Edited version of your private ruling

Authorisation Number: 1012295701747

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Ruling

Subject: Health Benefits

Question 1

Will the provision of the right to receive a payment of a Hospital Excess Refund be an exempt benefit under section 58P of the Fringe benefits Tax Assessment Act 1986 (FBTAA), where the Administration Allowance paid by the Health Insurer in a year of tax, in respect of the employee's health insurance, is less than $X?

Answer

Yes.

Question 2

Will the provision of the right to receive a payment of a Hospital Excess Refund be an exempt benefit under section 58P of the FBTAA, where the Administration Allowance paid by the Health Insurer in a year of tax in respect of the employee's health insurance, is more than $X?

Answer

No.

Question 3

Will the payment of a Hospital Excess Refund to an Eligible Employee or an Eligible Family Member be a fringe benefit?

Answer

No.

This ruling applies for the following period:

Year ending 31 March 2013

Year ending 31 March 2014

Year ending 31 March 2015.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

To enable employees to obtain competitively priced health insurance cover you have entered into an agreement with a health insurer for the provision of an Employee Health Plan.

Under the Employee Health Plan, Eligible Employees will enter into a low-premium-high-hospital excess health insurance policy with the Health Insurer.

The Health Insurer will pay you a percentage of the premiums received under the policies taken out by employees.

The payment received from the Health Insurer will be paid into a Hospital Excess Refund Pool (ERP).

Following an episode of hospitalisation of the employee or family member, the employee will pay the hospital excess to the public or private hospital. After paying this hospital excess, they can apply for a Hospital Excess Refund from the ERP.

In your capacity as the ERP Operator, you maintain an account into which all funding is deposited and from which all Hospital Excess Refunds are paid.

The day-to-day administration of the Employee Health Plan and the ERP is part of the broader responsibility of your Payroll Department. Any payments out of the ERP must be approved in writing by the Authorised Officer.

The Authorised Officer is also required to prepare an annual report and furnish it with your Head of Human Resources at the end of each financial year.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 58P

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

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Will the provision of the right to receive a payment of a Hospital Excess Refund be an exempt benefit under section 58P of the Fringe benefits Tax Assessment Act 1986 (FBTAA), where the Administration Allowance paid by the Health Insurer in a year of tax, in respect of the employee's health insurance, is less than $X?

The definitions of 'benefit' and 'fringe benefit' are provided in subsection 136(1) of the FBTAA, and state, amongst other things, that:

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

· a fringe benefit must be provided in relation to an employee, in relation to the employer of the employee, in relation to a year of tax: to the employee or to an associate of the employee. The terms 'year of tax, 'employee' and 'employer' are defined in subsection 136(1);

· a fringe benefit must be provided by the employer, by an associate of the employer, by an 'arranger', or by another person when the employer participates in or facilitates the provision of the benefit and knows it is doing so;

· a fringe benefit must be provided in respect of the employment of the employee; and

· a fringe benefit does not include an exempt benefit, including an exempt benefit under section 58P (minor benefits).

When an Eligible Employee has taken out a health insurance policy with the Health Insurer under the Employee Health Plan and makes premium payments, that employee receives a right to have you, as the ERP operator, reimburse up to the maximum entitlement out of the ERP if an entitlement event occurs. If you were to refuse to make a reimbursement up to the maximum entitlement out of the ERP, an aggrieved employee would have to take legal action against you. This right provides financial coverage for the employee against a particular event. This right (or rights) is a 'benefit' as defined in subsection 136(1) of the FBTAA.

As the operator of the ERP you are the provider of the benefit. Therefore, the benefit is being provided by the employer.

The benefit is provided in respect of the employment of the employee as it is only available to employees.

As each of these requirements of the 'fringe benefit' definition are met, the provision of rights under this scheme will be a fringe benefit, unless the benefit is an exempt benefit. The FBTAA specifies that a number of benefits are exempt benefits. For the purpose of this ruling the relevant exemption is contained in section 58P of the FBTAA.

