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Ruling

Subject: Fringe benefits tax: use of computer software

Question

Will a fringe benefit arise from an employee's use of software products?

Answer

No

This ruling applies for the following periods:

Year ended 2012

Year ended 2013

Year ended 2014

Relevant facts and circumstances

You have entered into an agreement with a software company for the management of your computer network.

Under the agreement the software company is able to offer your employees the use of certain programs.

You did not negotiate for this clause to be included in the agreement.

Under the terms of the agreement eligible employees can obtain the use of certain programs on a personal computer.

To obtain the software an employee applies to the software company.

To facilitate this, you provide the employee with a program code which is entered together with other identifier details including their name and your email address.

The software company then emails the employee's work email account with a link and instructions on how to proceed with the purchase of a licence/product key. The transaction requires the employee to enter into an individual licensing agreement with the software company and to make payment direct to the software company.

You do not have any other involvement in the arrangement.

It is a condition of the agreement that, if an employee ceases employment with you, the employee removes the software from their personal computer.

The offer is not dependant upon the employee using the software installed on their personal computer for their employment duties. Employees are able to use the software for private purposes.

A search of the internet in the recent year indicates an unrestricted version of the software can be purchased for less than $300.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 (FBTAA) section 45

Fringe Benefits Tax Assessment Act 1986 section 51

Fringe Benefits Tax Assessment Act 1986 section 58P

Fringe Benefits Tax Assessment Act 1986 section 58X

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision

Will a fringe benefit arise from an employee's use of software products?

The definition of 'fringe benefit' in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides that a benefit will be a fringe benefit where it is:

(i) provided to an employee or an associate of an employee;

(ii) by the employer, an associate of the employer or a third party either under an arrangement that comes within paragraph (e) of the 'fringe benefit' definition or in circumstances that come within paragraph (ea) of the 'fringe benefit' definition;

(iii) is provided in respect of the employment of the employee; and

(iv) does not come within paragraphs (f) to (s) of the 'fringe benefit' definition.

In considering each of these requirements:

Is the right to use the software a benefit?

The term 'benefit' is defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) as follows:

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;….

The right to use the software comes within this definition.

Is the benefit provided to an employee or an associate of an employee?

The software is available to your current employees. Therefore this requirement is satisfied.

Is the benefit provided by the employer, an associate of the employer or a third party in a situation that comes within either paragraph (e) or (ea) of the 'fringe benefit' definition?

The terms 'provide' and 'provider' are defined as follows in subsection 136(1) of the FBTAA:

"provide" :

(a) in relation to a benefit - includes allow, confer, give, grant or perform; and

(b) in relation to property - means dispose of (whether by sale, gift, declaration of trust or otherwise):

(i) if the property is a beneficial interest in property but does not include legal ownership - the beneficial interest; or

(ii) in any other case - the legal ownership of the property.

"provider" , in relation to a benefit, means the person who provides the benefit.

The right to use the software is provided to the employee by the software company. As the software company is not the employer or an associate of the employer it is necessary to consider the application of paragraphs (e) and (ea) of the 'fringe benefit' definition.

Paragraph (e) applies where the benefit is provided by a person who is not the employer or an associate of the employer under an arrangement covered by paragraph (a) of the 'arrangement' definition.

Paragraph (a) of the 'arrangement' definition in subsection 136(1) states:

any agreement, arrangement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings.

This requirement will be satisfied as the software is provided under an agreement that you have with the software company.

Alternatively, if paragraph (e) is not satisfied, paragraph (ea) will be satisfied as you are knowingly participating in a scheme or plan involving the provision of the benefit by providing the employee with a program code, enabling the use of your email facility to confirm the applicant is an employee and to inform employees about the arrangement.

Is the benefit provided in respect of the employee's employment?

The benefit is provided in respect of employment as the employee's use of the licensed software is contingent on the employee's employment with you. If the employee's employment ceases, the employee is required to remove the software from their personal computer.

