Edited version of your private ruling

Authorisation Number: 1012448413776

Ruling

Subject: In-house fringe benefits - salary sacrifice arrangement

Question 1

Will the reimbursement of an employee's expenses be an in-house fringe benefit?

Answer

Yes.

Question 2

Will an in-house fringe benefit arise when you transfer the quarterly salary sacrificed amount from a sundry debtor account to the employee's account?

Answer

Yes.

Qusetion 3

Will an in-house fringe benefit arise when you pay part or all of an employee's expenses?

Answer

Yes.

Question 4

Will the taxable value of the fringe benefits that arise from:

(a) the reimbursement of an employee's expenses;

(b) the transfer of the quarterly salary sacrificed amount; or

(c) the payment of an employee's expenses;

be calculated under section 48 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

(a) No. The taxable value will be calculated under subsection 22A(2) of the FBTAA. However, subsection 22A(2) uses the calculation method contained in section 48 of the FBTAA.

(b) Yes.

(c) No. The taxable value will be calculated under subsection 22A(2) of the FBTAA. However, subsection 22A(2) uses the calculation method contained in section 48 of the FBTAA.

This ruling applies for the following periods:

1 April 2012 - 31 March 2013

1 April 2013 - 31 March 2014.

NOTE:

This ruling is based on the in-house fringe benefit provisions that are currently contained in the Fringe Benefits Tax Assessment Act 1986 (FBTAA). As part of the Mid-Year Economic and Fiscal Outlook 2012-13, the Treasurer announced that the government will remove the concessional fringe benefits tax treatment for in-house fringe benefits if they are accessed by way of a salary sacrifice arrangement.

The relevant amendments are contained within Tax Laws Amendment (2012 Measures No. 6) Bill 2012 which was introduced into Parliament on 29 November 2012.

If enacted, these proposed reforms will apply in relation to benefits provided on or after 22 October 2012 unless the benefit is provided under a salary packaging arrangement that is covered by the transitional arrangements. Under the transitional arrangements, the existing provisions will continue to apply to a benefit provided before 1 April 2014 under a salary packaging arrangement entered into by the employer and employee before 22 October 2012, unless the salary packaging arrangement is materially altered or varied.

If the law is substantively changed, the part of the private ruling dealing with the changed law will cease to apply.

Further information regarding the proposed reforms can be obtained from The Treasury website at http://www.treasury.gov.au?Policy-Topics/Taxation/In-House-Fringe-Benefits.

The scheme commenced on:

1 April 2012.

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.

You intend to offer your employees an opportunity to enter into an effective salary sacrifice arrangement in relation to charges.

The amount specified in the salary sacrifice arrangement is used to calculate a fortnightly amount which is paid into a sundry debtor account.

Depending upon the particular arrangement the amount in the sundry debtor account may be:

· used to reimburse the employee;

· credited to the employee's account when it is due each quarter; or

· used to make a payment to another corporation in relation to the employee's account.

Any balance remaining in the sundry debtor account at the time the employee ceases his or her employment will be paid to the employee via the payroll system.

There are four alternative arrangements that can be entered into. The first two arrangements are available when you provide the service to an employee. The third and forth arrangements are available to an employee who receives the services from an associated company.

Arrangement 1 - reimbursement of charges where you provide the services

Under this arrangement an employee will enter into an effective salary sacrifice arrangement for the reimbursement of the employee's charges.

The reimbursement will not occur until the employee provides you with either a receipt printout or Bpay reference number showing the amount paid and date of payment.

Arrangement 2 - the crediting of an amount

Under this arrangement an employee will enter into an effective salary sacrifice arrangement for the crediting of an amount into the employee's account.

The amount specified in the salary sacrifice arrangement is used to calculate a fortnightly amount which is paid into a sundry debtor account and transferred to the employee's account when it is due each quarter.

Arrangement 3 - reimbursement of charges raised by associated company

Under this arrangement an employee will enter into an effective salary sacrifice arrangement for the reimbursement of the employee's charges.

