Edited version of your written advice

Authorisation Number: 1012930471962

Date of advice: 18 December 2015

Ruling

Subject: In-house fringe benefits

Question 1

Will an in-house residual expense payment fringe benefit arise for the purposes of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) when you reimburse an employee for expenses incurred in purchasing a service from an associate?

Answer

Yes

Question 2

Does subsection 22A(2) of the FBTAA apply?

Answer

Subsection 22A(2) of the FBTAA will be used to calculate the taxable value of the in-house residual expense payment fringe benefit. However, in applying the valuation rule in section 48 of the FBTAA the taxable value of the benefit will be the amount of the reimbursement.

Question 3

Can the taxable values of the in-house residual expense payment fringe benefits be reduced by $1,000 under section 62 of the FBTAA?

Answer

No

This ruling applies for the following periods:

Year ending 31 March 2017

Year ending 31 March 2018

Year ending 31 March 2019

Year ending 31 March 2020

Relevant facts and circumstances

You offer your employees the ability to enter into effective salary sacrifice arrangements whereby you reimburse your employees for the cost of services purchased from an associate.

Employees will provide you with a copy of the invoice they receive from the associate prior to the lodging of your FBT return.

This ruling is given on the basis of the facts stated in the description of the scheme as set out above. Any material variation from these facts (including any matters not stated in the description above and any departure from these facts) will mean that the ruling will have no effect. No entity will then be able to rely on this ruling as the Commissioner will consider that the scheme has been implemented in a way that is materially different from the scheme described.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 20.

Fringe Benefits Tax Assessment Act 1986 Subsection 22A(2).

Fringe Benefits Tax Assessment Act 1986 Section 48.

Fringe Benefits Tax Assessment Act 1986 Section 62.

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

Reasons for decision

Question 1

Detailed reasoning

Under the arrangement an employee will enter into a salary sacrifice arrangement for the reimbursement of the employee's private expenses.

The reimbursement will be an expense payment fringe benefit under paragraph 20(b) of the FBTAA.

In general terms, an expense payment fringe benefit will be an in-house expense payment fringe benefit arises where the expenditure reimbursed was incurred in purchasing goods or services that you sell in the ordinary course of your business.

There are two types of in-house expense payment fringe benefits:

1. an in-house property expense payment fringe benefit (where the expenditure reimbursed was for the purchase of property); and

2. an in-house residual expense payment fringe benefit (where the expenditure reimbursed was for the purchase of a residual benefit such as a service).

The term 'in-house residual expense payment fringe benefit' is defined under subsection 136(1) as:

… 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) if the residual benefit provider is not the employer or an associate of the employer:

…

(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.

The benefit is an expense payment benefit which relates to expenditure incurred in respect of the provision of a residual benefit. Therefore, paragraph (a) of the definition is met.

In considering paragraph (b) of the definition, the provider of the residual benefit is an associate. Therefore, paragraph (b) will be met if the associate carried on a business that consisted of or included the provision of identical or similar benefits principally to outsiders.

As all of the requirements of the definition are met, the benefit will be an in-house residual expense payment fringe benefit.

Question 2

Detailed reasoning

Subsection 22A(2) of the FBTAA provides the method for calculating the taxable value of in-house residual expense payment fringe benefits.

Subsection 22A(2) states:

… the taxable value in relation to a year of tax of an in-house residual expense payment fringe benefit (in this subsection called the actual fringe benefit) provided during the year of tax is the amount that, if:

(a) the provision of the residual benefit to which the actual fringe benefit relates were an in-house residual fringe benefit (in this subsection called the notional fringe benefit); and

(b) the recipients contribution in relation to the notional fringe benefit were equal to the recipients expenditure reduced by whichever of the following amounts is applicable:

(i) the amount of the payment referred to in paragraph 20(a) reduced by the amount of the recipients contribution in relation to the actual fringe benefit;

(ii) the amount of the reimbursement referred to in paragraph 20(b);

would have been calculated under whichever of sections 48 and 49 is applicable as the taxable value, but for section 52 and Division 14, of the notional fringe benefit in relation to the year of tax.

In applying this subsection, the method that would be used to calculate the taxable value of the residual benefit (if it was the in-house fringe benefit) is used to calculate the taxable value of the in-house expense payment fringe benefit.

The methods used to calculate the taxable value of an in-house residual fringe benefit are contained in sections 48 and 49 of the FBTAA. Section 48 applies where the residual benefit is a non-period residual fringe benefit.

