Edited version of your written advice

Authorisation Number: 1051376130089

Date of advice: 25 May 2018

Ruling

Subject: Fringe benefits tax – expense payment fringe benefit – otherwise deductible rule

Question

Will the ‘otherwise deductible’ rule in section 24 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) reduce the taxable value of an expense payment fringe benefit if the employer pays or reimburses the cost of the employee’s visa application?

Answer

No. The ‘otherwise deductible’ rule in section 24 of the FBTAA will not operate to reduce the taxable value of the expense payment fringe benefit.

This ruling applies for the following period:

1 April 20XX to 30 June 20XX

Relevant facts and circumstances

The Employer engaged a non-resident employee under a fixed term employment contract for the period October 20xx to 30 June 20xx. It is a general employment condition for all staff that they hold a legal right to work in Australia. If a staff member requires a visa to meet this requirement, the Employer does not specify in its contract exactly what type of visa is needed. The individual bore the cost of the original visa which was not tax deductible as it was acquired prior to earning assessable income, and this is not in dispute.

The Employer had nominated to sponsor the skilled overseas worker to work temporarily in Australia for a period of up to four years in July 20xx under a section 457 visa. This 457 visa was current at the time of entering into the new fixed term employment contract commencing on October 20xx.

The 457 visa is due to expire in July 20xx. It was negotiated at the time of the new employment contract that the Employer would support and pay for the application fees for a permanent 186 visa application to allow the Employee to reside in Australia and continue employment.

Relevant legislative provisions

Income Tax Assessment Act 1997

Section 8-1

Fringe Benefits Tax Assessment Act 1986

Section 20

Section 24

Subsection 136(1)

Reasons for decision

Expense payment benefit

Section 20 of the FBTAA defines an expense payment benefit as follows:

Where a person (in this section referred to as the provider):

(a) makes a payment in discharge, in whole or in part, of an obligation of another person (in this section referred to as the recipient) to pay an amount to a third person in respect of expenditure incurred by the recipient; or

(b) reimburses another person (in this section also referred to as the recipient) in whole or in part, in respect of an amount of expenditure incurred by the recipient;

the making of the payment referred to in paragraph (a), or the reimbursement referred to in paragraph (b), shall be taken to constitute the provision of a benefit by the provider to the recipient.

The taxable value of an expense payment fringe benefit can be reduced in certain circumstances by the ‘otherwise deductible’ rule, as explained in section 24 of the FBTAA. The taxable value of the benefit is reduced to the extent that an employee would have been entitled to a ‘once-only’ income tax deduction for the expense had they incurred the expense themselves.

A ‘once-only deduction’ is defined in subsection 136(1) of the FBTAA to mean:

once-only deduction, in relation to expenditure, means a deduction in a year of income in respect of a percentage of the expenditure where no deduction is allowable in respect of a percentage of the expenditure in any other year of income.

Would the employee be entitled to a ‘once-only deduction’ If they had incurred the expenditure?

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

● it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478),

● there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and

● it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

In Ronpibon Tin NL the High Court stated:

For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words incurred in gaining or producing assessable income mean in the course of gaining or producing such income.

Expenditure may be incurred in order to be in a position to be able to derive assessable income, for example unless one arrives at work it is not possible to derive income. This does not mean that the expenditure is incurred in the course of gaining or producing assessable income. Rather, the expenses are incurred to enable the taxpayer to commence income earning activities. This was the view taken by the High Court in Lunney's Case where it was found that the expenses in travelling from home to work did not have a connection with the activities carried out by the taxpayers to earn their income. It was considered that although the travel expenses were necessary and a prerequisite to earning income, the travel itself was not an activity undertaken in the course of earning their income.

Although the expenses in obtaining a visa are different to those expenses related to a driver's license or home to work travel, the principle of the expense being private in nature is the same.

It is acknowledged that without the permanent visa the Academic would not be able to earn assessable income. In that sense, the expenses associated with the visa are a pre-requisite to earning income. However, as in Lunney's Case, this does not mean that the expenses were incurred in the course of producing your assessable income.

It is considered that the costs of applying for a permanent visa are incurred to place the academic in a position to be able to earn income, rather than in the completion of the person’s employment duties.

The predominant purpose of obtaining permanent residency is to allow a person to live in Australia rather than earn assessable income. Therefore expenses relating to an application for permanent residency are considered private or domestic in nature.

As no deduction would be allowable under section 8-1 of the ITAA 1997 to the employee, the ‘otherwise deductible’ rule will not operate to reduce the taxable value of the expense payment fringe benefit.

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).