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Ruling
Subject: Recipients Contribution
Question 1
Will payments made by an employee in regard to the employee's housing loan be a 'recipient's contribution' as that term is defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?
Answer
No
This ruling applies for the following periods:
01 April 2012 - 31 March 2013.
01 April 2013 - 31 March 2014.
The scheme commences on:
01 April 2012
Relevant facts and circumstances
The employee has a housing loan and under the terms of the loan agreement the employee is under an obligation to pay both loan interest and loan principal.
The employee's employer proposes to have an effective salary sacrifice arrangement in place with the employee.
Under the terms of the proposed salary sacrifice arrangements the employee's employer will directly pay 50% of the employee's housing loan interest.
The employee will pay the remaining 50% housing loan interest from the employee's after-tax salary.
Relevant legislative provisions
Fringe Benefits Tax Assessment Act 1986 section 20
Fringe Benefits Tax Assessment Act 1986 subsection 136(1)
Fringe Benefits Tax Assessment Act 1986 Subdivision B of Division 5 of Part III.
Reasons for decision
Detailed reasoning
An expense payment benefit arises under paragraph 20(a) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) where an employer pays a third party for expenses incurred by the employee.
Broadly, the taxable value (as worked out under Subdivision B of Division 5 of Part III) of an 'expense payment fringe benefit', resulting from the provision of an expense payment benefit under paragraph 20(a) of the FBTAA, may be reduced by the amount of a 'recipient's contribution'.
Relevantly, 'recipients contribution' is defined in subsection 136(1) of the FBTAA as:
…(b) in relation to an expense payment fringe benefit provided in respect of the employment of an employee of an employer, being a fringe benefit to which paragraph 20(a) applies - the amount paid to the provider or to the employer by the recipient or by the employee in respect of the provision of the fringe benefit.
Therefore, where an employee pays 50 per cent of the interest incurred on the loan from the employee's after-tax salary and is provided with an expense payment fringe benefit in relation to the other 50 per cent of the interest incurred, the question arises as to whether the amount paid by the employee is paid 'in respect of' the provision of the expense payment fringe benefit.
The term 'in respect of' is defined in subsection 136(1) of the FBTAA in the context of 'in respect of the employment of the employee' to include 'by reason of, by virtue of, or for or in relation directly or indirectly to, that employment'.
A number of judicial decisions have considered the meaning of the phrase 'in respect of'.
In Federal Commissioner of Taxation v. Scully (2000) 201 CLR 148; 2000 ATC 4111; (2000) 43 ATR 718, consideration of the words 'in respect of' highlighted the importance of the context in which the phrase appears and resulted in the requirement that there be some 'discernable rational link' between the two subject matters.
In J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; 44 ATR 22, Heerey, Merkel and Findelstein JJ stated:
The words "in respect of" have no fixed meaning. They are capable of having a very wide meaning denoting a relationship or connection between two things or subject matters. However, the words must, as with any other statutory expression, be given a meaning that depends on the context in which the words are found…
…it must be remembered that what must be established is whether there is a sufficient or material, rather than a, causal connection or relationship…
Therefore, in the context of the meaning of 'recipients contribution' in subsection 136(1) of the FBTAA, there needs to be a sufficient or material connection between the payment of the remaining 50 per cent of the interest by the employee and the provision of the expense payment fringe benefit to the employee.
When the employee enters into the loan agreement the employee is under an obligation to pay the total amount of the loan interest (and the loan principal).
The provision of the expense payment fringe benefit under the terms of the salary sacrifice arrangement discharges the obligation of the employee to pay 50 per cent of the interest incurred by the employee on the loan.
The payment of the remaining loan interest by the employee from the employee's after-tax salary relates to the employee's obligation to pay the amount of loan interest not covered by the provision of the expense payment fringe benefit.
The payment by the employee of the remaining loan interest incurred is made in respect of the employee's obligation under the terms of the loan agreement and not in respect of the provision of the expense payment fringe benefit.
Therefore, it is considered there is not a sufficient or material connection between the employee's payment of the remaining loan interest incurred and the provision of the expense payment fringe benefit.
Accordingly, as the amount paid by the employee is not paid 'in respect of' the provision of the fringe benefit, it is not a 'recipient's contribution' as defined in subsection 136(1) of the FBTAA.
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