The reimbursement will not occur until the employee provides you with either a receipt printout or Bpay reference number showing the amount paid and date of payment.

Arrangement 4 - the payment of the charges raised by associated company

Under this arrangement an employee will enter into an effective salary sacrifice arrangement for the payment of the employee's account.

The payment will not occur until the employee provides the account to you.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 20

Fringe Benefits Tax Assessment Act 1986 subsection 22A(2

Fringe Benefits Tax Assessment Act 1986 section 45

Fringe Benefits Tax Assessment Act 1986 section 46

Fringe Benefits Tax Assessment Act 1986 section 48

Fringe Benefits Tax Assessment Act 1986 section 49

Fringe Benefits Tax Assessment Act 1986 section 62

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 section 149

Fringe Benefits Tax Assessment Act 1986 section 153

Fringe Benefits Tax Assessment Act 1986 section 159

Reasons for decision

Question 1

Will the reimbursement of charges be an in-house fringe benefit?

An in-house fringe benefit is defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to mean:

(a) an in-house expense payment fringe benefit;

(b) an in-house property fringe benefit; or

(c) an in-house residual fringe benefit.

Under the first arrangement you will reimburse an employee for the amount shown on account.

In determining whether this reimbursement will be an in-house benefit it is necessary to determine what kind of benefit will be provided as there are only three types of benefit that can be an in-house fringe benefit; namely an expense payment fringe benefit, a property fringe benefit and a residual fringe benefit.

In general terms, section 20 of the FBTAA provides that an expense payment fringe benefit will arise where an employer either:

makes a payment to a third party to discharge an obligation of an employee, or

reimburses the employee for expenses incurred by the employee.

As you intend to reimburse expenditure incurred by an employee, the benefit will be an expense payment fringe benefit.

Is the expense payment fringe benefit an in-house expense payment fringe benefit?

Subsection 136(1) of the FBTAA defines an in-house expense payment fringe benefit as:

(a) an in-house property expense payment fringe benefit; or

(b) an in-house residual expense payment fringe benefit.

Both of these terms are defined in subsection 136(1) of the FBTAA. In broad terms:

an in-house property expense payment fringe benefit refers to an expense payment fringe benefit where the expenditure incurred by the employee was in respect of the purchase of tangible property of a kind sold by the provider in the ordinary course of business; and

an in-house residual expense payment fringe benefit refers to an expense payment fringe benefit where the expenditure incurred by the employee was in respect of the purchase of a service or other residual benefit of a kind supplied by the provider to members of the public in the ordinary course of business.

In your situation, you are providing one benefit (a reimbursement) which relates to both the provision of property and a residual benefit. This will be a residual benefit under section 153 of the FBTAA.

Will the reimbursement be an 'in-house residual expense payment fringe benefit'?

Subsection 136(1) of the FBTAA defines an in-house residual expense payment fringe benefit to mean:

an expense payment fringe benefit in relation to an employer where:

(a) the recipients expenditure was incurred in respect of the provision of a residual benefit (other than a benefit provided under a contract of investment insurance) by a person (in this definition called the "residual benefit provider");

(b) if the residual benefit provider is the employer or an associate of the employer - at or about the time that, if the residual benefit had been a residual fringe benefit, would have been the comparison time, the residual benefit provider carried on a business that consisted of or included the provision of identical or similar benefits principally to outsiders;

(c) if the residual benefit provider is not the employer or an associate of the employer:

(i). the residual benefit provider purchased the benefit from the employer or associate of the employer (which employer or associate is in this definition called the "seller"; and

(ii). at or about the time that, if the residual benefit had been a residual fringe benefit, would have been the comparison time, both the residual benefit provider and the seller carried on business that consisted of or included the provision of identical or similar benefits principally to outsiders: and

(d) documentary evidence of the recipients' expenditure is obtained by the recipient and that documentary evidence, or a copy, is given to the employer before the declaration date.

