Edited version of your written advice

Authorisation Number: 1012818118200

Ruling

Subject: Fringe Benefits Tax - Internally-funded scholarships

Question 1

Is the provision of internally funded scholarships by an educational institution to specified employees who undertake a specified course a residual benefit under section 45 of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes

Question 2

If the answer to (1) above is yes, is the provision of the scholarship further classified as an in-house period residual fringe benefit under section 49 of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes

This ruling applies for the following periods:

FBT year ended 31 March 2012

FBT year ended 31 March 2013

FBT year ended 31 March 2014

FBT year ended 31 March 2015

The scheme commences on:

1 April 2011

Relevant facts and circumstances

The educational institution (the taxpayer) was established under an Act. It offers tertiary education to a large number of students.

The taxpayer offers a course which is specifically designed for teaching staff members but is also offered by the taxpayer to the public. The admission criteria are that applicants to the course must normally hold an approved Bachelor degree or equivalent qualification from an approved tertiary institution.

In 20XX there are Y students enrolled of which Z are staff members of the taxpayer and a number are not.

Each year the taxpayer offers a number of internally-funded scholarships to eligible employees. The employees who are eligible are selected by academic merit as well as being an employee of the taxpayer with a current teaching responsibility.

These employees do not have to make any student contribution for the course duration, that is, there is a full waiver of the tuition fees. Employees who are not awarded a scholarship have to pay the student contribution amount. There are no additional charges.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 section 45

Fringe Benefits Tax Assessment Act 1986 section 49

Reasons for decision

Question 1

Summary

The provision of internally-funded scholarships by the taxpayer to specific employees who undertake a specified course is a residual benefit as defined in section 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Detailed reasoning

Under subsection 136(1), fringe benefit is defined as:

in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit:

(a) provided at any time during the year of tax; or

(b) provided in respect of the year of tax;

being a benefit provided to the employee or to an associate of the employee by:

(c) the employer; or

(d) an associate of the employer; or

(e) a person (in this paragraph referred to as the arranger) other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of arrangement between:

(i) the employer or an associate of the employer; and

(ii) the arranger or another person; or

(ea) a person other than the employer or an associate of the employer, if the employer or an associate of the employer:

(i) participates in or facilitates the provision or receipt of the benefit; or

(ii) participates in, facilitates or promotes a scheme or plan involving the provision of the benefit;

and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so;

in respect of the employment of the employee, but does not include: …

[paragraphs (f) to (r)]

The elements from this definition are:

1. A benefit

According to the Fringe benefits tax - a guide for employers (ato.gov.au, QC 16123, Last modified: 21 May 2013), benefits include rights, privileges or services. The provision of an educational course gives something of value to the employee and therefore satisfies the definition of the term benefit as defined in the FBTAA.

2. Provided to the employee or an associate of the employee;

The benefit is to be provided to selected employees. Therefore this condition is met.

3. Provided by the employer, an associate of the employer or an arranger

The benefit is to be provided by the educational institution as the employer. Therefore this condition is met.

4. Be provided in respect of employment; and

The scholarships are provided only to selected employees of the taxpayer. They are not offered to individuals who are not employees of the taxpayer. Therefore this condition is met.

5. Not be listed in paragraphs (f) to (r) of the definition of a fringe benefit

Paragraphs (f) to (r) in subsection 136(1) contain a number of benefits which do not qualify as a fringe benefit for the purposes of the FBTAA. The scholarships do not fall under paragraphs (f) to (r), and therefore, this condition is met.

As all of the conditions have been met, the benefit provided comes within the definition of fringe benefit under subsection 136(1) of the FBTAA.

As the benefit in question is a fringe benefit, we need to determine if the benefit is a residual benefit or another type of benefit.

Type of fringe benefit

Any fringe benefit that does not fall within any of the specific categories of fringe benefit is a residual fringe benefit. Essentially, these are the fringe benefits that remain or are left over because they are not one of the more specific categories of fringe benefit.

Subsection 136(1) provides that a residual benefit means a benefit that is a residual benefit by virtue of section 45. Section 45 provides that:

A benefit is a residual benefit for the purposes of this Act if the benefit is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive).

These categories include:

• Car fringe benefit

• Debt waiver fringe benefit

• Loan fringe benefit

• Expense payment fringe benefit

• Housing fringe benefit

• Living-away-from-home allowance fringe benefit

• Board fringe benefit

• Meal entertainment fringe benefit

• Tax-exempt body entertainment fringe benefit

• Car parking fringe benefit

• Property fringe benefit

In these circumstances, employees do not incur any financial liability in respect to the course and therefore the benefit could not be classified as an expense payment fringe benefit under Division 5 or a debt waiver benefit under Division 3 of the FBTAA. No property passes to the employees as would be required under Division 11. No other Divisions have application.

