics as specifically listed expenses (advertising, legal services, agent's services, and services related to borrowing) contained paragraph 141A(2)(a) of the FBTAA.

Detailed reasoning

Subparagraph 58C(2)(a)(ii) requires that the benefit be 'a residual benefit where the recipients benefit is incidental to that sale of the interest or right'. The interest or right being referred to is the subparagraph being an interest or right in a dwelling.

A residual benefit is defined in subsection 136(1) of the FBTAA and 'means a benefit that is a residual benefit by virtue of section 45', and section 45 of the FBTAA states:

A benefit is a residual benefit for the purposes of this Act if the benefit is not a benefit by virtue of a provision of Subdivisions A of Divisions 2 to 11 (inclusive).

This means that a residual benefit only arises if none of the other specific benefit types applies to that benefit.

In addition recipients benefit is also defined in subsection 136(1) of the FBTAA as 'in respect of a residual benefit means the benefit to which the residual benefit relates.

In this case the employee is receiving a cash payment from the employer because they sold their home for less than:

· the market appraisal provided by a real estate agent

· a valuation by a registered valuer; or

· the original purchase price

In looking at whether this payment is a residual benefit we must first look at whether it is a benefit and a fringe benefit. A benefit is defined in subsection 136(1) of the FBTAA as:

includes any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under:

(a) an arrangement for or in relation to:

(i) the performance of work (including work of a professional nature), whether with or without the provision of property;

(ii) the provision of, or of the use of facilities for, entertainment, recreation or instruction; or

(iii) the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction;

(b) a contract of insurance; or

(c) an arrangement for or in relation to the lending of money.

This definition would include a cash payment which is confirmed in both:

· ATO Interpretative Decision ATO ID 2007/204 Fringe Benefits Tax Property Fringe Benefit: status of money as a fringe benefit; and

· ATO Interpretative Decision ATO ID 2011/60 Fringe Benefits Tax Exempt benefits: emergency assistance - cash payment to victim of natural disaster to provide immediate relief.

A fringe benefit is also defined in subsection 136(1) and one of the exclusions from the definition of a fringe benefit is a payment that constitutes salary or wages. As we are dealing with a payment from the employer to an employee we must also determine if that payment constitutes salary or wages.

Therefore in order to determine if the cash payment is a residual benefit incidental to the sale of a dwelling we need to look at whether:

· the cash payment is salary or wages;

· any of the specific benefit types apply; and

· the provision of the benefit is incidental to the sale of a dwelling.

Salary or Wages?

Salary or wages, as defined in subsection 136(1) of the FBTAA, is a payment from which an amount must be withheld under a provision in Schedule 1 to the TAA (in this case section 12-35 being a payment to an employee).

However for the payment to be salary and wages it needs to be part of the employee's ordinary income that they receive from their employer because it is a payment expected in return for their service as an employee.

In respect of determining the nature of income the reasons for decision in ATO Interpretative Decision ATO ID 2003/204 Income Tax Assessability of a lump sum payment received under a mortgage protection policy states in part:.

Based on case law, it can be said that ordinary income generally includes receipts that:

· are earned;

· are expected;

· are relied upon; and

· have an element of periodicity, recurrence or regularity.

Characteristics of a capital receipt include:

· being paid in a lump sum, that is, not received periodically,

· being a one-off payment, that is a payment made once and for all; and

· being expected but not relied upon.

In the case the payment is linked to the sale price of the employee's home and not the work they are performing. It is a one-off lump sum payment and cannot be relied upon as it is only be determined once the house is actually sold.

If the house is sold for an amount equal to or for more than the market appraisal, valuation or the purchase price then no payment is received.

Following the reason given in ATO ID 2003/204 the payment would be a capital receipt of the employee and not salary or wages.

Specific benefit type

ATO ID 2007/204 explains that money can constitute property and the reasons for decision in that ATO ID states:

Section 40 of the FBTAA provides that where a person (the 'provider') provides property to another person (the recipient), the provision of property 'shall be taken to constitute a benefit provided by the provider to the recipient'.

'Property' is defined in subsection 136(1) of the FBTAA as 'intangible property' and 'tangible property'. Tangible property is in turn defined as 'goods and includes animals, including fish; and gas and electricity'.

Intangible property' is defined as:

(a) real property;

(b) a chose in action; and

(c) any other kind of property other than tangible property,

but does not include:

(d) a right under a contract of insurance; or

(e) a lease or licence in respect of real property or tangible property.

Money is or may be a form of exchange, but even when regarded as currency; money is still a form of property. The courts have always recognised that when money is exchanged or provided by one person to another, property passes from one to the other. For example, in Higgs v. Holiday (1599) Cro Eliz 746; 78 ER 978, the court held that, in respect of money 'where the owner of property lost the possession of it, he had lost the property in it'. Similarly, in Wookey v. Pole (1820) 4 B & Ald 1; 106 ER 839, the court held that, in the case of money, the property passes with delivery. In describing the nature of money, Best J said that 'by the use of money the interchange of all other property is most readily accomplished'.

