Edited version of your written advice

Authorisation Number: 1012805626595

Ruling

Subject: Fringe benefits tax and annual public transport tickets

Question 1

Does the provision of an annual pass to an employee under an arrangement whereby the pass is purchased by the employer on the request of the employee and the cost of the rail pass is repaid interest free by the employee over the next twelve months fall under any of the benefit types contained in Division 2 to 12 inclusive of the Fringe Benefits Assessment Act 1986 (FBTAA)?

Answer

Yes:

• the initial purchase of the annual pass will be either an expense payment benefit under section 20, a property benefit under section 40, or a residual benefit under section 45 of the FBTAA; and

• the requirement to repay the Employer for the cost of purchasing the annual pass creates a loan benefit under section 16 of the FBTAA.

Question 2

If it is determined that the payment to the Employer by the employee of the cost of the rail pass gives rise to a benefit as an interest free loan, is such a loan benefit exempted as a minor benefit under section 58P of the FBTAA?

Answer

Yes

This ruling applies for the following period<s>:

Year ending 31 March 2017

Year ending 31 March 2018

Year ending 31 March 2019

The scheme commences on:

1 April 2016

Relevant facts and circumstances

The Employer currently enters into agreements once a year with employees in State A to purchase annual rail passes on the employees' behalf.

The cost of the rail pass is then recovered from the employees over the course of the next twelve months in equal fortnightly instalments as an after tax payroll deduction.

The maximum price for an annual pass under the scheme is $X which is the cost for an annual ticket between the two business premises of the Employer.

The scheme is only offered once a year to limit administration costs.

If an employee's employment is terminated before the annual pass has been fully paid for the balance will be recovered before they depart their employment.

Relevant legislative provisions

Fringe benefits Tax Assessment Act 1986 (FBTAA) section 16

FBTAA section 18

FBTAA section 20

FBTAA section 23

FBTAA section 40

FBTAA section 43

FBTAA section 45

FBTAA section 51

FBTAA section 58P

FBTAA subsection 136(1).

Question 1

Summary

An expense payment, property or residual benefit will arise under either section 20, 40 or 45 of the FBTAA but the taxable value is reduced to nil.

A loan fringe benefit arises under section 16 of the FBTAA with the taxable value being calculated in accordance with section 18 of the FBTAA.

Detailed reasoning

The pass

The purchase of the annual pass on behalf of an employee constitutes a benefit.

Each issuing authority will have its own set of terms and conditions in which the relevant pass can be used and it is those terms and conditions that will determine the benefit type the pass will fall under. However it will be either an expense payment, a property or a residual benefit.

An expense payment benefit arises under section 20 of the FBTAA, where an employer:

• reimburses an employee for expenses incurred by the employee; or

• where an employer pays a third party in satisfaction of expenses incurred by an employee.

If the terms in which the annual pass is issued requires that the individual who is issued the pass also pay the cost of the pass then an expense payment benefit will arise.

If the terms do not require the pass holder to pay for the pass then the employee may not have incurred the expense and in that case an expense payment benefit would not arise.

A property benefit may arise under section 40 of the FBTAA if ownership of a pass purchased by an employer is passed onto the employee. This would depend on a number of factors depending on whether pass is transferable or has to be used by an identified person.

However if under the terms of issue the pass remains the property of the issuing authority then a property benefit cannot arise as the ownership is not passed to the employee.

In instances where the benefit is not an expense payment and the terms of use only provide a right to use the relevant service (being public transport) then the benefit will constitute a residual benefit under section 45 of the FBTAA.

However the taxable value will be the same regardless of whether the benefit is an expense payment, property, or a residual benefit, and this is the cost of the annual pass.

This taxable value is then reduced to nil because the employee effectively pays the employer because of the employee's obligation to the full cost of the pass through fortnightly after tax payroll deductions.

The payroll deductions

A loan fringe benefit arises under section 16 of the FBTAA where a person makes a loan to another person and there still remains an obligation by the second person to repay the whole or any part of that loan.

A loan is defined in subsection 136(1) of the FBTAA and includes 'the payment, of an amount, on account of, on behalf of or at the request of a person where there is an obligation (whether expressed or implied) to repay the amount'.

In looking at the scheme between the employer and its employees both parties enter into an agreement where:

• an annual rail pass (or other annual public transport ticket) is purchased by the employer on behalf of employees who choose to enter into the scheme; and

• at the same time the employee agrees to repay the employer the cost of the annual pass in fortnightly instalments over the next twelve month (or the balance on termination).

As there is an obligation for the employee to repay the amount spent on the annual pass a loan as defined in subsection 136(1) of the FBTAA is created and a loan benefit will arise under section 16 of the FBTAA.

Under section 18 of the FBTAA, the taxable value of a loan fringe benefit is the difference between:

• the interest that would have accrued during the tax year if the statutory (benchmark) interest rate had applied to the outstanding daily balance of the loan; and

• the interest (if any) which actually accrued.

As no interest is being charged on the advance by the employer the taxable value if calculated using the benchmark interest rate which is issued via a Taxation Determination each year.

The benchmark interest rate listed in Taxation Determination TD 2015/8 Fringe benefits tax: what is the benchmark interest rate to be used for the fringe benefits tax year commencing on 1 April 2015 is 5.65%

In looking at the maximum amount that would be paid under this scheme the taxable value of a loan fringe benefit for this amount would be less than $300. This would be the case even if the employee made no repayments throughout the FBT year.

Question 2

Summary

Section 58P of the FBTAA will apply to exempt the loan benefits provided under this scheme.

