Edited version of your private ruling

Authorisation Number: 1012593382573

Ruling

Subject: Fringe benefits tax: Residual fringe benefits

Question 1

Is the service provided to your employee an 'in-house residual fringe benefit' according to the definition provided in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

Question 2

If the service provided to your employees is an 'in-house residual fringe benefit', will the taxable value be calculated under paragraph 49(aa) of the FBTAA as a benefit provided under a 'salary packaging arrangement'?

Answer

No

Question 3

Where an employee purchases the same service from a third party private retailer and you reimburse the employee for a percentage of their bill, will the reimbursement be an 'in-house residual expense payment fringe benefit' according to the definition provided by subsection 136(1) of the FBTAA?

Answer

Yes

This ruling applies for the following periods:

For a number of fringe benefits tax years commencing in the year ending 31 March 2014

The scheme commences on:

In the relevant FBT year

Relevant facts and circumstances

You are an entity wholly owned by X.

You are related to another entity, Z who is also wholly owned by X.

Z purchases a service from Y that Z on sells to the public.

Y is also wholly owned by X.

The discount

Under your employee's conditions of employment, your employees are entitled to receive a discount off of their bill where you are the service provider.

You consider that similar discounts are offered by other retailers who sell the same service to the public.

You have provided a discount to your employees for numerous years.

The discount is provided to all eligible employees at the same percentage rate and on the same terms.

Your employees become entitled to the discount even though they have not requested it.

The discount percentage is fixed and your employees are not entitled to exchange it for another benefit or for an increase in their salary or wages.

Reimbursement of equivalent discount

Your employees may choose to change to another retailer for the service.

Where an employee purchases the service from a third party provider that is not an associate of you, you will reimburse your employees an equivalent percentage discount.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 20

Fringe Benefits Tax Assessment Act 1986 paragraph 20(b)

Fringe Benefits Tax Assessment Act 1986 section 45

Fringe Benefits Tax Assessment Act 1986 paragraph 49(aa)

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 section 159

Reasons for decision

Question 1

Is the service provided to your employees an 'in-house residual fringe benefit' according to the definition provided in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides the following definition of a 'fringe benefit':

fringe benefit, in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit:

(a) provided at any time during the year of tax; or

(b) provided in respect of the year of tax;

being a benefit provided to the employee or to an associate of the employee by:

(c) the employer; or

(d) an associate of the employer; or

(e) a person (in this paragraph referred to as the arranger) other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of arrangement between:

…

in respect of the employment of the employee, but does not include:

…

'Benefit' in this context is also defined in subsection 136(1) of the FBTAA as follows:

Benefit 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;

(ii) the provision of, or the use of facilities for, entertainment, recreation or instruction; or

(iii) the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction;

(b) a contract of insurance; or

(c) an arrangement for or in relation to the lending of money.

The provision of the service at a discounted rate is a benefit that is a fringe benefit as it is provided to employees and is not an exempt benefit.

In order to calculate the taxable value of a fringe benefit it is necessary to initially consider the type of benefit that is provided. The FBTAA is divided into 13 types of benefits and each type has its own valuation rules.

Section 45 of the FBTAA defines residual benefits as:

45 Residual benefits

A benefit is a residual benefit for the purposes of this Act if the benefit is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive).

The provision of the service will not come within Divisions 2 to 11 of the FBTAA. Therefore the provision of the service at the discounted rate will be a residual benefit.

The taxable values of residual benefits are calculated using different methods according to whether the benefits are in-house residual fringe benefits or external residual fringe benefits.

Subsection 136(1) defines an 'in-house residual fringe benefit' as follows:

in-house residual fringe benefit, in relation to an employer, means a residual fringe benefit in relation to the employer:

(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.

Chapter 18 of Fringe benefits tax - a guide for employers (FBT guide for employers) (NAT 1054) provides the following summary of in-house residual fringe benefits:

18.4 In-house residual fringe benefits

A residual fringe benefit is valued as an in-house residual fringe benefit if you (or an associate) provide the benefit and it is identical or similar to rights, services or facilities you (or an associate) provide to the public in the ordinary course of business. Examples include professional advice provided free or at a discount by a law firm to its employees, and video recorders hired out to employees of a television rental firm at a discount.

In considering whether paragraph (a) or paragraph (b) of the in-house residual fringe benefit applies it is necessary to consider whether Z is your associate.

An 'associate' for the purposes of the FBTAA is defined in subsection 136(1) as follows:

associate has the same meaning given by section 318 of the Income Tax Assessment Act 1936.