To constitute a 'property fringe benefit' a property benefit needs to be a 'fringe benefit'.

The definition of 'fringe benefit' in subsection 136(1) of the FBTAA is as follows:

"fringe benefit", in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit -

(a) provided at any time during the year of tax; or

(b) provided in respect of the year of tax,

being a benefit provided to the employee or to an associate of the employee by

(c)  the employer

(d) an associate of the employer; or

(e) a person (in this paragraph referred to as the "arranger") other than the employer or an associate of the employer under an arrangement between-

(i) the employer or an associate of the employer and

(ii)  the arranger or another person,

...in respect of the employment of the employee....

The FBTAA contemplates that money is property and capable of constituting a fringe benefit. This is evident from the definition of 'fringe benefit' in subsection 136(1) of the FBTAA which specifically excludes:

(hb) a benefit constituted by the acquisition by a trust of money or other property where the sole activities of the trust are obtaining shares.... [emphasis added]

Further, paragraphs 136(1)(j) to 136(1)(p) of the FBTAA, which exclude certain payments of money from the definition of fringe benefit, demonstrates a plain intention that payments of money can constitute a fringe benefit, otherwise such exclusions would be superfluous.

The principle that money can constitute property for the purposes of the FBTAA has the support of the Federal Court decision of Caelli Constructions (VIC) Pty Ltd v. Commissioner of Taxation (2005) 147 FCR 449; 2005 ATC 4938; 60 ATR 542. Here at FCR 465; ATC 4952; ATR 557, Kenny J accepted the Commissioner's submission that money constitutes property whilst formally rejecting the applicant's argument that the FBTAA does not contemplate that the payment of money can constitute a property fringe benefit.

For these reasons, the payment of money can constitute a property fringe benefit as defined in subsection 136(1) of the FBTAA.

As money is considered to be property, section 45 of the FBTAA requires that we first consider whether section 40 of the FBTAA applies. We can only look at the application of section 45 of the FBTAA once we first eliminate section 40 of the FBTAA.

In this case the arrangement does not involve third parties. The benefit is money which is provided by the employer to the employee. This would suggest that a property benefit would arise under section 40 of the FBTAA.

However the applicant has put forward a number of arguments were put forward in respect of cash payments being a residual benefit and these are examined below.

Kumagai Gumi Co Ltd v. Commissioner of Taxation (1999) 90 FCR 274; (1999) 41 ATR 363; (1999) 161 ALR 699; (1999) 99 ATC 4316; [1999] FCA 235 (Kumagai Gumi case)

In the Kumagai Gumi case it was held that the payment of an employee's income tax represented a residual fringe benefit.

Although the benefit involved a cash payment, the payment was made to a third party being the Australian Taxation Office (ATO).

In addition it was never argued that the benefit may be a property benefit. The ATO was of the view that an expense payment benefit arose under section 20 of the FBTAA. However the actual arrangement entered into in the Kumagai Gumi case made it difficult to conclude that the employee was actually incurring an expense. It was the fact that it couldn't be concluded that the employee incurred the expense that resulted in the payment being a residual benefit.

The Kumagai Gumi case has no application in this instance as there is no third party receiving the payment and there is no transfer of an obligation to pay an expense.

The applicant also made reference to subsection 148(2) of the FBTAA which deals with the provision of a benefit to a person other than an employee or an associate applying to the ATO in the Kumagai Gumi case. This subsection had no application as the ATO was already entitled under tax law to receive income tax. All the arrangement did was transfer the obligation to pay that income tax from the employees to the employer. Unless the employee selects someone else other than themselves or one of their associates to receive the payment subsection 148(2) of the FBTAA will have no application in this case either.

Walstern v. Commissioner of Taxation 2003 ATC 5076 at 5092; (2003) 54 ATR 423 at 441( Walstern Case)

The Walstern Case effectively dealt with the issues addressed in Taxation Ruling TR 2010/6 Income tax, Pay As You Go Withholding and fringe benefits tax: tax consequences on the issue, holding and redemption of bonus units as part of an employee benefits trust arrangement (which was also referred to by the applicant) and paragraph 99 of TR 2010/6 states:

At the time of the transfer from the employer contribution/unallocated trust capital account to the employee's bonus unit account there is a provision of property, namely the benefit in the trust fund constituted by the money which is property, so that there is a property benefit as defined in the FBTAA. However, it is noted that Hill J stated in Walstern v. FC of T 2003 ATC 5076 at 5092; (2003) 54 ATR 423 at 441( Walstern ) that the benefit may be either a property benefit or a residual benefit.

In looking at the Walstern Case, it does not suggest that there is a choice in whether the benefit is a property benefit or a residual benefit, it concludes that the benefit will be one or the other. In addition the taxable value would be the same regardless of the benefit type there was no need to determine if the benefit was a property benefit or a residual benefit.

