Edited version of your private ruling

Authorisation Number: 1012554515956

Ruling

Subject: Fringe benefits & Otherwise Deductible Rule - Training for Sales Staff

Question 1

Would the driving course, flights and accommodation provided under the training and education program to the sales consultants be considered expense payment fringe benefits under Division 5 of the Fringe Benefits Tax Assessment Act 1986 ('FBTAA')?

Answer

No

Question 2

Would the driving course, flights and accommodation be deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA) if they were incurred by the employee directly therefore enabling the application of the otherwise deductible rule under section 52 of the FBTAA?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The employer is a car dealership.

A third party consulting business has a contract to devise a specialised training program for a large motor vehicle corporation (Client).

The Client will send selected sales consultants from its respective dealerships on an advanced driving course where they will achieve certification through practical and theoretical training.

The sales consultants are not employed by the client directly but are employed by its dealerships.

The Client has agreed to pay for all of the costs of the training program, including the cost of the driving program, economy flights, accommodation, food and drink. The dealership is located in a separate state of Australia to the driving course.

The sales consultants will gain skills and experience from the advanced driving program across a range of vehicles. They will be assessed on subjects such as vehicle safety (i.e. recovery, stall outs) and vehicle capability.

The driving course is not compulsory for all sales consultants. The dealership selects high achieving sales consultants to participate in the course. No-one refuses attendance if selected for the course. The best performing sales consultants are selected to participate in the course as they are typically highly motivated individuals. It is expected that they will benefit the most from extensive training and product knowledge that the proposed training course will provide.

The sales consultant's role implies an obligation to know the vehicle product range as it is updated. It is incidental to the dealership that a sales consultant should undertake a training program which is relevant and might improve their knowledge and understanding of the vehicles. This will directly improve the skills and knowledge of the sales consultants required for their employment with the dealership and lead to increased income for the sales consultants by transferring their knowledge into the sales process with the dealership's customers.

At the end of each training program, the participants will attend a dinner where the provider supplies the participants with food and a choice of refreshments which include tea, coffee, beer, wine and soft drink. The participants may consume some alcohol while consuming their dinner, however the percipients will be blood alcohol tested at the start of the training program each day. The blood alcohol testing ensures the alcohol use is incidental to the training program.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986

Fringe Benefits Tax Assessment Act 1986 s20

Fringe Benefits Tax Assessment Act 1986 s23

Fringe Benefits Tax Assessment Act 1986 s40

Fringe Benefits Tax Assessment Act 1986 s45

Fringe Benefits Tax Assessment Act 1986 s51(1)

Fringe Benefits Tax Assessment Act 1986 s52

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Income Tax Assessment Act 1997 s8-1

Reasons for decision

Question 1

Summary

The driving course, flights and accommodation provided under the training and education program to the sales consultants are considered residual fringe benefits under FBTAA 1986.

Detailed reasoning

A fringe benefit is a benefit (other than salary or wages) provided to an employee by the employer or an associate of the employer, with respect to the employee's employment. The definition of a fringe benefit is defined in subsection 136(1) of the FBTAA 1986.

The course participants will be receiving a fringe benefit as it is provided in respect of their employment, and is provided by an associate of their employer.

The benefit includes flights, accommodation and meals, all of which is incidental to the driving course.

According to section 20 of FBTAA 1986 an expense payment fringe benefit arises 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.

Basically an expense payment fringe benefit may arise in either of two ways:

1. where you (the employer) reimburse an employee for expenses they incur

2. where you pay a third party in satisfaction of expenses incurred by an employee.

In your circumstance, the employers are not reimbursing their employees for expenses incurred, and a third party is not being paid in satisfaction of expenses incurred by an employee. Therefore the benefits received by the employees are not expense payment benefits, but residual benefits as per section 45 of the FBTAA 1986.

As per section 45 of the FBTAA 1986, any fringe benefit that is not subject to the rules of other identified benefits are residual fringe benefits. Essentially, these are the fringe benefits that remain, or are left over, because they are not one of the more specific categories of fringe benefit.

The taxable value is the amount the employee could reasonably be expected to pay to obtain the benefit under an arm's length transaction, reduced by any amount paid by the employee, and any other reductions or exemptions that may apply.

Question 2

Summary

The driving course, flights and accommodation are deductible under section 51(1) of the ITAA, enabling the application of the otherwise deductible rule under section 52 of the FBTAA.

Detailed reasoning

The benefit received must be treated under residual fringe benefit tax rules.