Therefore an 'in-house residual expense payment fringe benefit' requires that:

(i). The fringe benefit is an 'expense payment fringe benefit';

(ii). The employee's (or associate's) expenditure is incurred on the provision of a residual benefit (other than a benefit provided under a contract of investment insurance);

(iii). Either:

· the residual benefit provider is the employer or the employer's associate who carried on a business that consisted of, or included, the provision of identical or similar benefits principally to outsiders; or

· if the residual benefit is not the employer or the employer's associate, the provider purchased the benefit from the employer or the employer's associate and both the residual benefit provider and the employer or the employer's associate carried on a business that consisted of, or included, the provision of identical or similar benefits principally to outsiders.

(iv) The required documentary evidence is given to the employer at the required time.

These criteria are discussed below.

(i). Will the fringe benefit be an expense payment fringe benefit?

As discussed above, the reimbursement will be an expense payment fringe benefit.

(ii). Will the expenditure be incurred on the provision of a residual benefit?

As discussed above, the expenditure will be incurred on the provision of a residual benefit.

(iii). Is the provider of the residual benefit the employer or an associate of the employer that carries on a business that consists of or includes the provision of identical or similar benefits principally to outsiders?

The services will be provided by either:

(a) yourself; or

(b) an associated corporation.

(a) Where you provide the services

Where you provide the services it is necessary to consider whether you carry on a business that consists of or includes the provision of identical or similar benefits principally to outsiders.

Do you carry on a business that consists of or includes the provision of identical or similar benefits principally to outsiders.

The FBTAA does not define what constitutes carrying on a business for the purposes of the application of the in-house provisions.

It does however, define 'business operations' in subsection 136(1) of the FBTAA as:

In relation to a government body or a non-profit company, includes any operations or activities carried out by that body or company.

In discussing the meaning of the term 'business operations', paragraph 9 of Taxation Ruling TR 2000/4 Fringe benefits tax: meaning of business premises (TR 2000/4), states:

The term 'business operations' in the definition of 'business premises' includes a wide range of activities. The activities include those undertaken by a person in the ordinary course of carrying on a business. They also include those activities that, although not undertaken in the ordinary course of carrying on a business, are nevertheless undertaken in the course of carrying on a business. Profit making activities that fall short of being a business are also included in 'business operations' if they have a business or commercial character.

The term 'business' is also defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as:

A business includes any profession, trade, vocation or calling, except the occupation as an employee.

The Macquarie media dictionary describes to 'be in business' as:

To earn a living from a commercial activity; to be carrying out an activity, enterprise, etc., successfully.

These definitions indicate the requirement to be carrying on a business for the purpose of the FBTAA as capable of having a wide meaning.

Support for this conclusion was provided by the High Court decision in NT Power Generation Pty Ltd v. Power and Water Authority [2004] HCA 48; 219 CLR 90; 210 ALR 312; 79 ALJR 1 (Power and Water Authority case), where the phrase 'carrying on a business' was constructed broadly.

In its decision in the Power and Water Authority case, the Court held at paragraph 52 that the Power and Water Authority was carrying on a very substantial business. In making this statement, the Court referred to the references to carrying on a business contained within the Power and Water Authority's internal documents, its annual report which discussed indicators like rate of return on assets, the debt to capital ratio and the sales revenue.

Further, at paragraph 66 in the Power and Water Authority case, the Court stated:

While the word "business" in any particular context takes its meaning from that context, normally it is a "wide and general" word. Its meaning in the Act [Trade Practices Act 1974] is widened by s 4(1`), since "business" includes "a business not carried on for profit".

In the earlier decision of NT Power Generation Pty Ltd v. Power & Water Authority [2001] FCA 334, Mansfield J stated at paragraph 236:

Whether or not a business is being carried on is a question of fact, having regard, for example, to the nature of the activities carried out, and their continuous or repetitive character: Smith v Capewell (1979) 142 CLR 509; Fasold v Roberts (1997) 70 FCR 489.