As the provision of a scholarship which provides a free course of education does not fall within any of the specific categories of benefits within Subdivision A of Divisions 2 to 11 (inclusive), it is therefore classified as a residual fringe benefit.

Question 2

Is the provision of the scholarship further classified as an in-house period residual fringe benefit under section 49 of the FBTAA?

Summary

The provision of the scholarship is classified as an in-house period residual fringe benefit.

Detailed reasoning

As is relevant in the circumstances, an in-house residual fringe benefit is defined in subsection 136(1) as:

in relation to an employer, means a residual fringe benefit in relation to the employer:

(a) where both of the following conditions are satisfied:

(i) the provider is the employer or an associate of the employer;

(ii) at or about the comparison time, the provider carried on a business that consisted of or included the provision of identical or similar benefits principally to outsiders …

Provider

In these circumstances, as the taxpayer is both the provider and the employer, paragraph (a)(i) is met. In addition, in accordance with subparagraph (a)(ii) it needs to be determined whether at or about the comparison time, the taxpayer carried on a business that consisted of or included the provision of identical or similar benefits principally to outsiders.

Comparison time

Under subsection 136(1) comparison time in relation to a residual fringe benefit, means:

(a) if the fringe benefit is constituted by a benefit to which subsection 46(2) applies - the start of the billing period referred to in that subsection in relation to the benefit; or

(b) if the fringe benefit is a period residual fringe benefit - the time when the recipients overall benefit started to be provided; or

(c) if the fringe benefit is an airline transport fringe benefit - the time when the transport starts; or

(d) otherwise - the time when the benefit is provided.

Depending on how long students take to complete the course, it is assumed that the course fees are paid per semester, as would occur for members of the public. In this case, subsection 46(2) has the effect that each payment constitutes a separate benefit.

In these circumstances, the benefit commences when the course (or relevant unit/s if spread over more than one semester) commences. It needs to be determined whether, at this time, the taxpayer carried on a business that consisted of or included the provision of identical or similar benefits principally to outsiders.

Carried on a business

The FBTAA does not define what constitutes carrying on a business for the purposes of the in-house residual benefit provisions, so this phrase takes its ordinary meaning. The ATO website (ato.gov.au, QC 31733, Last modified: 20 Aug 2014) sets out the following factors that courts and tribunals take into account in working out if a business exists for tax purposes.

The taxpayer offers tertiary education in the ordinary course of its day to-day operations. While no one factor can be used to work out whether the taxpayer is carrying on a business, taken together they can show whether the taxpayer's activity is a business:

Does your activity have a significant commercial character? It is important to consider whether you carry on your activity for commercial reasons and in a commercially viable manner.

Do you have more than just an intention to engage in business? You must have made a decision to start your business and have done something about it. If you are still setting up or preparing to go into business, you might not yet have started the business.

Do you have the purpose of profit as well as the prospect of profit? Do you intend to make a profit or genuinely believe you will make a profit, even if you are unlikely to do so in the short term?

Is there repetition and regularity to your activity? Businesses usually repeat similar types of activities, although one-off transactions can amount to a business in some cases.

Is your business similar to other businesses in your industry? Is the way you operate consistent with industry norms or other businesses in your industry?

What is the size, scale or permanency of your activity? Is the size or scale of your activity consistent with other businesses in your industry? Is it enough to allow you to make a sustainable profit?

Is your activity planned, organised and carried on in a businesslike manner? This can be shown using

• business records and account books

• a separate business bank account

• business premises

• licenses or qualifications

• a registered business name.

When these factors are taken together, it is clear that the taxpayer is carrying on a business for the following reasons:

• the taxpayer's operations have a significant commercial character in that students pay for their tertiary education, and the taxpayer's intention is to generate revenue;

• the taxpayer's operations are well established, and it has more than a mere intention to engage in business;

• there is repetition and regularly to the taxpayer's activities;

• the taxpayer's business is similar to that of other educational institutions which offer tertiary education;

• the taxpayer's activities are large in scale and similar to that of other similar institutions; and

• the taxpayer's activities are carried on in a business-like manner.

For the purposes of the subsection 136(1) definition of in-house residual fringe benefit, the taxpayer is carrying on the business of providing tertiary education to students.

