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Ruling

Subject: Flying lessons

Question 1:

Is the entity entitled to a deduction for operating costs relating to use of an asset in providing its services to other entities?

Answer:

Yes.

Question 2:

Is an entity entitled to a deduction for the costs of training expenses?

Answer:

Yes.

Question 3

Is the payment of an employee's training fees by an entity a fringe benefit for the purposes of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer:

Yes, it is an expense payment fringe benefit.

Question 4

What is the taxable value of the fringe benefit?

Answer:

The amount paid by the employer to the third party for the employee's lessons.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

Entity A operates a business.

A large proportion of the income is earned by providing services in remote areas.

An employee travels to various locations to provide entity A's services.

Entity B provided training to the employee.

Entity A paid for the training directly to Entity B.

The employee did not pay for any of the training and was not reimbursed for any training expenses.

Entity A purchased an asset.

Entity A pays for the operating costs of this asset.

The asset will be used for business purposes by entity A and for private purposes by the employee.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1.
Fringe Benefit Tax Assessment Act 1986 section 20
Fringe Benefit Tax Assessment Act 1986 section 23

Fringe Benefit Tax Assessment Act 1986 section 24

Fringe Benefit Tax Assessment Act 1986 subsection 24(1)

Fringe Benefit Tax Assessment Act 1986 subsection 136(1)

Reasons for decision

Under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) you can deduct expenses incurred in gaining or producing your assessable income, or expenses necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

You cannot deduct an expense under section 8-1 of the ITAA 1997 if it is of a capital, private or domestic nature.

You also cannot claim a deduction if the expense is incurred in producing exempt income or a provision of the tax law prevents you from claiming a deduction.

Connection with the income of the taxpayer
To be deductible under section 8-1 of the ITAA 1997, a loss or outgoing must have a sufficient connection with the derivation of your assessable income.

The expense must be incurred in gaining or producing your assessable income.

The sufficiency of the connection is determined on the facts of each case.

Apportionment of deductible expenses
Expenses may have to be apportioned into deductible and non-deductible parts. The inclusion of the words 'to the extent' in section 8-1 of the ITAA 1997 implies that the apportionment of expenses is contemplated.

The general requirement when apportioning expenditure is to assign a percentage to represent the deductible part of a composite expenditure. There is no universally accepted formula that can be applied. As long as apportionment is reasonable in the circumstances and there is some proof of its determination.

Capital expenses
Expenses of capital, or of a capital nature, cannot be claimed as a deduction under section 8-1 of the ITAA 1997.

An expense will usually be capital in nature where it is incurred with the intention to create an asset or advantage of a lasting and enduring nature (British Insulated & Helsby Cables Ltd v. Atherton (1926) AC 205; (1926) 10 TC 155).

Capital expenditure often produces an enduring benefit, that is, the structure of the advantage or asset. Revenue expenditure is often repetitious or recurring in nature and often does not produce assets or advantages of an enduring nature.

Operating costs
Entity A has purchased an asset to use in providing its services to various entities. Entity A has used the asset to service clients in various locations. Entity A has derived income through providing services to these clients.

The costs incurred in operating the asset will be necessarily incurred in carrying on the entity A's business as the asset has been used by the employee to undertake travel to visit clients in various locations. Entity A has indicated that the asset will be used for both business and private purposes. A deduction will be allowed for operating expenses to the extent that the asset is used for business purposes under section 8-1 of the ITAA 1997. The expenses should be apportioned accordingly.

Training costs
In this case, it is accepted that the training costs are relevant to the carrying on of entity A's business. Entity A is entitled to a deduction for the training costs under section 8-1 of the ITAA 1997. However, as the entity has incurred expenses relating to the provision of a fringe benefit, the entity will have a fringe benefits tax liability as noted below.

Fringe benefits
The definition of a fringe benefit within subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides that a fringe benefit will arise where the following circumstances exist:

· A benefit is provided to an employee, or an associate of an employee.

· The benefit is provided by an employer, or an associate of an employer, or by a third party under an arrangement with the employer, or an associate of the employer.

· The benefit is provided in respect of the employment of the employee.

· The benefit is not one of the exempt benefits.