Paragraph 13 of Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) provides a number of indicators which are relevant in determining whether a person is carrying on a business for income tax purposes. The indicators are as follows:

· whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;

· whether the taxpayer has more than just an intention to engage in business;

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

· whether there is repetition and regularity of the activity;

· whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

· whether the activity is planned, organised and carried on in a business like manner such that it is directed at making a profit;

· the size, scale and permanency of the activity;

· whether the activity is better described as a hobby, a form of recreation or a sporting activity.

In considering these factors it is accepted that you are carrying on a business.

Does the business consist of the provision of identical or similar benefits principally to outsiders?

The meaning of 'principally' is also not defined in the FBTAA, however, at page 52 in the ATO publication Income tax guide for non-profit organisations 'principally' is stated to mean 'mainly or chiefly' and that 'less than 50% is not principally'. Therefore, under such guidance, 'principally' may be regarded to mean 'more than 50%' or, alternatively, 'more than half, of the time'.

'Outsider' is defined in subsection 136(1) of the FBTAA as being:

in relation to the employment of an employee of an employer, means a person not being:

(a) an employee of the employer;

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

(c) an employee of a person (in this definition referred to as the ``provider'') other than the employer or an associate of the employer who provides benefits to, or to associates of, employees of the employer or an associate of the employer under an arrangement between:

(i). the employer or an associate of the employer; and

(ii). the provider or another person; or

(d) an associate of an employee to whom any of the preceding paragraphs apply.

Therefore, an 'outsider' is someone who is not an employee of the relevant employer, not an employee of an associate of that employer, not an employee of someone who provides benefits to the employees of either that employer or that employer's associate under an arrangement between them and also not to any associates of these latterly mentioned employees.

Given you provide services to in excess of 100,000 customers, it is accepted that your services will principally be provided to outsiders. Therefore, it is accepted that the services are principally provided for customers who are not an employee of the employer or an employee of an associate of the employer.

(b) Where the service is provided by an associated company

Where the service is provided by an associated company it is necessary to consider the following questions:

(b)(i) Is the corporation that provides the services your associate?

(b)(ii) If the corporation that provides the services is your associate, does it carry on a business that consists of or includes the provision of identical or similar benefits principally to outsiders?

(b)(i) Are the other corporations your associate?

On the basis of the information provided it is accepted that the other corporations are your associate.

(b)(ii) Do the corporations carry on a business that consists of or includes the provision of identical or similar benefits principally to outsiders?

On the basis of the information provided it is accepted that this requirement will be met.

It is also accepted that their business consists of or includes the provision of identical or similar benefits principally to outsiders.

(iv) Will the required documentary evidence be given to the employer at the required time?

This condition will be met as a reimbursement will not be paid until the employee provides you with either a receipt printout or Bpay reference number showing the amount paid and date of payment.

Conclusion

As all the conditions will be satisfied the reimbursement of an employee's expenses will be an in-house residual expense payment fringe benefit.

Question 2

Will an in-house fringe benefit arise where you credit a pre determined amount to the employee's account?

Under this second arrangement you will transfer the balance of the sundry debtor account which contains the amount that the employee has salary sacrificed during the relevant quarter into the employee's account. The effect of this transfer is that you provide the services to the employee for an amount that is less than the amount that would otherwise be paid.

As discussed above, an expense payment fringe benefit will arise under section 20 of the FBTAA where you either

· make a payment to a third party to discharge an obligation of an employee, or

· reimburse the employee for expenses incurred by the employee.

Neither of these dot points applies to the crediting of the sacrificed amount to the employee's account as the transfer does not involve a payment to a third party or a reimbursement to the employee. Therefore, the crediting will not be an expense payment fringe benefit.

Rather, in determining the type of benefit that will be provided it is necessary to consider the factors discussed above in determining whether the expense payment benefit was an in-house property expense payment fringe benefit or an in-house residual expense payment fringe benefit. In considering these factors the benefit will be a residual benefit as it involves the provision of both property and a service. As the benefit involves the provision of both property and residual benefits, the benefit will be a residual benefit under section 153 of the FBTAA.

Will the residual benefit be an 'in-house residual fringe benefit'?

