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Ruling

Issue 1

Question 1

Can the taxable value of expense payment fringe benefits that arise from the employer's payment or reimbursement of the interest on the investment loan incurred by employees be reduced under section 24 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

This ruling applies for the following periods:

Fringe benefits tax year ending 31 March 2016

Fringe benefits tax year ending 31 March 2017

Fringe benefits tax year ending 31 March 2018

The scheme commences on:

1 April 2015

Issue 2

Question 1

Will section 67 of the FBTAA apply to the employer in relation to the reimbursement of interest expenses under the scheme?

Answer

No

This ruling applies for the following periods:

Fringe benefits tax year ending 31 March 2016

Fringe benefits tax year ending 31 March 2017

Fringe benefits tax year ending 31 March 2018

The scheme commences on:

1 April 2015

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 are Company B, Company C and Company D.

Company E will make loans available to certain employees to fund investment in Notes issued by Company B.

The Notes will only be offered to Employees.

The Employer of the Employees will make payment in discharge, in whole or in part, of the obligation of the Employees to pay the interest to Company E under the Investment Loan pursuant to an effective salary sacrifice arrangement.

The Investor will purchase one or more Notes from the Company B (the "Issuer").

All Notes will pay distributions.

At maturity the Issuer of the Note will return the capital initially invested.

The loan will have an interest rate of generally between X% and Y% p.a. with interest paid in advance for the entire term of the loan.

The loan will be for the term of the investment and will be a limited recourse loan.

Employees prepay, via expense payment reimbursement, the entire term of 12 months interest expense on the Investment Loan.

The Notes will be issued in July of each year with a maturity date in June the following year. The Investment Loan will not extend beyond its original maturity date.

The Employees will not repay the Investment Loan prior to its maturity or terminate the scheme early.

The Notes are expected to be offered annually (depending on the demand from investors) on substantially the same terms and conditions.

The dominant purpose of the Employees entering into the scheme is to derive assessable income.

The dominant purpose of the Employer in setting up this scheme is to profit from interest received on the investment loan and from its hedging of exposure to the underlying reference assets.

The Employees are not traders in investments and are not treated for taxation purposes as trading in interests in the notes, carrying on a business of investing in Company B Investment, or holding their interests in the notes as trading stock or as a revenue asset.

All dealings in relation to the scheme will be at arm's length.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 20

Fringe Benefits Tax Assessment Act 1986 Section 22A

Fringe Benefits Tax Assessment Act 1986 Section 24

Fringe Benefits Tax Assessment Act 1986 Section 45

Fringe Benefits Tax Assessment Act 1986 Section 67

Fringe Benefits Tax Assessment Act 1986 Section 136

Income Tax Assessment Act 1936 Subsection 51(1)

Income Tax Assessment Act 1936 Section 177A

Income Tax Assessment Act 1997 Section 8(1)

Reasons for decision

Question 1

Subsection 136(1) of the FBTAA defines 'expense payment fringe benefit' to mean a fringe benefit that is an expense payment benefit.

Section 20 of the FBTAA defines 'expense payment benefit' as:

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.

You meet the definition of 'a person'.

As Employers you will make a payment in discharge, in whole or in part, of the obligation of the Employees to pay interest expenses on loans to be provided to the Employees by Company E.

The requirements in section 20 are met and the payment of the interest expenses gives rise to expense payment benefits under section 20.

As the expense payment fringe benefits are provided to the Employees in respect of their employment and are not excluded by the definition of 'fringe benefit' in subsection 136(1) of the FBTAA, these benefits will constitute expense payment fringe benefits.

Each expense payment fringe benefit you provide is most appropriately categorised as an external expense payment fringe benefit as the Notes product is currently only offered to your Employees, and does not meet the definition of an in-house residual expense payment fringe benefit in subsection 136(1) of the FBTAA.

The taxable value of expense payment fringe benefits are calculated under section 23 of the FBTAA which states:

Subject to this Part, the taxable value in relation to a year of tax of an external expense payment fringe benefit provided during the year of tax is the amount of the payment referred to in paragraph 20(a), or the reimbursement referred to in paragraph 20(b), as the case requires, reduce, in a case to which paragraph 20(a) applies, by the amount of the recipient's contribution.

The taxable value of an expense payment fringe benefit is the amount you reimburse or pay. In this case, this is the amount of the interest you will pay on behalf of your Employees under the Investment Loan.

The taxable value of the fringe benefit will not be able to be reduced by any Employee contribution under section 23 as the arrangement stipulates that the Employees need not pay the Employer from their net salary. Instead Employees must only enter into an effective salary sacrifice arrangement. We note that salary sacrificed amounts do not fall within the definition of a recipient's contribution.

Therefore under section 23 the amount of the interest which you will pay on behalf of your Employees will be the taxable value of the expense payment fringe benefit

However, the taxable value will be reduced through the application of section 24 of the FBTAA, this is explained further in ATO ID 2004/294. It states:

The taxable value of an expense payment fringe benefit may be reduced under section 24 of the FBTAA to the extent that the 'otherwise deductible' rule (ODR) applies.