Provision of identical or similar benefits principally to outsiders

In 2015, there are 19 students enrolled in the specified course, of which 13 are staff members, and 6 are not.

Subsection 136(1) defines outsider to mean:

in relation to the employment of an employee of an employer, means a person not being:

(a) an employee of the employer;

(b) an employee of an associate of the employer;

(c) an employee of a person (in this definition referred to as the provider) other than the employer or an associate of the employer who provides benefits to, or to associates of, employees of the employer or an associate of the employer under an arrangement between:

(i) the employer or an associate of the employer; and

(ii) the provider or another person; or

(d) an associate of an employee to whom any of the preceding paragraphs apply.

An identical benefit in relation to a residual fringe benefit is defined in subsection 136(1) of the FBTAA and further clarified at paragraphs 215 to 217 of Taxation Ruling TR 2007/12 Fringe benefits tax: minor benefits (TR 2007/12) as follows:

215. The term "identical benefit" as defined in section 136(1) of the FBTAA, in relation to residual fringe benefits, to mean:

another benefit that is the same in all respects, except for differences (if any) that are minimal or insignificant and do not affect the value of the other benefit.

216. Although this definition does not apply to section 58P, it assists in understanding the meaning of the term and is not inconsistent with the ordinary (dictionary) meaning of "identical".

217. In giving meaning to the words "identical" and "similar", it is clear that the dictionary meanings, in the context of section 58P and its intended operation, are both appropriate and applicable.

Given that the majority of participants in the course are staff members, this particular course does not meet the requirement that the identical benefit is provided principally to outsiders. However, the benefit need only be identical or similar.

The term 'similar benefit' is not defined within the FBTAA. However, the Macquarie Dictionary defines it as 'having likeness or resemblance, especially in a general way'.

The taxpayer's main business activity is the provision of tertiary education through the provision of a wide range of courses to students. These courses could be considered to be a similar benefit as they provide knowledge and, in most cases, a qualification upon successful completion of the courses. The Commissioner accepts that the taxpayer's other courses are similar to the specified course in these circumstances. Therefore, this part of subparagraph (a)(ii) is satisfied.

As such, all of the parts of paragraph (a) are satisfied, and the benefit meets the definition of in-house residual fringe benefit.

Therefore, the provision of internally-funded scholarships by the taxpayer to specific employees who undertake the specified course is an in-house residual benefit as defined in subsection 136(1) of the FBTAA.

Period or non-period

The method used to value an in-house residual fringe benefit depends upon whether it is an 'in-house period residual fringe benefit', or an 'in-house non-period residual fringe benefit'. Both of these terms are defined in subsection 136(1) of the FBTAA. An in-house non-period residual fringe benefit is defined to mean 'an in-house residual fringe benefit that is not provided during a period'; while an in-house period residual fringe benefit is defined to mean 'an in-house residual fringe benefit that is provided during a period'.

In determining whether the benefit was provided during a period subsection 149(1) of the FBTAA provides that a benefit will be taken to be provided during a period if it is provided for a period of more than 1 day and is not deemed by a provision of the FBTAA to be provided at a particular time, or on a particular day.

In these circumstances, as the benefit is provided for a period of more than 1 day, it will be an in-house period residual fringe benefit unless it is deemed by a provision of the FBTAA to be provided at a particular time, or on a particular day.

Section 49 of the FBTAA defines the taxable value of in-house period residual fringe benefit as follows:

Subject to this Part, the taxable value of an in-house period residual fringe benefit in relation to a year of tax is:

…

(a) if … at or about the comparison time, identical overall benefits were provided by the provider:

(i) in the ordinary course of business to members of the public under an arm's length transaction or arm's length transactions; and

(ii) in similar circumstances and subject to identical terms and conditions (other than as to price) as those that applied in relation to the provision of the recipients overall benefit;

an amount equal to 75% of the lowest amount paid or payable by any such member of the public in respect of the current identical benefit in relation to an identical overall benefit so provided; or

(b) in any other case - an amount equal to 75% of the notional value of the recipients current benefit;

reduced by the amount of the recipients contribution insofar as it relates to the recipients current benefit.

As identical benefits were provided in the ordinary course of business to members of the public under an arm's length transaction the taxable value of the in-house period residual fringe benefit that arises from the payment of an employee's (or associate's) tuition fees, will be an amount equal to 75 per cent of the lowest amount charged by the taxpayer for the identical delivery of the educational units.

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