Subsection 136(1) of the FBTAA defines an in-house residual fringe benefit to mean:

(a) where both of the following conditions are satisfied:

(i) the provider is the employer or an associate of the employer;

(ii) at or about the comparison time, the provider carried on a business that consisted of or included the provision of identical or similar benefits principally to outsiders; or

(b) where all of the following conditions are satisfied:

(i) the provider is not the employer or an associate of the employer;

(ii) the provider purchased the benefit from the employer or an associate of the employer (which employer or associate is in this definition called the seller);

(iii) at or about the comparison time, both the provider and the seller carried on a business that consisted of or included the provision of identical or similar property principally to outsiders;

but does not include a benefit provided under a contract of investment insurance.

As you will be the provider of the benefit, the provision of the services will be an in-house residual fringe benefit if you carry on a business that consists of or includes the provision of identical or similar benefits.

In accordance with the discussion above in relation to question 1 it is accepted that you are carrying on a business that consists of or includes the provision of identical or similar benefits principally to outsiders.

Therefore, the provision of services for a reduced amount as a result of an amount being transferred to the employee's account from the sundry debtor account will be an in-house residual fringe benefit.

Question 3

Will an in-house fringe benefit arise when you pay part or all of an employee's account?

In the third arrangement, you will pay part or all of the expenses incurred by the employee in relation to the services.

As discussed above, an expense payment fringe benefit will arise under section 20 of the FBTAA where you either

make a payment to a third party to discharge an obligation of an employee, or

reimburse the employee for expenses incurred by the employee.

The payment of all or part of the debt due on an employee's account comes within the first dot point as you will be paying a third party to discharge an obligation incurred by the employee. Therefore, it will be an expense payment fringe benefit.

The definition of in-house expense payment fringe benefit was discussed above in relation to question 1. In accordance with that discussion, the payment will be an in-house residual expense payment fringe benefit as:

the payment is for the provision of a residual benefit as it is for the provision of both property and a residual benefit;

the residual benefit provider is an associate of the employer; and

the residual benefit provider carries on a business that consists of or includes the provision of identical or similar benefits principally to outsiders.

Question 4

Will the taxable value of the fringe benefits be calculated under section 48 of the FBTAA?

As discussed above in relation to the first three questions the arrangements will involve the provision of either:

· an in-house residual expense payment fringe benefit; or

· an in-house residual fringe benefit where the amount paid by the employee for the expenses is reduced by an amount transferred to the employee's account from the sundry debtor account.

Subsection 22A(2) of the FBTAA provides the valuation method for calculating the taxable value of an in-house residual expense payment fringe benefit.

Subsection 22A(2) states:

Subject this Part, the taxable value in relation to a year of tax of an in-house residual expense payment fringe benefit (in this subsection called the "actual fringe benefit") provided during the year of tax is the amount that, if:

a) the provision of the residual benefit to which the actual fringe benefit relates were an in-house residual fringe benefit (in this subsection called the "notional fringe benefit"); and

b) the recipients contribution in relation to the notional fringe benefit were equal to the recipients expenditure reduced by whichever of the following amounts is applicable;

i. the amount of the payment referred to in paragraph 20(a) reduced by the amount of the recipients contribution in relation to the actual fringe benefit;

ii. the amount of the reimbursement referred to in paragraph 20(b);

would have been calculated under whichever of sections 48 and 49 is applicable as the taxable value but for section 52 and Division 14, of the notional fringe benefit in relation to the year of tax.

In calculating what would have been the taxable value if the benefit had been a residual benefit the valuation rules in section 48 are used where the benefit is a non-period benefit. If the benefit is a period benefit the valuation rules in section 49 are used.

As the benefit is provided at the time when the payment in respect of that period is due and payable the benefit is a non-period residual benefit.

Therefore, the relevant section for the purpose of using subsection 22A(2) to calculate the taxable value of the in-house residual expense payment fringe benefits will be section 48.

Section 48 is also the relevant section to use to calculate the taxable value of the in-house residual fringe benefit that arises when the amount paid by the employee for the expenses is reduced by an amount transferred to the employee's account from the sundry debtor account.

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