The taxable value of a residual fringe benefit may be reduced in accordance with the otherwise deductible rule, but only if the recipient of the benefit is the employee. Broadly, this means that you may reduce the taxable value by the amount the employee would have been entitled to claim as an income tax deduction if both of the following conditions are satisfied:

· the residual benefit has not been provided as a fringe benefit

· the employee acted as a consumer or member of the public in purchasing the service or privilege that comprises the residual benefit.

A benefit is 'Otherwise Deductible' if the employee would have been entitled to claim an income tax deduction if the employer had not paid for the expense.

The deductibility of self education expenses is discussed in TR 98/9. General guidelines for determining the deductibility of self-education expenses are provided in paragraphs 12 to 17, and state:

12. Self-education expenses are deductible under section 8-1 of the ITAA 1997 where they have a relevant connection to the taxpayer's current income earning activities.

13. If a taxpayer's income-earning activities are based on the exercise of a skill or some specific knowledge and the subject of the self-education enables the taxpayer to maintain or improve that skill or knowledge, the self-education expenses are allowable as a deduction.

14. If the study of a subject of self-education objectively leads to, or is likely to lead to, an increase in a taxpayer's income from his or her current income-earning activities in the future, the self-education expenses are allowable as a deduction.

15. The fact that the study will enable a taxpayer to get employment, to obtain new employment or to open up a new income-earning activity (whether in business or in the taxpayer's current employment) is not a sufficient basis in itself for self-education expenses to be deductible. This includes studies relating to a particular profession, occupation or field of employment in which the taxpayer is not yet engaged. The expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

16. In practice, the above principles do not always operate on a mutually exclusive basis. It is always necessary to have regard to the words of the section 8-1 and apply them to the facts.

17. An expense is deductible under section 8-1 when it has the essential character of an income-producing expense. The essential character is to be determined by an objective analysis of the surrounding circumstances. There are circumstances where apportionment under section 8-1 is required. For example, if a study tour or attendance at a work related conference or seminar is undertaken for income-earning purposes and for private purposes, it is appropriate to apportion the expenses between the purposes. If the income-earning purpose is merely incidental to the main private purpose, only the expenses which relate directly to the former purpose are allowable. However, if the private purpose is merely incidental to the main income-earning purpose, apportionment is not appropriate.

Paragraphs 27 of Taxation Ruling TR 98/9 outlines what constitutes a 'course of education', with particular emphasis on organised course of study, including those provided by an institution or organisation who's primary function is the provision of systematic instruction, training or schooling in a subject, skill or trade. The proposed driving course schedule shows that participants will gain experience and be tested on a range of vehicles, and includes a set schedule of study. Participants will gain certification of their skill. The element of 'course of education' is therefore satisfied.

The employees attending the course will gain knowledge and experience which will help them improve in their current jobs by improving their practical and theoretical knowledge of vehicles, and potentially increased sales.

The benefits include flights, accommodation, and meals. Consideration must be given to the possibility of any entertainment element as part of this course. Based on the facts provided, sales consultants are selected by the dealerships to attend the course. There is no indication the opportunity to attend the course is a reward for performance. Flights will be in economy class, and not first class or business class.

Paragraph 23 of Taxation Ruling TR 97/17 Income tax and fringe benefits tax: entertainment by way of food and drink states that whether or not the provision of food or drink constitutes entertainment requires an objective analysis of all the circumstances surrounding that provision.

The following are relevant factors considered by the Commissioner in undertaking any objective analysis:

i. Why is the food or drink being provided

ii. What food or drink is being provided

iii. When is the food or drink being provided

iv. Where is the food or drink being provided

The provision of food and drink is off the employer's premises, and is provided to attendees of certain business seminars that go for at least 4 hours. At the end of each training program day, the participants will attend a dinner where the provider supplies the participants with food and a choice of refreshments which include tea, coffee, beer, wine and soft drink. The participants may consume some alcohol while consuming their dinner, however the participants will be blood alcohol tested at the start of the training program each day. The blood alcohol testing ensures the alcohol use is incidental to the training program.

Alcohol is made available to be consumed at dinner. With the application of TR 97/17, paragraphs 68-71, it is reasonable to conclude that the consumption of the alcohol forms only an incidental part of the meal. The alcohol does not result in the food or drink amounting to the provision of meal entertainment.

Conclusion:

The employer would be able to reduce the taxable value of the residual benefit fringe benefits under the otherwise deductible rule, as the employees would be entitled to claim a deduction if the had incurred the expenses themselves.

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