Does the benefit come within paragraphs (f) to (s) of the 'fringe benefit' definition?

For the purpose of this ruling the relevant paragraph is paragraph (g) which provides that a benefit that is an exempt benefit will not be a fringe benefit. This includes benefits that are exempt under section 58P or 58X of the FBTAA.

Will the benefit be an exempt benefit under section 58X of the FBTAA?

Section 58X exempts certain eligible work related items used primarily for work purposes from fringe benefits where the benefit is provided by the employer to the employee. Computer software is identified as an eligible work related item in paragraph 58X (2) (b) of the FBTAA.

The computer software is provided by the software company. As the software company is not the employer, the requirement for the software to be provided by the employer is not met.

Further, in most (if not all) instances the software is not primarily for use in the employee's employment.

Therefore, the benefit will not be an exempt benefit pursuant to section 58X of the FBTAA.

Will the benefit be an exempt benefit under section 58P of the FBTAA?

In general terms section 58P of the FBTAA provides that a minor benefit will be an exempt benefit where the notional value is less than $300 and the specified conditions are satisfied.

Section 58P states:

Where:

(a) a benefit (in this section called a ``minor benefit'') is provided in, or in respect of, a year of tax (in this section called the ``current year of tax'') in respect of the employment of an employee of an employer;

(b) the benefit is not an airline transport benefit;

(c) in the case of an expense payment benefit, a property benefit or a residual benefit - if the minor benefit were an expense payment fringe benefit, a property fringe benefit or a residual fringe benefit, as the case may be, in relation to the employer, the expense payment fringe benefit, the property fringe benefit or the residual fringe benefit, as the case requires, would not be an in-house fringe benefit;

(d) in the case of a tax-exempt body entertainment benefit where the provider incurs non-deductible exempt entertainment expenditure that is wholly or partly in respect of the provision of entertainment to the employee or an associate of the employee:

(i) the provision of entertainment to the employee or the associate of the employee, as the case may be:

(A) is incidental to the provision of entertainment to outsiders; and

(B) neither consists of, nor is provided in connection with, the provision of a meal (other than a meal consisting of light refreshments) to the employee or the associate of the employee, as the case may be; or

(ii) the entertainment is provided to the employee or the associate of the employee, as the case may be:

(A) on eligible premises of the employer; and

(B) solely as a means of recognising the special achievements of the employee in a matter relating to the employment of the employee;

(e) the notional taxable value of the minor benefit in relation to the current year of tax is less than $300; and

(f) having regard to:

(i) the infrequency and irregularity with which associated benefits, being benefits that are identical or similar to:

(A) the minor benefit; or

(B) benefits provided in connection with the provision of the minor benefit;

have been or can reasonably be expected to be provided;

(ii) the amount that is, or might reasonably be expected to be, the sum of the notional taxable values of the minor benefit and any associated benefits, being benefits that are identical or similar to the minor benefit, in relation to the current year of tax or any other year of tax;

(iii) the amount that is, or might reasonably be expected to be, 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;

(iv) the practical difficulty for the employer in determining the notional taxable values in relation to the current year of tax of:

(A) if the minor benefit is not a car benefit - the minor benefit; and

(B) if there are any associated benefits that are not car benefits - those associated benefits; and

(v) the circumstances surrounding the provision of the minor benefit and any associated benefits including, but without limiting the generality of the foregoing:

(A) whether the benefit concerned was provided to assist the employee to deal with an unexpected event; and

(B) whether the benefit concerned was provided otherwise than wholly or principally by way of a reward for services rendered, or to be rendered, by the employee;

it would be concluded that it would be unreasonable to treat the minor benefit as a fringe benefit in relation to the employer in relation to the current year of tax;

the minor benefit is an exempt benefit in relation to the current year of tax.