The application of section 58P

Subsection 58P(1) of the FBTAA provides a number of tests which must be satisfied for benefit to be considered to be an exempt benefit.

Guidance on the application of the tests in subsection 58P(1) of the FBTAA, are provided in Taxation Ruling TR 2007/12 Fringe benefits tax: minor benefits (TR 2007/12).

TR 2007/12 states in paragraphs 8 to 12 that:

8. A minor benefit is an exempt benefit under section 58P where:

· the notional taxable value of the minor benefit is less than $300; and

· it would be concluded that it would be unreasonable, having regard to the specified criteria in paragraph 58P(1)(f), to treat the minor benefit as a fringe benefit.

9. In considering the application of the exemption under section 58P it is necessary to look to the nature of the benefit provided and give due weight to each of the criteria. The weight given to each criterion will also vary depending on the circumstances surrounding the provision of each benefit.

10. Section 58P does not apply to exempt all benefits that have a notional taxable value of less than $300.

11. First, there are certain benefits that are specifically excluded from section 58P. These are:

· airline transport benefits;

· expense payment benefits where, if the benefit was an expense payment

· fringe benefit, it would be an in-house fringe benefit;

· property benefits where, if the benefit was a property fringe benefit, it would

· be an in-house fringe benefit; and

· residual benefits where, if the benefit was a residual fringe benefit, it would

· be an in-house fringe benefit.

12. Secondly, where:

· tax-exempt body entertainment is provided, and

· the provider incurs non-deductible exempt entertainment expenditure that is wholly or partly in respect of the provision of entertainment to an employee or an associate of the employee, such benefits are excluded from consideration for exemption under section 58P.

A benefit which is the provision of rights (i.e. the 'minor benefit') provided under your scheme will therefore be an exempt benefit under section 58P of the FBTAA, where the following tests are satisfied:

(a) the benefit is not an airline transport benefit, in-house fringe benefit or a tax-exempt body entertainment benefit;

(b) the notional taxable value of the minor benefit is less than the amount specified in paragraph 58P(1)(e) of the FBHTAA, currently $300; and

(c) it would be concluded that it would be unreasonable, having regard to the five criteria in paragraph 58P(1)(f) of the FBTAA, to treat the minor benefit as a fringe benefit.

(a) Is the benefit an airline transport benefit, in-house fringe benefit or a tax-exempt body entertainment benefit?

The benefit which is the provision of a right will be either a property or residual benefit. It will not be an airline transport benefit or a tax-exempt body entertainment benefit.

The in-house fringe benefit provisions (for property and residual benefits) require the provider to carry on a business that consists of or includes the provision of identical or similar benefits principally to outsiders.

'Outsider' is defined in subsection 136(1) of the FBTAA to mean a person who is not:

(a) an employee of the employer;

(b) an employee of an associate of the employer....

Under the Employee Health Plan the benefits are exclusively made available by you as the ERP operator to your employee members or associates of an employee, and not to outsiders as defined in subsection 136(1) of the FBTAA. As identical or similar benefits are not provided principally to outsiders, the benefit can not be an in-house benefit.

(b) Is the notional taxable value less than the amount specified in paragraph 58P(1)(e) of the FBTAA?

The term 'notional taxable value' as defined in subsection 136(1) of the FBTAA as the amount which would have been the taxable value of the benefit if it was a fringe benefit.

In applying the valuation for either external property fringe benefits or external period residual fringe benefits, the taxable value will depend upon the 'notional value' of the benefit.

'Notional value' is defined in subsection 136(1) of the FBTAA to mean:

… the amount that the person could reasonably be expected to have been required to pay to obtain the property or other benefit from the provider under an arm's length transaction.

