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Ruling

Subject: FBT reduction in expense payment fringe benefits

Question 1

Are you liable to pay fringe benefit tax where an employee salary sacrifices half of their mortgage repayments in respect of a remote area housing loan?

Answer

Yes.

This ruling applies for the following periods:

1 April 2012 to 31 March 2013

The scheme commences on:

1 April 2012

Relevant facts and circumstances

You are a organisation located in a remote area.

You currently allow your employees to salary sacrifice half of their rental housing payments of which no fringe benefit tax (FBT) liability arises.

You propose to allow your employees to salary sacrifice X% of their mortgage repayments which consist of principal and interest expenditures.

For the purpose of this ruling all the conditions listed under subsections 60(2) and 142(2E) of the FBTAA have been met.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 20.

Fringe Benefits Tax Assessment Act 1986 section 60.

Fringe Benefits Tax Assessment Act 1986 subsection 60(2).

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

Fringe Benefits Tax Assessment Act 1986 subsection 142(1).

Fringe Benefits Tax Assessment Act 1986 subsection 142(1A).

Fringe Benefits Tax Assessment Act 1986 subsection 142(2E).

Fringe Benefits Tax Assessment Act 1986 subsection 142(2C).

Reasons for decision

Question 1

Will a fringe benefits tax liability arise from the mortgage repayments you pay for the employee under the terms of the salary sacrifice arrangement?

You propose, under an effective salary sacrifice arrangement, to pay or reimburse half of the mortgage repayments incurred by your current employees.

Subsection 60(2) of the FBTAA provides for a 50% reduction of the taxable value of expense payment fringe benefits in respect of remote area housing loan interest payment where all the conditions in that subsection are satisfied.

Subsection 60(2) of the FBTAA states:

Where:

(a) the recipient of an expense payment fringe benefit in relation to an employer in relation to a year of tax is an employee of the employer;

(b) the recipients expenditure is in respect of interest in respect of a remote area housing loan connected with a dwelling;

(c) the recipient occupied or used the dwelling as his or her usual place of residence during a period (in this section referred to as the ``occupation period'') during which the interest accrued; and

(d) the fringe benefit was not provided under: (i) a non-arm's length arrangement; or (ii) an arrangement that was entered into by any of the parties to the arrangement for the purpose, or for purposes that included the purpose, of enabling the employer to obtain the benefit of the application of this section;

the amount that, but for this subsection, would be the taxable value of the fringe benefit in relation to the year of tax shall be reduced by 50% of so much of that amount as relates to the occupation period.

In summary the value of the benefit can be reduced where:

(a) the benefit is an expense payment fringe benefit

(b) the employees expenditure is in respect of interest on a remote area housing loan connected with a dwelling

(c) the employee occupied the dwelling as his or her usual place of residence, and

(d) the benefit was not provided:

(i) under a non-arm's length arrangement, or

(ii) under an arrangement entered into by any of the parties for purposes that included the purpose of enabling the employer to obtain the benefit of the application of the reduction.

Will the benefit be an expense payment fringe benefit?

Section 20 of the FBTAA states:

Where a person (in this section referred to as the "provider"):

(a) makes a payment in discharge, in whole or in part, of an obligation of another person (in this section referred to as the "recipient") to pay an amount to a third person in respect of expenditure incurred by the recipient; or

(b) reimburses another person (in this section also referred to as the "recipient"), in whole or in part, in respect of an amount of expenditure incurred by the recipient;

the making of the payment referred to in paragraph (a), or the reimbursement referred to in paragraph (b), shall be taken to constitute the provision of a benefit by the provider to the recipient.

As you will pay or reimburse your employee's mortgage repayments through a salary sacrifice arrangement the benefit will be an expense payment fringe benefit.

Will the employee's expenditure be in respect of interest on a remote area housing loan for a dwelling?

You propose to allow your employees to salary sacrifice their mortgage repayments which consist of both the principal and interest component.

Subsection 136(1) of the FBTAA defines a 'dwelling' as meaning a unit of accommodation constituted by, or contained in a building, being a unit that consists, in whole or in substantial part, of residential accommodation.

Subsection 142(1) of the FBTAA, in basic terms, sets out the requirements for a 'remote area housing loan'.

For the purposes of this ruling all the requirements under subsection 60(2) of the FBTAA have been met, therefore the interest component of the employee's expenditure is considered to be in respect of interest on a remote area housing loan for a dwelling.

Conclusion

The taxable value of the expense payment fringe benefit resulting from the payment of the remote area housing loan interest only, can be reduced by 50% under subsection 60(2) of the FBTAA.

Therefore where you pay or reimburse your employee for 50% of their mortgage repayments a fringe benefits tax liability will arise from the principle component and the residual interest component.

You state that you have been advised that there would be no fringe benefits tax liability as the employees would be sacrificing X% of their costs.

This conclusion could have been reached as the application of the 50% reduction available for remote area housing interest under subsection 60(2) of the FBTAA is applied to the taxable value of the fringe benefit while the 50% reduction available under subsection 60(2A) for remote area housing rent is applied to the employee's expenditure (the gross rent) not to 50% of the taxable value.

ATO Interpretative Decision ATO ID 2003/159 Fringe Benefits Tax: Remote area housing: reduction of taxable value - remote area housing rent, provides an example of how the taxable value of the benefit is calculated where the employer reimburses the employee for the full amount of the rent expense incurred and the taxable value of the benefit where the employer reimburses 50% of the rent expense incurred. The example is as follows:

Example calculation

Based on the facts (and alternative facts) contained above, the reduction in taxable value of the 'expense payment fringe benefit' would be calculated as follows:

Note: Unlike the reduction contained in subsection 60(2) of the FBTAA the 50% reduction contained in subsection 60(2A) of the FBTAA refers to 50% of the employee's expenditure (the gross rent) not to 50% of the taxable value. ATO Interpretative Decision ATO ID 2003/157 contains an example of the application of subsection 60(2)of the FBTAA in relation to remote area housing interest.

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