Edited version of your written advice

Authorisation Number: 1012801490226

Ruling

Subject: Fringe benefits tax

Question 1

Will the increased amount of reimbursement of the cost of financial and/or career counselling paid under the terms of your proposed agreement to an employee who has been declared excess be an exempt benefit in accordance with section 58M of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes

Question 2

Will the reimbursement of an employee's legal fees under the terms of a settlement relating to the employee's termination be a fringe benefit?

Answer

No

This ruling applies for the following periods:

Year ended 31 March 2015

Year ended 31 March 2016

Year ended 31 March 2017

The scheme commences on:

The scheme has commenced

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.

Your current agreement provides for an employee entitlement of up to a certain amount in the event of an employee being declared excess.

You have provided the relevant terms of that agreement.

The Commissioner issued a private ruling to you that the reimbursement of the cost of financial and/or career counselling paid under the terms of that agreement is an exempt benefit under section 58A of the Fringe Benefits Tax Assessment Act 1986.

The new agreement is proposing to increase the amount reimbursed.

You have also reimbursed legal fees incurred by an employee.

The employee had been given notice of termination by reason of the redundancy of the employee's position. You agreed to reimburse the legal fees as part of the settlement of a dispute relating to the employee's termination.

The terms of the Deed required you to reimburse the fees within a certain period of the employee's termination.

Assumption

The terms and conditions in the proposed agreement in relation to employees who are excess to requirements will be the same as the current agreement.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 58M and

Fringe Benefits Tax Assessment Act 1986 subsection 136(1).

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Summary

The increased amount of reimbursement of the cost of financial and/or career counselling paid under the terms of your proposed agreement to an employee who has been declared excess will be an exempt benefit in accordance with section 58M of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Detailed reasoning

Paragraph 58M(1)(a) of FBTAA sets out the circumstances in which an expense payment benefit will be an exempt benefit under section 58M. For the purpose of this ruling the relevant subparagraph is subparagraph 58M(1)(a)(iv) which states:

Where any of the following benefits is provided in respect of the employment of an employee:

(a) An expense payment benefit where the recipients expenditure is in respect of

…

(iv) work-related counselling of the employee or of an associate of the employee …

the benefit is an exempt benefit.

Therefore, the reimbursement of the cost of financial and/or career counselling will be an exempt benefit under subparagraph 58M(1)(a)(iv) of the FBTAA if the employee's expenditure is 'in respect of … work-related counselling of the employee'.

The Commissioner had ruled that the reimbursement for financial and/or career counselling provided for in the previous agreement was an exempt benefit in accordance with section 58M of the FBTAA.

This reimbursement will continue to be provided in the new agreement, however it is proposed that the amount reimbursed will be increased to a certain amount.

On the basis that the only change will be to the upper limit of the reimbursement, the provision of the benefit will be exempt in accordance with section 58M of the FBTAA.

Question 2

Summary

The reimbursement of an employee's legal fees under the terms of a settlement relating to the employee's termination is not a fringe benefit.

Detailed reasoning

The reimbursement of the legal costs of the employee is a benefit as defined in subsection 136(1) of the FBTAA. For it to be a fringe benefit it must be provided to

• an employee or

• an associate of an employee

by

• an employer

• associate of an employer, or

• a third party in an arrangement with an employer

in respect of the employee's employment and it is not excluded by paragraphs (f) to (s) of subsection 136(1). Employment termination payments (ETP) are excluded from the definition of a fringe benefit under paragraph (lc).

Taxation Ruling TR 2012/8 is about the assessability of amounts received to reimburse legal costs incurred in disputes concerning termination of employment. As noted in footnote 1:

"Disputes concerning termination of employment' include disputes which are about termination of employment as well as those that occur as a result of termination of employment.

According to Taxation Ruling TR 2012/8 the reimbursement of legal costs incurred in disputes concerning termination of employment is neither an ETP nor a fringe benefit.

Where an amount received by an employee is capable of being identified as relating specifically to the reimbursement of legal costs, it is not an ETP because it is not considered to be paid 'in consequence' of termination of employment.

The reimbursement is not a fringe benefit on the basis that the reimbursement will not have a sufficient or material connection to the former employment. This is explained in paragraphs 59 to 62 of TR 2012/8:

A 'fringe benefit' for the purposes of the Fringe Benefits Tax Assessment Act 1986 includes a benefit provided to an employee, including a former employee, by an employer 'in respect of the employment of the employee'.

The expression 'in respect of the employment of the employee' was considered by the Full Federal Court in J & G Knowles v. FCT [2000] FCA 196; 2000 ATC 4151; (2000) 44 ATR 22. The Full Federal Court noted that:

… Whatever question is to be asked, it must be remembered that what must be established is whether there is a sufficient or material, rather than a causal connection or relationship between the benefit and the employment.

Where the link between the payment in respect of legal expenses and the termination of employment has been severed such that the payment is not 'in consequence' of termination of employment, the payment will also not be 'in respect of employment of the employee', unless there is some other factor in the litigation which suggests a sufficient or material connection between the benefit and the employment.

The following are reasons why there is not a sufficient or material connection between the reimbursement of the legal costs and the employment of the employee:

• the incurring of the legal expenses will be an intervening event which occurs after the termination of employment;

• at the time that the costs are incurred there is no right to recover those costs, as costs can only be awarded at the discretion of the Court;

• the costs do not form part of the damages for the underlying cause of action resulting from the termination of employment; and

• the (former) employment relationship is not objectively a consideration in the employer's decision to make the reimbursement, either because:

- the court orders the employer to make a payment towards costs; or

- the employer makes a commercial decision to settle a claim against them, including costs, in order to avoid the need to defend litigation.

Your employee's dispute occurred as a result of being given notice of termination. You agreed to reimburse the employee's legal expenses as part of a settlement of the dispute relating to termination. Therefore the reimbursement is not a fringe benefit.

Additional information

You are not required to report the amount of the reimbursement on your employee's payment summary as it is not an ETP and it is not a reportable fringe benefit.

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