In Walstern v. Federal Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423, at FCR 96; ATC 5092; at ATR 442, Hill J examined the application of this provision, and stated:

As already noted, the valuation formula depends upon the 'notional value' in relation to the provision whether of property or of a benefit to each of the Medichs. From the definition it follows that the question to be asked is what is the amount that each of the Medichs could reasonably be expected to have been required to pay to obtain the benefit from the provider under an arm's length transaction. The provider in the present case is Walstern. Hence the question in relation to Mr Ronald Medich, is how much he could reasonably be expected to have been required (i.e., by Walstern) to pay to Walstern to obtain the interest obtained by him in the fund, assuming the transaction between Walstern and him to be at arm's length.

In the present case a particular employee is provided with a right to have you, as the ERP operator, reimburse that employee's hospital excess out of the ERP. You are the provider of the right, and the amount that you could reasonably have expected a person to pay for the right is equivalent to the funding required by you to administer the ERP and be in a position to be able to reimburse the employee's excess, when an entitlement arises. This amount is the amount of the Administration Allowance for that employee as is paid by the Health Insurer to the ERP during the period of the year of tax (1 April to 31 March). This amount paid, is the 'notional value' and the 'notional taxable value' of the minor benefit.

Where the Administration Allowance that is paid in a year of tax in respect of the employee's health insurance policy is less than the amount specified in paragraph 58P(1)(e) of the FBTAA, currently $300, the 'notional taxable value' will be less than this amount in a year of tax.

(c) Is it unreasonable to treat the minor benefit as a fringe benefit?

Paragraph 58P(1)(f) of the FBTAA states that regard is to be had to various criteria in concluding if it is unreasonable to treat a minor benefit as an exempt benefit. The criteria which paragraph 58P(1)(f) of the FBTAA requires to be considered are:

· the infrequency and irregularity with which associated benefits, being identical or similar benefits, are provided;

· the sum of the notional taxable values of the benefit and any associated benefits which are identical or similar to the minor benefit in relation to the current year of tax or any other year of tax;

· 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;

· the practical difficulty in determining the notional taxable values of the benefit and any associated benefits; and the circumstances surrounding the provision of the benefit and any associated benefits.

Infrequency and irregularity with which associated benefits are provided

For the purposes of the minor benefit exemption, the term 'associated benefit' is defined in subsection 58P(2) of the FBTAA.

An employee who is hospitalised will receive a Hospital Excess Refund which is a benefit as defined in subsection 136(1) of the FBTAA. For this benefit to be an 'associated benefit', paragraph 58P(2)(b) of the FBTAA requires that both the minor benefit (the rights) and the refund to be made in respect of the employee's employment.

The refund paid to the employee or the employee's family member is not made in respect of the employee's employment, but, as discussed below, arises as a result of the exercise of an employee's or associate's pre-existing rights. The Hospital Excess Refund is therefore not an 'associated benefit'.

This criterion also requires one to have regard to the infrequency and irregularity of the associated benefits. The greater the frequency and regularity of associated benefits, the less likely the minor benefit will qualify as an exempt benefit.

In this scheme and for a particular employee there is only one minor benefit (being rights which are property or residual benefits) which exists during the period of the employee's membership of the Employee Health Plan. These rights are a single benefit which exists inside and outside the year of tax. In this scheme there are no associated benefits and therefore in terms of this criterion the minor benefit would be more likely to qualify as an exempt benefit.

The sum of the notional taxable values of the minor benefit and associated benefits which are identical or similar

In this scheme there is only one minor benefit and no associated benefits. The notional taxable value of the minor benefit is an amount less than the amount specified in paragraph 58P(1)(e) of the FBTAA. Having regard to this amount in terms of this criterion the minor benefit would be more likely to qualify as an exempt benefit.

The sum of the notional taxable values of any other associated benefits

In this scheme this value will always be nil and in terms of this criterion the minor benefit would be more likely to qualify as an exempt benefit.

The practical difficulties in valuing the minor benefit and associated benefits

As you are the operator of the fund it will not be difficult for you to determine the amount that the fund has received in relation to a particular employee.