Caelli Constructions (VIC) Pty Ltd v. Commissioner of Taxation (2005) 147 FCR 449; 2005 ATC 4938; 60 ATR 542 (Caelli Constructions case) was also referred to by the applicant as it made reference to the Walstern Case and in respect of both these cases it is relevant to note that paragraph 52 of Class Ruling CR 2009/12 Fringe benefits tax: RewardsCorp Resort Rewards Certificates provided by RewardsCorp Trading Pty Limited clients to their own employees or to the employees of third party employers it states:

In Caelli Constructions and in Walstern the taxable value of the property fringe benefit was determined under paragraph 43(c) as the notional value. It was considered by the Federal Court that this notional value equated to the acquisition cost paid by the provider for the relevant property.

Although both cases considered whether payment of money would be either a property or a residual benefit, in both cases a conclusion was made that the benefits being provided were property benefit and in particular it should be noted in Caelli Constructions case at ATC 4952 it states:

68. Finally, given the number of direct references in the FBTA Act to the payment of money as a fringe benefit, it seems unlikely that this important category was intended merely to be addressed as a ``residual benefit'', particularly when one considers the types of residual benefits that are exempted under s 47 such as transport and childcare facilities. On a fair reading of the FBTA Act, the appropriate category is that of property fringe benefits. There is no contrary indication in the FBTA Act.

Priority of access to child care

The application also made reference to priority of access to child care facilities and the exemption under subsection 47(8) of the FBTAA.

Although subsection 47(8) of the FBTAA may involve a payment from the employer to the child care provider, the benefit being offered (and received) by the employee is the right to gain access to that child care facility. It is that right which when transferred to the employee becomes the benefit being received by the employee.

As the payment in this case is not being exchanged for a right or a service, the benefit is the provision of the money itself. In looking at the definition of a property benefit in section 40 of the FBTAA we can see that this definition has been satisfied. A person (the employer), provides property (money), to another person (the employee), the provision of that property 'shall be taken to constitute a benefit provided by the provider to the recipient'. As section 40 of the FBTAA applies the catch-all provisions in section 45 of the FBTAA cannot apply.

The alternative is that if the transfer of money is not a transfer of property but is being used to pay for something else. However as the payment is going directly to the employee, if the payment was to pay for a service being provided by that employee the payment would be salary or wages.

Incidental to the sale of a dwelling

For completeness, we will also address whether the benefit provided is incidental to the sale of a dwelling.

Subsection 141A(2) of the FBTAA includes a list of recipients benefit which are taken to be incidental to the acquisition or sale of a prescribed interest in land or a stratum unit or of a proprietary right in respect of a dwelling for the purposes of subparagraph 58C(2)(a)(ii) of the FBTAA.

This list at paragraph 141A(2)(a) of the FBTAA states:

the recipients benefit consists of any of the following matters:

(i) advertising;

(ii) legal services;

(iii) agent's services;

(iv) services related to borrowing;

(v) any similar matter;

being a matter of a capital nature that is incidental to the acquisition or sale of the interest or right;

As explained about the payment is a capital receipt, and this capital receipt was a direct result of the sale of the employee's home. Had the home not been sold the payment would not have been made.

The payment can be seen as an incident to the sale of the right or interest in the dwelling as the payment would not have been if the house had not been sold. However the payment has to be a similar matter to advertising, legal services, agent's services, and services related to borrowing.

Although now withdrawn as a result of amendments to the FBTAA which changed the wording of section 58X of the FBTAA, ATO Interpretative Decision ATO ID 2006/44 (Withdrawn) Fringe Benefits Tax Exempt Benefits: work related item - notebook computer, laptop computer or similar portable computer ,addressed meaning of the words 'or a similar portable computer' within section 58X of the FBTAA. In respect of this meaning the reasons for decision ATO ID 2006/44 stated:

computer' is limited to a computer which has . . .The meaning of the words 'or a similar portable computer' should be restricted to the characteristics of the words that preceded the general words. That is, the meaning of 'or a similar portable characteristics similar to a notebook or laptop computer. . .

In following the same principle when applying paragraph 141A(2)(a) of the FBTAA, when looking at what is a similar matter we are restricted to matters which have the characteristics of the words that precede the general words.

The general words advertising, legal services, agent's services, and services related to borrowing these are all expenses which are normally incurred when selling a dwelling. Therefore any other similar matter of a capital nature have to have the character of expenses incurred on advertising, legal services, agent's services, or services related to borrowing.

In this case we are dealing with a receipt rather than an expense which effectively augments the amount the employee received from the purchaser of the house. What it does is increase the gain the employee may make from the sale of the property (if it is sold for more than the purchase price), or decrease the loss (if sold for less than the purchase price).

It cannot be said that a receipt that augments the proceeds from the sale of a house has the character of outgoings for advertising, legal services, agent's services, or services related to borrowing. Following the view expressed in ATO ID 2006/44 it is not considered to be a similar matter.

Therefore even if it was accepted that the benefit was a residual benefit, the secondary requirement under subparagraph 58C(2)(a)(ii) of the FBTAA, that the recipients benefit be incidental to the sale of that interest or right, would not be satisfied.

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