Detailed reasoning

Section 58P of the FBTAA, however, provides an exemption for benefits that meet all the following conditions:

• The benefit must be provided in respect of the employment of the employee.

• The benefit is not one of the benefit or fringe benefit types specifically excluded from exemption under the section.

• The notional taxable value of the benefit is less than $300.

• It would be unreasonable to treat the minor benefit as a fringe benefit in relation to the current year of tax.

Benefit in respect of employment of employee

There is no evidence to suggest that the advance of money would be provided to anyone other than employees and therefore this condition has been satisfied.

Not a specifically excluded benefit or fringe benefit

There are a number of benefits excluded from the exemption under section 58P of the FBTAA but these exclusion do not include loan fringe benefits.

Notional taxable value of benefit less than $300.

As explained above the maximum taxable values for each of the relevant loan benefits under the scheme will be under $300.

Unreasonable to treat the minor benefit as a fringe benefit

The criteria that need to be addressed to see if it is unreasonable to treat the minor benefit as a fringe are listed in the electronic version of our publication Fringe benefits tax - a guide for employers in chapter 20.8 and it states in part:

The following five criteria need to be considered when deciding if it would be unreasonable to treat the minor benefit as a fringe benefit.

1. The infrequency and irregularity with which associated benefits, being benefits that are identical or similar to the minor benefit and benefits given in connection with the minor benefit, are provided. The more frequently and regularly associated benefits are provided, the less likely that the minor benefit will qualify as an exempt benefit.

2. The total of the notional taxable values of the minor benefit and identical or similar benefits to the minor benefit. The greater the total value of the minor benefit and identical or similar benefits, the less likely it is the minor benefit will qualify as an exempt benefit.

3. The likely total of the notional taxable values of other associated benefits - that is, those provided in connection with the minor benefit. For example, where a meal, which is a minor benefit, is provided in connection with a night's accommodation and taxi travel, which themselves may or may not be a minor benefit, the total of their taxable values must be considered. The greater the total value of other associated benefits, in this case being the accommodation and the taxi travel, the less likely it is that the minor benefit will qualify as an exempt benefit.

4. The practical difficulty in determining what would be the notional taxable value of the minor benefit and any associated benefits. This would include consideration of the difficulty for you in keeping the necessary records in relation to the benefits.

5. The circumstances in which the minor benefit and any associated benefits were provided. This would include consideration as to whether the benefit was provided as a result of an unexpected event, and whether or not it could be considered principally as being in the nature of remuneration.

In applying these five points paragraphs 193 to 198 of Taxation Ruling TR 2007/12 Fringe benefits tax: minor benefits state:

Where a benefit has satisfied the minor benefits threshold test discussed at paragraphs 176 to 186 of this Ruling, further analysis is required to determine if it would be concluded that it would be unreasonable to treat the minor benefit as a fringe benefit.

Paragraph 58P(1)(f) contains five specific criteria to which regard must be had in reaching such a conclusion (see Appendix 3 at paragraph 278 of this Ruling).

All five criteria must be considered. No single criterion on its own will determine whether it is unreasonable to treat the benefit as a fringe benefit.

In considering the scope of the exemption it will be necessary to look to the nature of the benefit provided and give due weight to each of the criteria.

The weight given to each criterion will vary depending on the circumstances surrounding the provision of each benefit.

The conclusion that must be reached after having considered the five criteria is an objective one. It is a 'reasonable person' test. That is, what would a reasonable person conclude after having regard to all the relevant circumstances surrounding the provision of the minor benefit. The provision does not give the Commissioner discretion.

Infrequency and irregularity of identical, similar or connected benefits

Each of the loan benefits arising from the employee's obligation to repay the employer the cost of the annual pass. This only happens once a year.

Although the scheme is only offered to employees once a year the offer is made part way through an FBT year. This means that in a particular FBT year there could be two separate loan fringe benefits (a new loan and the balance of the old loan as at 30 March).

However at any given point within an FBT year there is only one loan in place and only one loan if offered in any given FBT year.

Sum of the notional taxable values of the minor benefit and any other identical or similar benefits

As there is only ever one loan in place at any given time the sum of similar benefits (being the new loan and the balance of the old loan) will not exceed the $300 threshold.

Likely total of the notional taxable values of other associated benefits

The only other associated benefit (depending on the terms of use) is the expense payment, property or residual benefit which has a taxable value of nil.

The practical difficulty for the employer in determining the notional taxable values

Although the amount outstanding on the loan changes on a fortnightly basis there would be no practical difficulty in determining the taxable value of the loan fringe benefit.

The circumstances in which the minor benefit and any associated benefits were provided.

The provision of the loan benefit does not arise from an unexpected event as the employer offers to enter into the agreement with the relevant employee.

However the agreement is not in the nature of remuneration for services provided as the employee is under an obligation to repay the employer for the cost of the annual pass. If it had been provided by way of remuneration (for example via salary sacrifice) then section 58P of the FBTAA could not apply.

Weighing up the five factors (conclusion)

The purpose of section 58P of the FBTAA is exempt benefits of a small taxable value (being $300) that would otherwise be treated as fringe benefits providing certain conditions are satisfied, because it would be unreasonable to treat the benefit as a fringe benefit.

In this case the first three criteria point to the taxable value of both the loan fringe benefit and any associated benefits not exceeding the $300 limit. In respect of the fourth there is no practical difficulty in determining the taxable value and that calculation would show that the taxable value would be less than $300.

However as an ongoing scheme it is known well in advance that the benefit will arise.

On balance it is accepted that it would be unreasonable to treat the loan benefit as a fringe benefit provided the taxable value continues to remain below the $300 threshold.

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