Note: Section 159 of this Act affects the above definition.

You and Z are associates according to the relevant definition in section 318 of the Income Tax Assessment Act 1936.

Therefore, in applying the in-house residual fringe benefit definition the service provided to employees at a discount by Z will be an in-house residual fringe benefit if the following conditions are satisfied:

1. Z carries on a business that consists of or includes the provision of identical or similar benefits principally members of the public; and

2. the benefit is not provided under a contract of investment insurance.

Each of the conditions above is considered in turn.

1. Does Z carry on a business that consists of or includes the provision of identical or similar benefits principally members of the public?

It is accepted that Z carries on a business that consists of selling the service to members of the public. As the service provided to your employees is identical or similar to the service sold to members of the public this requirement is met.

2. Is the benefit a benefit that is not provided under a contract of investment insurance?

The benefit is a benefit that is not provided under a contract of investment insurance.

Conclusion

As the conditions discussed above are met the benefit is an in-house residual fringe benefit in accordance with paragraph (a) of the subsection 136(1) definition of in-house residual fringe benefit.

Question 2

If the service provided to your employees is an in-house residual fringe benefit', will the taxable value be calculated under paragraph 49(aa) of the FBTAA as a benefit provide under a 'salary packaging arrangement'?

In-house residual fringe benefits can be classified as 'period' or 'non-period' in-house residual fringe benefits.

Subsection 136(1) of the FBTAA defines 'in-house period residual fringe benefit' as follows:

in-house period residual fringe benefit means an in-house residual fringe benefit that is provided during a period.

The benefit is an in-house period residual fringe benefit.

Section 49 of the FBTAA sets out four methods that can be used to calculate the taxable value of an in-house period residual fringe benefit.

The first of these methods is contained in paragraph 49(aa). This method applies when the benefit is provided under a salary packaging arrangement. Paragraph 49(aa) states:

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

(aa) if the benefit was provided to the recipients under a salary packaging arrangement - an amount equal to the notional value of the benefit at the comparison time; or

…

Is the benefit provided to the recipients under a salary packaging arrangement?

Subsection 136(1) of the FBTAA provides the following definition of 'salary packaging arrangement':

salary packaging arrangement means an arrangement under which a benefit is provided to an employee if:

(a) the benefit is provided in return for the employee agreeing to a reduction in the employee's salary or wages that would not have happened apart from the arrangement; or

(b) the arrangement is part of the employee's remuneration package, and the benefit is provided in circumstances where it is reasonable to conclude that the employee's salary or wages would be greater if the benefit were not provided.

Chapter 18 of the Fringe benefits tax - a guide for employers (FBT guide for employers) (NAT 1054) summarises the subsection 136(1) definition:

Salary packaging arrangements

Salary packaging arrangements (also commonly referred to as salary sacrifice or total remuneration packaging) are arrangements where either:

• You enter into an agreement with your employee to have their salary and wages reduced (or sacrificed) in order to receive a benefit; or

• A reduction in salary is not negotiated, but you give your employee a benefit as part of their employment contract, and it is reasonable to conclude that the salary and wages they would have received would have been greater if the benefit wasn't provided.

That is, a salary packaging arrangement will occur where a benefit is provided to an employee in accordance with paragraph (a) or (b) of the subsection 136(1) definition.

Is the benefit provided in accordance with paragraph (a) of the subsection 136(1) definition?

Paragraph (a) provides that a benefit will be provided under a salary packaging arrangement where the employer and employee agree for the employee to have their salary and wages reduced in order to receive a benefit.

The FBT guide for employers provides the following example of a negotiated salary packaging arrangement:

Example: Negotiated salary packaging arrangement

Felicity has just started working for a car company. In negotiating her remuneration package she agrees with her new employer to forego $25,000 of her yearly salary in order to receive the use of a car.

As she has entered into an agreement to reduce her salary and wages, Felicity would be taken to have entered into a salary packaging arrangement.

You provide your employees with a discount of a set amount. The discount is provided automatically to your employees bills.

Your employees have not requested the discount and they have not negotiated to receive the discount over an increase in salary and wages or another benefit. It is considered that you have not entered into an agreement with your employees to have their salary and wages reduced or sacrificed to receive a benefit.

Is the benefit provided in accordance with paragraph (b) of the subsection 136(1) definition?

Paragraph (b) of the subsection 136(1) definition provides that a salary packaging arrangement can still occur where a reduction in salary is not negotiated but you give your employee a benefit as part of their remuneration package and it is reasonable to conclude that the salary and wages they would have received would have been greater if the benefit was not provided.

