Edited version of private advice

Authorisation Number: 1012630612054

Ruling

Subject: Income Tax ~~ Deductions ~~ expenses incurred by employer for employees

Question 1

Can the Taxpayer claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 for paying the application fee of a Temporary Work (Skilled) (subclass 457) visa for a prospective employee?

Answer

Yes

This ruling applies for the following periods:

01 July 2012 to 30 June 2015

The scheme commences on:

01 July 2012

Relevant facts and circumstances

1. The Taxpayer operates a business.

2. To obtain recognition, establish exclusivity and improve their brand name the Taxpayer has sought out foreign skilled employees to work at its establishment.

3. In order to bring those employees to Australia, the Taxpayer pays for the employee's application fee for a Temporary Work (Skilled) (subclass 457) visa.

4. The employment is determined whilst the prospective employee is overseas. The Taxpayer pays for the application cost of the visa in order for the employee to be legally employed in Australia.

5. The process for employment of a foreign skilled worker is as follows:

a) The employer makes an application to the Department of Immigration and Border Protection to become an approved standard business sponsor.

b) The employer makes a nomination application where they identify a position to be filled by an overseas worker and nominate the prospective overseas employee.

c) The prospective employee makes an application for a Temporary Work (Skilled) (subclass 457) visa.

Each step in the process requires the payment of an application fee.

6. The Taxpayer will pay for the prospective employee's application fee for the Temporary Work (Skilled) (subclass 457) visa as well as their own sponsorship and nomination fees.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Fringe Benefits Tax Assessment Act 1986 section 58F

Fringe Benefits Tax Assessment Act 1986 section 142A

Fringe Benefits Tax Assessment Act 1986 section 143A

Reasons for decision

Deductions can be claimed for many common types of business expenses under the general rules provided for in section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Subsection 8-1(1) of the ITAA 1997 allows a loss or outgoing to be deductible, to the extent that:

a) it is incurred in gaining or producing your assessable income, or

b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

Subsection 8-1(2) of the ITAA 1997 prevents a loss or outgoing from being deductible, to the extent that it is:

a) of capital, or of a capital nature, or

b) of a private or domestic nature, or

c) used to gain or produce your exempt income, or your non-assessable non-exempt income, or

d) prevented from being deducted by a provision of the Act.

A common business expenses is the cost of obtaining and retaining employees. Such costs are incurred by a business in gaining or producing their assessable income and are generally deductible.

The Taxpayer has asked whether it can claim a deduction for paying the application fee for a subclass 457 visa for a prospective employee. The cost of these application fees are normally borne by the visa applicant and not the employer. By paying this fee on their prospective employee's behalf, the Taxpayer could be liable to Fringe Benefits Tax.

A fringe benefit is a benefit that is provided by an employer (be it a current, future or former employer) to an employee where the benefit is provided in respect of employment. The cost of providing a fringe benefit is deductible to an employer. Not all benefits provided are fringe benefits and the legislation contains exceptions.

In this case, the Taxpayer is providing a benefit to a prospective employee that is in respect of their employment but the benefit is captured by the exceptions and so it is not a fringe benefit. The exception will be examined below because it proves relevant to the determination as to whether this expense is still otherwise deductible under section 8-1 of the ITAA 1997.

Section 58F of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides that a benefit in respect of relocation transport is an exempt benefit. It is considered that the payment of the visa application fee is a payment in respect of relocation transport, for the reasons outlined below.

Section 143A of the FBTAA states that where the benefit provided to an employee is an expense payment benefit and the recipient's expenditure is in respect of the provision of transport then the benefit is taken to be in respect of relocation transport.

Section 142A of the FBTAA provides that where a recipient's benefit that consists of a visa in connection with transport it shall be taken to be in respect of the provision of transport.

The Explanatory Memorandum to the Tax Laws Amendment (Fringe Benefits and Substantiation) Bill 1987 (the 'EM') which introduced section 143A of the FBTAA discusses the intended meaning of 'benefit in respect of relocation transport':

The circumstances in which a benefit will be treated as a 'benefit in respect of relocation transport' are specified in proposed section 143A. Broadly, such a benefit is one that is provided to an employee who moves from one locality to another in the course of employment or in order to commence new employment where the benefit meets the travel costs (i.e., transport costs and accommodation and meals en route) incurred by the employee (or a family member) for the purpose of taking up residence in the locality of the new work place.

As highlighted above where an employer pays the cost of a visa for an employee in order for that employee to relocate and take up residence in the locality of their new place of employment it is considered an expense benefit in respect of relocation transport of that employee and as such it will be an exempt benefit which is not subject to FBT.

The view in ATO Interpretative Decision ATO ID 2013/35 Fringe Benefits Tax: Exempt Benefits - relocation transport - cost of a visa application for a non-resident employee to remain in Australia concurs with this.

In terms of whether this expense is still deductible to the Taxpayer, not as a cost of providing a fringe benefit, but under the general deduction provisions contained in section 8-1 of the ITAA 1997, guidance is provided by Taxation Ruling IT 2566 Income tax: Deductibility of travelling expenses of employee, spouse and family incurred by employer in relocating the employee.

IT 2566 states that if an employer pays for the travelling costs of getting an employee who is travelling to commence employment in a new work location, such costs are an allowable income tax deduction to the employer.

The term 'travelling costs' is not defined in IT 2566 but the ruling is written in the context of the inter-relationship between exemption from FBT on costs related to employee relocations and the operation of a now repealed provision of the Income Tax Assessment Act 1936. Therefore the use of the term 'travelling costs' in this context, when referring to the costs involved in relocating to a new place of employment is synonymous with the term 'relocation transport' costs in the FBTAA. As outlined above, such costs can include the cost of a visa which would be required for the employee to take up residence in the locality of the new workplace.

Therefore, the Taxpayer can claim an income tax deduction for meeting the cost of the visa application fee for its prospective employees. Such a cost is seen as an outgoing incurred in gaining or producing the Taxpayer's assessable income and therefore allowable under section 8-1 of the ITAA 1997.

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