In terms of this criterion, the benefit would be more likely to not qualify as an exempt benefit.

The circumstances surrounding the provision of the benefits

In this scheme the benefit is provided to assist the employee with reimbursement of hospital expenses. It may be argued that the benefit provides continuous coverage against an expected event, or alternatively that hospital events are, by their nature, often unexpected.

In this scheme the benefit is not provided as a reward for services.

In terms of the two parts of this criterion the minor benefit would be more likely to qualify as an exempt benefit.

Having regard to all of the five criteria contained in paragraph 58P(1)(f) it would be concluded that it would be unreasonable to treat the minor benefit as a fringe benefit.

Therefore, section 58P of the FBTAA will apply to treat the minor benefit which arises from the provision of rights as an exempt benefit where the Administration Allowance that is paid by the Health Insurer in a year of tax, in respect of the employee's health insurance policy, is less than the amount specified in paragraph 58P(1)(e) of the FBTAA, currently $300.

Question 2

Will the provision of the right to receive a payment of a Hospital Excess Refund from the Hospital Excess Refund Pool, be an exempt benefit under section 58P of the Fringe benefits Tax Assessment Act 1986 (FBTAA), where the Administration Allowance paid by the Health Insurer in a year of tax, in respect of the employee's health insurance, is more than $X?

By applying the above discussion, where the Administration Allowance that is paid by the Health Insurer in a year of tax, in respect of the employee's health insurance policy, is equal to or exceeds the amount specified in paragraph 58P(1)(e) of the FBTAA, then, that paragraph of the FBTAA is not satisfied and section 58P of that Act is not satisfied.

Therefore, where the Administration Allowance paid by the Health Insurer in a year of tax in respect of the employee's health insurance is more than $300, the provision of rights to the employee or associate of the employee will be a 'fringe benefit' as defined in subsection 136(1) of the FBTAA, and will not be an exempt benefit.

Question 3

Will the payment of a Hospital Excess Refund to an Eligible Employee or an Eligible Family Member be a fringe benefit?

The payment of a Hospital Excess Refund from the ERP to an Eligible Employee or an Eligible Family Member in a year of tax is a 'benefit' as defined in subsection 136(1) of the FBTAA. However, for a benefit to be a 'fringe benefit', it must be provided in respect of the employment of the employee.

The payment of the refund from the ERP to an employee or an associate of an employee arises as a result of the exercise of the employee's or associates pre-existing rights to a refund from the ERP under the Employee's Health Plan.

Pre-existing rights were considered in McArdle v. FC of T 88 ATC 4222; (1988) 19ATR 985 (McArdle). In that case, the employment of the taxpayer for consideration paid for the surrender of various rights held under stock option agreements was held to have had no bearing on the character of the payment received under the surrender agreement. The consideration for the payment was the surrender or abandonment of pre-existing rights.

Fisher J in McArdle stated at 4238 that:

… the consideration for the payment of $1,100,000 … was the surrender, or perhaps more strictly the extinguishment or abandonment, of his rights to acquire shares or alternatively to obtain cash under the LSAR agreements. That consideration passed from the taxpayer as the holder of options and not by virtue or in consequence of the employer-employee relationship.

Emphasising the exercise of existing rights, Fisher J also said at 4238:

The taxpayer in entering into the surrender agreement can correctly be said to be enjoying ``the fruits of the rights'' and not the rights themselves. Alternatively … he was engaged in ``exploitation of a valuable right'' earlier granted to him.

As the payment of the refund from the ERP to an employee or an associate of an employee arises out of a pre-existing right, the refund is not provided in respect of the employment of the employee.

While the payment of a Hospital Excess Refund to an Eligible Employee or an Eligible Family Member in a year of tax is a 'benefit' as defined in subsection 136(1) of the FBTAA, the benefit is not provided in respect of the employment of the employee as required in the definition of a 'fringe benefit' in the same subsection.

The payment of a Hospital Excess refund is therefore not a fringe benefit.

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