The FBT guide for employers refers to this as a non-negotiated salary packaging arrangement and provides the following example of such an arrangement:

Example: Non-negotiated salary packaging arrangement

McKenzie has started employment with an IT firm. His job was previously advertised as having a total remuneration package of $100,000 per year.

McKenzie only receives $95,000 in salary and wages but is given by his employer, free of charge, gaming and photography software with a retail value of $5,000.

In this case, while McKenzie has not entered into a separate agreement to reduce his salary and wages, the salary and wages he would have received would clearly have been greater if the benefit had not been provided. Therefore, McKenzie has entered into a salary packaging arrangement.

In applying these examples, the question to be considered is whether there are any factors that indicate the employee's salary or wages would have been higher if the benefit had not been provided. In considering this question, it is noted:

• the salary or wages received by the employees will be the same regardless of whether the employee uses the service;

• you have been providing a discount to your employees for numerous years;

• the discount applied is a set percentage amount and therefore the value of the benefit to the employee is reliant on consumption by the employee, rather than the position held by the employee;

• the discount cannot be substituted for an alternative benefit or an increase in salary; and

• the discount is only available to eligible employees in certain circumstances (e.g. account must be in employees name).

On the basis of these factors, it is not reasonable to conclude that the salary or wages that would have been received if the discount had not been provided would be greater. Therefore, the discounted service provided to the employees is not provided under a salary packaging arrangement.

Conclusion

When your employees receive the discounted service they are receiving an in-house period residual fringe benefit. As the discounted service is not provided under a salary packaging arrangement the taxable value will not be calculated in accordance with paragraph 49(aa) of the FBTAA.

Question 3

Where an employee purchases the same service from a third party private retailer and you reimburse the employee for a percentage of their bill, will the reimbursement be an 'in-house residual expense payment fringe benefit' according to the definition provided by subsection 136(1) of the FBTAA?

The reimbursement of part of the employee's bill will be an expense payment benefit under paragraph 20(b) of the FBTAA.

An 'in-house expense payment fringe benefit' is defined in subsection 136(1) of the FBTAA to mean:

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

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

In general terms, a reimbursement will be an in-house property expense payment fringe benefit where the reimbursement is for expenditure incurred in the purchase of property. Alternatively, a reimbursement will be an in-house residual expense payment fringe benefit where the reimbursement is for expenditure incurred in the purchase of a residual benefit.

As discussed above, the provision of the service is a residual benefit. Therefore, the relevant definition to consider is the definition of 'in-house residual expense payment fringe benefit'.

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

in-house residual expense payment fringe benefit, in relation to an employer, means an expense payment fringe benefit in relation to the 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 an 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 a 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, the reimbursement of a portion of an employee's account where the provider of the service is not the employer or an associate of the employer will be an 'in-house residual expense payment fringe benefit' if the following conditions are satisfied:

1. the provider of the service purchased the service from the employer or an associate of the employer (the seller);

2. both the provider of the service and the seller carried on a business that consisted of or included the provision of identical or similar benefits principally to outsiders; and

3. the employee obtains 'documentary evidence' of his or her expenditure and provides that 'documentary evidence' or a copy to the employer before the 'declaration date'.

Each of these conditions is considered in turn.

1. Will the retailer purchase the service from the employer or an associate of the employer?

The retailer will purchase the service from Y. As Y is not the employer, the question to be considered is whether Y is an associate of the employer?

Is Y an associate of the employer?

The definition of associate was discussed above in relation to Z. As Y is also wholly owned by X it will be your associate for the reasons discussed above in relation to Z.

2. Do both the provider of the service and the seller carry on a business that consisted of or included the provision of identical or similar benefits principally to outsiders?

The provider of the service is a third party retailer that sells the service in the retail market. Therefore, it is accepted that it will carry on a business that consists of or includes the provision of identical or similar benefits principally to outsiders.

As discussed above, the seller will be Y. Y carries on a business that consists of or includes the provision of the service to retail companies.

Therefore, both the provider of the service and the seller carry on a business that consists of the provision of identical or similar benefits to outsiders.

3. Will the employee provide documentary evidence of the expenditure to the employer?

The employees will provide you with documentary evidence of their expenditure.

Conclusion

As each of the conditions contained within the definition of 'in-house residual expense payment fringe benefit' are satisfied, the reimbursement of the service expenses of an employee will be an 'in-house residual expense payment fringe benefit'.

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