Edited version of your written advice

Authorisation Number: 1012713865622

Ruling

Subject: In-house residual expense payment fringe benefits

Question 1

Will the Private Company's reimbursement of the private electricity expenses paid by its employees be classified as in-house residual expense payment fringe benefits under subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

This ruling applies for the following periods:

FBT year ended 31 March 2016

FBT year ended 31 March 2017

FBT year ended 31 March 2018

The scheme commences on:

1 April 2015

Relevant facts and circumstances

The Private Company is considering the possibility of reimbursing the private electricity expenses of its employees as in-house residual expense payment fringe benefits like employers in the electricity industry do.

The Private Company will enter into a partnership agreement with an Individual that operates solar panels to generate electricity to carry on a business of producing electricity. Further details of the proposed partnership are as follows:

• The control and management of the partnership's business will be shared between the Private Company and the Individual, with the Private Company providing business acumen and the funding for the purchase of the solar panels that will be owned and operated by the Individual.

• The solar panels (generating units) will produce and supply electricity to a centralised power grid (i.e. a reticulation system). More specifically, all of the electrons generated from the solar panels will be supplied to the centralised power grid.

• Independent electricity retailers will then purchase electricity from this power grid pool and re-sell it to the general public.

• The partnership will receive revenue by way of Feed in Tariffs from independent electricity retailers for each kilowatt hour of renewable electricity produced by the solar panels. The partnership will lodge a partnership income tax return for each income year, with the partnership's net income or loss to be shared between the Private Company and the Individual as per the partnership agreement.

The Private Company's benefit proposal is set out as follows:

• The arrangement will be restricted to the Private Company's employees only, and the benefits will be provided in respect of their employment.

• The employees purchase electricity from their respective independent electricity retailers.

• The employees' electricity expenses will be reimbursed by the Private Company, with the maximum reimbursement being $X.

• Each employee will provide the Private Company with a copy of the independent electricity retailer's invoice prior to the reimbursement.

• The employees do not salary sacrifice these benefits, as they will be provided on top of their salaries.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 20,

Fringe Benefits Tax Assessment Act 1986 Section 45,

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1),

Fringe Benefits Tax Assessment Act 1986 Section 156 and

Income Tax Assessment Act 1936 Paragraph 318(1)(b).

Reasons for decision

Summary

The Private Company's reimbursement of the private electricity expenses paid by its employees will be classified as in-house residual expense payment fringe benefits under subsection 136(1) of the FBTAA.

Detailed reasoning

An in-house residual expense payment fringe benefit is relevantly defined by subsection 136(1) of the FBTAA 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) …

(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 the employees' private electricity expenses will be in-house residual expense payment fringe benefits if the following conditions are satisfied:

1. The reimbursement of the private electricity expenses is an expense payment fringe benefit.

2. The requirements of paragraph (a) are satisfied, where the employee's expenditure is incurred in respect of the provision of a residual benefit (other than a benefit provided under a contract of investment insurance) by the residual benefit provider.

3. The requirements of paragraph (b) are satisfied, where the residual benefit provider is the employer or an associate of the employer.

4. The employee obtains documentary evidence of their private electricity expenditure and provides that documentary evidence or a copy to the employer before the declaration date.

1. The reimbursement of the private electricity expenses is an expense payment fringe benefit.

An expense payment fringe benefit is defined in subsection 136(1) of the FBTAA as meaning a 'fringe benefit' that is an 'expense payment benefit'.

Section 20 of the FBTAA states what constitutes an expense payment benefit, with paragraph 20(b) of the FBTAA stating:

Where a person (in this section referred to as the 'provider'):

(a) …; 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 reimbursement referred to in paragraph (b), shall be taken to constitute the provision of a benefit by the provider to the recipient.

The Private Company's reimbursement of the private electricity expenses will be an expense payment benefit as the Private Company will reimburse each employee who enters into the arrangement, in whole or in part, in respect of the electricity expenses they will incur.

In basic terms, a fringe benefit, as defined in subsection 136(1) of the FBTAA, is a benefit provided to an employee (or associate) by an employer (or associate) or a third party under an arrangement with the employer (or associate) in respect of the employee's employment and such benefit is not otherwise exempted.

The reimbursement of the private electricity expenses by the Private Company will be an expense payment fringe benefit, because these benefits will be provided in respect of each employee's employment and will not be otherwise exempted.

2. The requirements of paragraph (a) are satisfied, where the employee's expenditure is incurred in respect of the provision of a residual benefit (other than a benefit provided under a contract of investment insurance) by the residual benefit provider.

Under section 45 of the FBTAA a benefit is a residual benefit if the benefit is not a benefit by virtue of Subdivision A of Divisions 2 to 11 of the FBTAA.

Section 156 of the FBTAA deems that the supply of electricity or gas through a reticulation system will not constitute the provision of property. Therefore, the supply of electricity will not come within Division 11 of the FBTAA. Nor will the supply of electricity come within Divisions 2 to 10 of the FBTAA.

Therefore, the provision of the electricity will be a residual benefit, and for completeness, it will not be provided under a contract of investment insurance.

3. The requirements of paragraph (b) are satisfied, where the residual benefit provider is the employer or an associate of the employer.

The residual benefit provider will be the partnership of the Private Company and the Individual, who will be an associate of the Private Company by virtue of subsection 136(1) of the FBTAA and paragraph 318(1)(b) of the Income Tax Assessment Act 1936.

The provision of the electricity will be a residual fringe benefit under subsection 136(1) of the FBTAA because:

• it is a residual benefit under section 45 of the FBTAA (as concluded earlier), and

• it is a fringe benefit under subsection 136(1) of the FBTAA, with it being a benefit provided in respect of each employee's employment and not being otherwise exempted.

The partnership of the Private Company and the Individual will be carrying on a business of consisting of the provision of identical benefits principally to outsiders. Consistent with the reasoning provided in ATO Interpretative Decision ATO ID 2006/197, the Commissioner accepts that the electricity that will be purchased by the independent electricity retailers from the power grid pool and re-sold to the general public will include the electricity produced by the partnership's solar panels.

4. The employee obtains documentary evidence of his or her private electricity expenditure and provides that documentary evidence or a copy to the employer before the declaration date.

Each employee will provide the Private Company with a copy of the independent electricity retailer's invoice prior to the reimbursement.

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