Guidance on the possible application of section 58P is contained within Taxation Ruling TR 2007/12 Fringe benefits tax: minor benefits (TR 2007/12). In summarising the requirements of section 58, paragraphs 8 to 12 of TR 2007/12 state:

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, except in two limited circumstances.

In applying these guidelines it is necessary to consider:

(i) whether the notional taxable value of the benefit is less than $300;

(ii) whether the benefit is one of the benefits listed in paragraphs 11 and 12 of TR 2007/12; and

(iii) whether it would be unreasonable having regard to the specified criteria in paragraph 58P(1)(f) to treat the benefit as a fringe benefit.

(i) Is the notional taxable value of the benefit less than $300?

The definition of 'notional taxable value' in subsection 136(1) provides that the 'notional taxable value' of the benefit that arises from the use of the software is the amount that would be the taxable value if the benefit was a fringe benefit.

To calculate the taxable value of a fringe benefit it is necessary to first determine the type of fringe benefit that has been provided. The FBTAA is divided into thirteen different categories. Each category has its own valuation rules.

For the purpose of this ruling, the relevant categories to consider are property benefits and residual benefits.

Section 40 of the FBTAA provides that a benefit will be a property benefit where it involves the provision of property to another person. In the situation being considered, the employee is only provided with the use of the computer software. If the employment ceases, or the computer services are provided by an alternative provider the employee is required to remove the software from their computer. Therefore, as ownership of the software does not pass to the employee the benefit will not be a property benefit.

A residual benefit is defined under section 45 of the FBTAA to be a benefit that does not fit within the specific categories contained in Division 2 to 11 of the FBTAA. As the benefit does not come within any of the other specific categories it will be a residual benefit.

The method used to calculate the taxable value of a residual benefit depends upon whether the benefit is an in-house benefit and whether it is provided for a period of more than one day.

In general terms, an in-house residual benefit requires the employer or an associate of the employer to be carrying on a business that consists of, or includes the provision of identical or similar benefits principally to outsiders. As neither the employer, nor an associate of the employer carry on a business that consists of, or includes the provision of identical or similar benefits principally to outsiders the benefit will be an external residual benefit.

The next step in determining the method to be used to calculate the taxable value of the residual benefit is to determine whether the benefit is a period benefit. In general terms a benefit will be a period benefit if it is provided for a period of more than one day. As the benefit being provided (the use of licensed software products) is provided for more than one day, the benefit will be an external period residual benefit.

The methods that are used to calculate the taxable value of an external period residual benefit are contained within section 51 of the FBTAA. Section 51 of the FBTAA states:

Subject to this Part, the taxable value of an external period residual fringe benefit in relation to an employer in relation to a year of tax is:

(a) where the provider was the employer or an associate of the employer and the recipients overall benefit was purchased by the provider under an arm's length transaction - the amount paid or payable by the provider in respect of the recipients current benefit;

(b) where the provider was not the employer or an associate of the employer and the employer, or an associate of the employer, incurred expenditure to the provider under an arm's length transaction in respect of the provision of the recipients current benefit - the amount of that expenditure; or

(c) in any other case - the notional value of the recipients current benefit;

reduced by the amount of the recipients contribution insofar as it relates to the recipients current benefit.

As the provider is neither the employer, nor an associate of the employer, paragraph 51(a) will not apply. Nor will paragraph 51(b) as neither the employer, nor an associate of the employer, incur expenditure to the provider.

Therefore, as neither paragraph 51(a), nor paragraph 51(b) applies, paragraph 51(c) will be used to calculate the taxable value of the benefit. The taxable value under paragraph 51(c) is 'the notional value of the recipients current benefit reduced by the amount of the recipient's contribution insofar as it relates to the recipients current benefit'.

Subsection 136(1) of the FBTAA defines the term 'notional value' 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.