Section 48 states:

the taxable value of an in-house non-period residual fringe benefit in relation to an employer in relation to a year of tax is:

(aa) if the benefit was provided to the recipient under a salary packaging arrangement - an amount equal to the notional value of the benefit at the comparison time; or

(ab) if paragraph (aa) does not apply and the benefit is an airline transport fringe benefit - an amount equal to 75% of the stand-by airline travel value of the benefit at the comparison time; or

(a) if neither paragraph (aa) nor (ab) applies and, at or about the comparison time, identical 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 benefit to the recipient;

an amount equal to 75% of the lowest price at which an identical benefit was so sold to a member of the public; or

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

reduced by the amount of the recipients contribution.

In considering the relevant paragraph, paragraph 48(aa) applies where the benefit is provided to a recipient under a salary packaging arrangement. This paragraph was inserted by Tax Laws Amendment (2012 Measures No.6) Act 2013. Generally, it applies to benefits provided on or after 22 October 2012.

However, if the benefit is provided under a under a salary packaging arrangement that was in place on 22 October 2012, the paragraph did not apply before the earlier of 1 April 2014, or the date on which the salary packaging arrangement was altered in a material way.

In explaining the application of the amendment the Explanatory Memorandum to Tax Laws Amendment (2012 Measures No. 6) Bill 2012 stated:

7.10 Schedule 7 to this Bill removes concessions for in-house fringe benefits where those benefits are accessed by way of a salary packaging arrangement.

7.11 In particular, these amendments:

• remove the concessional taxable value calculation method for particular benefits;

• The concession associated with the valuation of particular in-house expense payment benefits, in-house property benefits or in-house residual benefits no longer applies where the benefit is accessed by way of a salary packaging arrangement.

• Instead, the taxable value of the benefit is based on the 'notional value' of the benefit.

• remove the exemption that applies for residual benefits that are provided for transport from home to work (for employers in the transport business) and accessed through a salary packaging arrangement; and

• remove the annual $1,000 reduction of aggregate taxable value in respect of in-house fringe benefits where they are provided under a salary packaging arrangement.

7.12 However, these amendments do not affect the concessions relating to in-house benefits provided by employers where those benefits are provided outside of a salary packaging arrangement or are paid for out of after-tax income.

…

Changes to in-house expense payment fringe benefits

7.34 An expense payment benefit arises when a payment is made in discharge of an obligation of an employee or when a reimbursement is made to an employee for expenditure incurred by him or her.

7.35 An in-house expense payment fringe benefit arises where the expenditure reimbursed or paid for was incurred by the employee (or family member) in purchasing goods or services that the employer (or an associate) sells in the ordinary course of business.

7.36 In-house expense payment fringe benefits are either in-house property expense payment fringe benefits or in-house residual expense payment fringe benefits.

7.37 Consequently, as the concessions related to in-house expense payment fringe benefits are co-located with the relevant in-house property or residual benefits, no amendments are needed for the in-house expense payment fringe benefit provisions.

7.38 Rather, the concessions are appropriately limited where they are accessed under a salary packaging arrangement through the amendments that are detailed above.

…

Example 7.25 : Reduction of aggregate taxable value of salary packaged and non-salary packaged in-house benefits

Ronita works for an electricity and gas provider and receives two types of in-house benefits. The first is an in-house residual expense payment benefit in respect to her quarterly electricity bill. The taxable value of the benefit is $500 a year and it is provided under a salary packaging arrangement.

The second benefit is the provision of bottled gas and is an in-house property benefit. The taxable value of the benefit is $500 and it is not provided under a salary packaging arrangement.

Under this measure, Ronita's employer would not reduce the aggregate taxable value of the electricity bill benefit because it is provided under a salary packaging arrangement and therefore would only reduce the aggregate taxable value of the gas bottle benefit to zero (as the sum of the taxable value of the non-salary packaged in-house benefits is less than $1,000).

In applying this guidance, the benefit is provided under a salary packaging arrangement. Therefore, the value of the residual benefit is the notional value.

Subsection 136(1) defined notional value to mean:

the amount that the person could reasonably be expected to have been required to pay to obtain the property or other benefit from the provider under an arm's length transaction.

This is the amount the employee paid to the associate.

Therefore, if the employee paid $500 to the associate and the full amount is reimbursed the taxable value would be calculated as follows:

Notional value of the benefit $500

less recipients contribution

recipients expenditure ($500) - reimbursement ($500) 0

Taxable value $500

Question 3

Detailed reasoning

In general terms, section 62 of the FBTAA enables the sum of the taxable values of the in-house fringe benefits provided to an employee to be reduced by $1,000. However, this is subject to subsection 62(2) which was inserted by Tax Laws Amendment (2012 Measures No.6) Act 2013.

Subsection 62(2) states:

Subsection (1) does not apply to an in-house fringe benefit provided under a salary packaging arrangement.

As the reimbursement is provided under a salary packaging arrangement, the $1,000 reduction in section 62 will not apply.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).