Has a benefit been provided to an employee, or an associate of the employee?
A benefit is defined within subsection 136(1) of the FBTAA as including;

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:

an arrangement for or in relation to:

(i) the performance of work …

Where an employer pays a third party on behalf of an employee or reimburses an employee in relation to expenses in respect of the employees' employment then a fringe benefit would be provided.

In this case, a benefit was by provided to the employee by the employer in the form of the employee training fees.

The cost of an employee to obtain the training is a benefit provided under an arrangement for or in relation to the performance of work.

A 'fringe benefit' will arise from providing training fees to the employee by the employer as it is a 'benefit' provided to an employee by the employer by reason of the employee's employment and does not come within an exempt benefit as outlined in paragraphs (f) to (s) of the 'fringe benefit' definition under section 136 of the FBTAA.

Expense payment benefit
The definition of an expense payment fringe benefit which is also contained within subsection 136(1) of the FBTAA provides that a fringe benefit which comes within the expense payment definition in section 20 of the FBTAA will be an expense payment fringe benefit.

Section 20 of the FBTAA provides that an expense payment benefit will arise in two ways:

     1.   Where the provider (in this case the employer) pays a third party in satisfaction of expenses incurred by the recipient (in this case the employee); or

     2. Where the provider (in this case the employer) reimburses the recipient (in this case the employee) for expenses they incur.

In this case, the employer paid directly to a third party entity B for the employee's training fees. The employee has not paid for any of the training costs themselves and therefore has not been reimbursed for any expenses by the employer.

As the employer has paid directly to a third party for the training costs on behalf of the employee, an expense payment benefit has arisen.

Taxable value of expense payment fringe benefits
The taxable value of an external expense payment fringe benefit is determined under Section 23 of the FBTAA.

Section 23 of the FBTAA states as follows:

Subject to this Part, the taxable value in relation to a year of tax of an external expense payment fringe benefit provided during the year of tax is the amount of the payment referred to in paragraph 20(a), or the reimbursement referred to in paragraph 20(b), as the cases requires, reduced, in a case to which paragraph 20(a) applies, by the amount of the recipients contribution.

In simple terms, the taxable value of an expense payment fringe benefit is either the amount of payment made by the employer on behalf of the employee for an employee obligation or an amount of reimbursement paid by the employer to the employee for an obligation the employee has paid or incurred.

In this case, the employer has made an expense payment fringe benefit which relates to payment of training costs under section 20 of the FBTAA.

Therefore, the taxable value of the expense payment fringe benefit under section 23 of the FBTAA will be the amount paid to the third party for the training cost.

Otherwise deductible rule
The taxable value of an expense payment fringe benefit may be reduced in accordance with the otherwise deductible rule (ODR) under section 24 of the FBTAA.

Subsection 24(1) of the FBTAA permits a reduction of the taxable value of an expense payment fringe benefit under the otherwise deductible rule where all the necessary conditions of that section are met.

Broadly, this means that the taxable value may be reduced by any amount an employee would hypothetically be entitled to claim as an income tax deduction if the employer had not paid a third party or reimbursed the employee in satisfaction of an expense incurred by the employee.

However, the ODR only applies where the employee would have been entitled to a once-only deduction for the expenditure paid or reimbursed by the employer. A once-only deduction is defined, in subsection 136(1) of the FBTAA, to mean one that is wholly or partly allowable under the income tax law in only one year (for example, this would exclude deductions for depreciation expenses).

The question of whether or not the employer would have been entitled to an income deduction for the expense is irrelevant.

For an employer to reduce the taxable value of a fringe benefit under the otherwise deductible rule an employee would have had to incur the expense solely relating to the performance of their employment related duties and that expense would have to be wholly deductible to that employee for income tax purposes.

The employee must substantiate to the employer each year prior to lodgement of the relevant FBT return, the extent to which the expense payment fringe benefit would have been otherwise deductible to the employee.

Before one considers whether the costs involved with the employee undertaking flying lessons are 'otherwise deductible' to the entity under the FBTAA, one needs to establish whether these costs would be deductible to the employee, in accordance with the income tax provisions.

Based of the information provided, the employee would not be eligible for a deduction under section 8-1 of the ITAA 1997. Therefore, the 'otherwise deductible' rule will not apply to reduce the taxable value of the expense payment benefit provided.

Therefore, the employer would not be able to reduce the taxable value of the expense payment fringe benefit under the otherwise deductible rule.

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