The ODR applies when the recipient of the benefit is the employee. Furthermore, the ODR applies where the employee receiving the benefit would have been entitled to a 'once only' income tax deduction for the expenditure had it not been paid or reimbursed by the employer. A 'once only' deduction is one that is wholly or partly allowable in only one year (therefore excluding claims such as those relating to the 'decline in value' of depreciating assets that are spread over a number of years).

The ODR is a notional test. The person or class of persons to receive the fringe benefit will be your Employees. What needs to be shown is that the expenditure you will incur could be claimed as a deduction by your Employees if you do not make the payment in discharge of their obligation to pay interest and they pay it themselves.

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a general deduction for losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Section 8-1 General deductions:

" (1) You can deduct from your assessable income any loss or outgoing 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.

Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income.

(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your *exempt income or your *non- assessable non-exempt income; or

(d) a provision of this Act prevents you from deducting it.

(3) A loss or outgoing that you can deduct under this section is called a general deduction."

For expenditure to be regarded as being incurred in the course of gaining or producing assessable income, it must be incidental and relevant to that end (Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; 8 ATD 431; (1949) 4 AITR 326). The expenditure must be related to the production of assessable income and not incurred at a point too soon to be deductible (Federal Commissioner of Taxation v. Maddalena 71 ATC 4161; (1971) 2 ATR 541 and Steele v. Deputy Commissioner of Taxation (1999) CLR 459; 99 ATC 4242; (1999) 41 ATR 139).

The expenditure that will notionally be incurred by the Employees will have been incurred in the gaining or production of the Employees' assessable income. The expense is interest which is payable upfront on loans provided by Company E to fund the Employees' investment in a Note issued by Company B. The ATO does not regard the upfront payment of interest as being at a point too soon to be deductible. This Note will pay two distributions which are assessable income.

The interest expense on the Loan will solely be used for the purpose of purchasing the Notes and is not used for a private or capital purpose but will be incurred solely in the production of assessable income.

Section 24 of the FBTAA requires that in certain situations where the otherwise deductible rule applies documentation is required to be held by the Employer. Subsections 24(1)(e)(i) to (v) list the circumstances where declarations need not be held by the employer. Cases involving the otherwise deductible rule are not included in this list therefore there is a requirement that:

"the recipient gives to the employer, before the declaration date, a declaration, in a form approved by the Commissioner, in respect of the recipient's expenditure"

The Commissioner accepts that the Employer will hold the relevant Employees' declarations used to substantiate the expense payment as otherwise deductible for the relevant employees.

Conclusion

The expenditure that will notionally be incurred by the Employees will be incurred in the gaining or production of the Employees' assessable income and will therefore be deductible to the Employees.

In applying the otherwise deductible rule under section 24, you are able to reduce the taxable value of the external expense payment fringe benefits to the extent that your Employees would have notionally been able to claim a once only deduction under section 8-1 of the ITAA.

The interest expenditure incurred by the Employees would have been incurred in relation to a loan used to purchase an interest in Notes from which assessable income is derived and is not private, capital, used to produce non-assessable non-exempt income and is not excluded specifically by legislation. Therefore such expenditure would have been deductible to the Employees.

Following the formula outlined in section 24 you will be entitled to reduce the taxable value of the fringe benefit by the interest amount to be paid on behalf of your Employees. This will reduce your FBT liability to nil.

Question 2

Section 67 of the FBTAA is the general anti-avoidance provision of the FBTAA. In explaining the circumstances in which it is intended to apply the Explanatory Memorandum to the Fringe Benefits Tax Assessment Bill 1986 stated:

The clause is intended to apply where, on an objective view of a particular arrangement and its surrounding circumstances, it would be concluded that the arrangement was entered into for the sole or dominant purpose of having an amount omitted from an employer's fringe benefits taxable amount of any year of tax in respect of a benefit provided to a person.

The circumstances in which the Commissioner can apply section 67 of the FBTAA are set out in paragraphs 67(1)(a) and (b) of the FBTAA which contain the following requirements:

• an employer obtains (or would have done so but for section 67 of the FBTAA) a tax benefit in respect of a year of tax

• the tax benefit was obtained in connection with an arrangement under which a benefit is or was provided to a person

• the arrangement was entered into, or commenced to be carried out on or after 19 September 1985, and

• one of the persons who entered into, or carried out the arrangement did so for the sole or dominant purpose of enabling the employer to obtain a tax benefit.

Subsection 67(2) of the FBTAA sets out the circumstances in which a tax benefit will be deemed to have been provided.

Subsection 67(2) of the FBTAA provides that a tax benefit may arise where an amount that is not included in the employer's aggregate fringe benefits amount if that amount would have been, or could reasonably be expected to have been, included if the arrangement had not been entered into or carried out.

The circumstances of this case are that under valid salary sacrifice arrangements the employees forgo salary in exchange for a fringe benefit in the form of payment of interest on an investment loan. It has been determined that the payment of interest would be deductible if it were expended by an employee, so the amount of the fringe benefit has been reduced under the otherwise deductible rule to potentially nil.

On an objective review of the transaction, it is concluded that the sole or dominant purpose in carrying out the arrangement does not constitute a purpose to purely obtain a tax benefit to the employer. 

The Commissioner will not seek to apply section 67 of the FBTAA to the arrangement.

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