Taxation Determination TD 93/231 provides guidance on how to determine the 'notional value' of a property fringe benefit. Paragraphs 2 to 4 of TD 93/231 state

2. To ascertain the 'notional value' of a property fringe benefit the employer must determine the amount the employee would have to pay for a comparable (on the basis of age, type and condition) benefit under an arm's length transaction.

3. This Office will accept a number of ways of obtaining the notional value including:

- the price of comparable goods advertised in local newspapers and/or relevant magazines or similar publications;

- the price paid for comparable goods at a public auction;

- the price of comparable goods at a second-hand store; or

- the market value of the goods determined by a qualified valuer.

4. The lowest value obtained using any of these methods will be acceptable.

Although this Taxation Determination relates to the 'notional value' of a property fringe benefit it can also be used to calculate the 'notional value' of a residual benefit.

In applying TD 93/231, a search of the internet provides a range of prices for which the software can be purchased. Each of the prices is less than $300. As an unrestricted version can be purchased for less than $300, it is reasonable to conclude that a restricted licence could be obtained for less than $300.

Therefore, it is accepted that the notional value is less than $300.

(ii) Is the benefit is one of the benefits listed in paragraphs 11 and 12 of TR 2007/12?

Paragraphs 11 of 12 of TR 2007/12 refer to airline transport benefits, in-house benefits and tax-exempt body entertainment benefits. As the use of the software does not come within any of these categories the benefit is not one of the benefits listed in paragraphs 11 and 12 of TR 2007/12.

(iii) Would it be unreasonable having regard to the specified criteria in paragraph 58P(1)(f) to treat the benefit as a fringe benefit?

Paragraph 58P(1)(f) contains five specific criteria which must be considered in determining whether it would be unreasonable to treat the benefit as a fringe benefit. The five criteria are:

1. the infrequency and irregularity with which associated identical or similar benefits are provided;

2. the sum of the notional taxable values of the minor benefit and associated benefits which are identical or similar to the minor benefit;

3. the sum of the notional taxable values of any other associated benefits;

4. the practical difficulty in determining the notional taxable values of the minor benefit and any associated benefits; and

5. the circumstances surrounding the provision of the minor benefit and any associated benefits.

For the purposes of the minor benefits exemption the term 'associated benefits' is defined in subsection 58P(2) of the FBTAA to mean a benefit that is any of the following:

· identical or similar to the minor benefit;

· provided in connection with the provision of the minor benefit; or

· identical or similar to a benefit provided in connection with the provision of the minor benefit.

The use of the software is a 'once-off' use. That is, the employee is only entitled to receive the use of one version of the software.

In considering each of the five criteria:

The infrequency and irregularity with which associated identical or similar benefits are provided

As set out above, the use of the software is a 'once-off' use. Therefore, the benefit will not be provided on a frequent or regular basis.

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

As the notional taxable values is less than $300 the sum of the notional taxable values of the minor benefit and associated benefits which are identical or similar is not sufficient to prevent the benefit being a minor benefit.

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

No other associated benefits will be provided.

The practical difficulty in determining the notional taxable values of the minor benefit and any associated benefits

As the employee orders the software from the software company you will not be aware of which software has been made available to a particular employee. Therefore, there will be practical difficulties in determining the notional taxable values.

The circumstances surrounding the provision of the minor benefit and any associated benefits

In considering the circumstances in which the benefit is provided, paragraph 58P(1)(f)(v) provides that it is necessary to consider whether the benefit was provided to assist the employee to deal with an unexpected event and whether the benefit was provided as a reward for services rendered.

In considering these two tests the program is not being provided to assist the employee to deal with an unexpected event and is not directly linked to the services provided by the employee.

In weighing the five factors, it can be concluded that it would be unreasonable to treat the benefit as a fringe benefit.

Therefore, as the notional value of the benefit in this case is less than $300 and the specified conditions are satisfied, section 58P of the FBTAA will apply to exempt this benefit. As the benefit is an exempt benefit, then it is not a fringe benefit as defined in subsection 136(1) of the FBTAA.

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