Edited version of your written advice

Authorisation Number: 1013062747192

Date of advice: 29 July 2016

Ruling

Subject: Fringe benefits tax

Question 1

Should fringe benefits tax be paid on compulsory contributions towards a pension/unemployment/illness insurance plan for an expatriate employee who is currently an Australian resident?

Answer

Yes

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

2014

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 pay a compulsory contribution in respect of an insurance plan (the Insurance Plan) for an expatriate employee. The employee is currently an Australian resident.

Your employee can receive the old age pension once he/she reaches the pensionable age, the disability pension in case of disability and the unemployment contribution in case of unemployment.

You bear the cost of both the employee's and employer's portion of the contributions.

Relevant legislative provisions

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

Income Tax Assessment Act 1997, subsection 995-1(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.

Summary

Fringe benefits tax (FBT) should be paid on compulsory contributions towards the Insurance Plan for an expatriate employee who is currently an Australian resident.

Detailed reasoning

You are required to pay FBT on a fringe benefit that has a taxable value of greater than nil. A fringe benefit is defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to mean:

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)…

(ea)…

…in respect of the employment of the employee

Benefit is defined in subsection 136(1) of the FBTAA to include:

Any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be provided under:

(a) an arrangement for or in relation to:

(I) the performance of work (including work of a professional nature), whether with or without provision of property;

(II) the provision of, or of the use of facilities for, entertainment, recreation or instruction; or

(III) the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction;

(b) a contract of insurance; or

(c) an arrangement for or in relation to the lending of money.

The contributions that you make in respect of the Insurance Plan fit within the definition of a benefit even though they are compulsory. In particular they are residual benefits.

The phrase in respect of in relation to the employment of an employee is defined in subsection 136(1) of the FBTAA to include 'by reason of, by virtue of, for or in relation directly or indirectly to, that employment'.

The meaning of in respect of employment was considered by the Federal Court in J & G Knowles v Federal Commissioner of Taxation [2000] 96 FCR 402; 2000 ATC 4151; 44 ATR 22 (Knowles). In Knowles, the Full Federal Court concluded that there needs to be a sufficient or material, rather than a causal connection or relationship between the benefit and the employment.

You are required to make the contributions as part of the conditions of employing your employee. Therefore there is a material connection between your employee's employment and the provision of the benefit.

There are some benefits that would otherwise be fringe benefits which are specifically excluded from the definition of a fringe benefit. In particular subparagraph (j)(ii) of the definition of a fringe benefit excludes a benefit constituted by:

the making of a contribution to a foreign superannuation fund (within the meaning of the Income Tax Assessment Act 1997) where:

(A) the contribution is for the purpose of making provision for superannuation benefits for the employee (whether or not the benefits are payable to a dependant of the employee if the employee dies before or after becoming entitled to receive the benefits); and

(B) the employee is a temporary resident (within the meaning of the Income Tax Assessment Act 1997) when the contribution is made;

Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines a 'foreign superannuation fund' as follows:

(a) a ^*superannuation fund is a foreign superannuation fund at a time if the fund is not an ^*Australian superannuation fund at that time; and

(b) a superannuation fund is a foreign superannuation fund for an income year if the fund is not an Australian superannuation fund for the income year.

For a fund to be a foreign superannuation fund a prerequisite is that it must be a superannuation fund.

Subsection 995-1(1) of the ITAA 1997 defines a 'superannuation fund' as having the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), that is:

(a) a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme.

The High Court examined both the terms superannuation fund and fund in Scott v Commissioner of Taxation of the Commonwealth (No. 2) (1966) 40 ALJR 265; (1966) 10 AITR 290; (1966) 14 ATD 333 (Scott). In that case, Justice Windeyer stated:

… I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion "fund", I take it, ordinarily means money (or investments) set aside and invested, the surplus income therefrom being capitalised. I do not put this forward as a definition, but rather as a general description.

The issue of what constitutes a provident, benefit, superannuation or retirement fund was discussed by the Full Bench of the High Court in Mahony v Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony). In that case, Justice Kitto held that a fund had to exclusively be a 'provident, benefit or superannuation fund' and that 'connoted a purpose narrower than the purpose of conferring benefits in a completely general sense …'. This narrower purpose meant that the benefits had to be 'characterised by some specific future purpose' such as the example given by Justice Kitto of a funeral benefit.

Furthermore, Justice Kitto's judgement indicated that a fund does not satisfy any of the three provisions, that is, provident, benefit or superannuation fund, if there exist provisions for the payment of benefits 'for any other reason whatsoever'. In other words, though a fund may contain provisions for retirement purposes, it could not be accepted as a superannuation fund if it contained provisions that benefits could be paid in circumstances other than those relating to retirement.

In section 62 of the SIS Act, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member:

• on or after the member's retirement from gainful employment

• on the member attaining a prescribed age, or

• on the member's death (this may require the benefits being passed on to a member's dependants or legal representative).

Notwithstanding the SIS Act applies only to regulated superannuation funds (as defined in section 19 of the SIS Act), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SIS Act (and the SIS Regulations) as providing guidance as to what benefit or specific future purpose a superannuation fund should provide.

In view of the legislation and the decisions made in Scott and Mahony, the Commissioner's view is that for a fund to be classified as a superannuation fund, it must exclusively provide a narrow range of benefits that are characterised by some specific future purpose. That is, the payment of superannuation benefits upon retirement, invalidity or death of the individual or as specified under the SIS Act.

The Insurance Plan provides for more than just superannuation benefits upon retirement, invalidity or death, therefore it is not a foreign superannuation fund for the purposes of establishing whether a fringe benefit has been provided.

As you are providing a fringe benefit you are required to pay FBT where the taxable value is greater than nil. As the contributions to the Insurance Plan fall within the category of external residual fringe benefits, the taxable value is the amount of the contributions you make on behalf of the employee less any employee contribution. As your employee makes no contribution, there will be no reduction to the taxable value and fringe benefits tax will be payable.

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