Edited version of private advice

Authorisation Number: 1051804446547

Date of advice: 2 March 2021

Ruling

Subject: FBT - otherwise deductible rule

Question 1

Is the uniform provided to employees by a company a residual fringe benefit under section 45 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

Question 2

Is the provision of compulsory uniforms by a company to employees eligible for reduction under section 52 of the FBTAA based on the 'otherwise deductible rule'?

Answer

Yes

This ruling applies for the following periods

Year ended 31 March 2021

Year ended 31 March 2022

Year ended 31 March 2023

Year ended 31 March 2024

The scheme commenced on

1 April 2020

Relevant facts

The company is the Australian subsidiary of an overseas fashion brand (parent company).

The parent company has a worldwide reputation for luxury and sophistication, specialising in the creation, production and sale of luxury footwear, leather goods, apparel, silk goods, jewels, fragrances and other accessories for men and women.

In order to maintain a homogeneous and unique image of the brand, the company has a policy that requires its retail staff, who have passed probation, to wear a compulsory uniform during the performance of their work. The compulsory uniform items are specifically designed for only the company's employees to wear during work, and are not available for sale to the general public.

The compulsory uniform options available to the relevant company employees consist of a Summer uniform and a Winter uniform. The uniform items, which are designed to distinctively look like the company's products, are either sourced by the company through third party suppliers (as ready to wear garments), or are manufactured by the company itself using materials sourced from third party suppliers (mostly shoes, accessories and silks/ties). Although the uniform items are provided to the employees at no cost to them, they are required to return all uniform items back to the company upon termination of their employment, including temporary staff at the end of the hiring period.

The company chooses and maintains uniform items to be of the high quality and standard that it is recognised for. Their colour and style are a classic combination allowing the uniform to withstand changing fashions and trends and last for a number of years, albeit with changes to the colour of the tie/scarf from time to time.

With respect to the fabrics used, there are three of four different fabrics used at any time, with the designs of the uniforms distinctively reflective of the employer's signature design and colour scheme.

Retail staff uniform policy

In order to provide the necessary guidance to its employees, the company implements a strict company policy in respect of the compulsory uniform. The policy provides for each employee's entitlements to various uniform items, and refers them to the company's separate 'Dress Code and Grooming' policy to ensure they are groomed to a sufficient standard whilst wearing the uniform.

Male Uniform Package

Full time and part time male employees are provided with two dark navy jackets, two pairs of dark navy pants, four white shirts, two ties, a belt and two pairs of black shoes (which must be left at the company's stores overnight and cannot be worn home).

The shoes, belt and ties carry the employer's logo.

Female Uniform Package

Full time and part time female employees are provided with two dark navy jackets or cardigans, two pairs of dark navy pants, four white shirts, two navy, white grey pattern foulards (one per each style), a belt and two pairs of black shoes (which must be left at the company's stores overnight and cannot be worn home).

Temporary employees receive used, but dry-cleaned uniforms, which must be returned upon completion of their work period.

The shoes, belt and foulards carry the employer's logo.

Employee Guidelines

In order to maintain its brand image, the company requires its employees to treat the uniform items with care and maintain them with respect and at the utmost condition. In addition, the company provides mandatory guidelines to its employees in respect of the handling and maintenance of uniform items, as set out below:

General

• Employees must wear the uniform provided at all times while in store.
• The uniform items must be cleaned and ironed, silhouettes must be elegant and refined, (proper fit and empty pockets).
• The uniform items should not be too tight or too large for the employees.
• Any hems and minor alterations for the uniform should be done by the store's tailor, and length hems should be appropriate while no alteration should be made to the line of pants.

Shoes

• The company's shoes must be worn at all times.
• Shoes must be clean and polished regularly using black non silicon-based polishes.
• Worn heels should be replaced immediately.
• The same shoes should not be worn two days in a row.
• Shoes should be worn for work only.

Stockings

• Sheer, black pantyhose/stockings must be coordinated with the look of the uniform and have no runs or pulled threads.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Fringe Benefits Tax Assessment Act 1986 Section 40

Fringe Benefits Tax Assessment Act 1986 Section 45

Fringe Benefits Tax Assessment Act 1986 Section 52

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Reasons for decision

Question 1

Is the uniform provided to employees by a company a residual fringe benefit under section 45 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

A 'benefit' is defined in subsection 136(1) of Fringe Benefits Tax Assessment Act 1986 (FBTAA) to include any right, privilege, service or facility provided in relation to the performance of work. A 'fringe benefit' is defined in subsection 136(1) of the FBTAA to be a benefit provided to an employee, or an associate of an employee, by an employer, or associate of the employer, or in an arrangement between the employer and the arranger, with respect to the employment of the employee.

In the company's case, the fringe benefit is the use of a compulsory uniform provided to the employee at no cost in respect of the employment of the employee.

The benefit will be a residual benefit under section 45 of the FBTAA if it is not a benefit by virtue of Subdivision A of Divisions 2 to 11 (inclusive). The only division which may be relevant is Division 11 which determines if a property benefit under section 40 of the FBTAA will arise.

In the company's case, a property benefit does not arise because the company retains ownership of the uniforms at all times; they are never the property of the employees and all uniform items must be returned to the company upon termination of employment or when a new uniform is provided.

The provision of the compulsory uniform is therefore a residual fringe benefit.

Question 2

Is the provision of compulsory uniforms by a company to employees eligible for reduction under section 52 of the FBTAA based on the 'otherwise deductible rule'?

The taxable value of a residual fringe benefit can be reduced under section 52 of the FBTAA by the 'otherwise deductible rule'.

The taxable value of a residual fringe benefit may be reduced by the amount the employee would have been entitled to claim as a one-off income tax deduction had the employee incurred the expense themselves for gaining for producing assessable income.

Entitlement to an income tax deduction is determined by section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) which states:

An income tax deduction will be allowable if expenditure on uniforms is incurred in gaining or producing assessable income, and is not expenditure of a private or domestic nature.

Taxation Ruling TR 97/12 Income tax and fringe benefits tax: work related expenses: deductibility of expenses on clothing, uniform and footwear (TR 97/12) discusses compulsory uniforms, as follows:

Compulsory uniform

30. A deduction is allowable for the cost of a compulsory and distinctive uniform under section 8-1 of the ITAA 1997.

31. The essential character of an employee's expenditure on clothing items including shoes, socks, stockings and accessories which form an integral part of a compulsory and distinctive uniform is expenditure directly related to the income producing activities of the employee. It is the compulsory and distinctive characteristics which provide the nexus between the expenditure on the uniform and the work activity.

32. A compulsory uniform must be prescribed by the employer in an expressed policy which makes it a requirement for a particular class of employees to wear that uniform while at work, and which identifies the relevant employer. The employer's compulsory uniform policy guidelines should stipulate the characteristics of the colour, style and type of the clothing and accessories that qualify them as being a distinctive part of the compulsory uniform. Also, the wearing of the uniform generally should be strictly and consistently enforced.

A similar guideline is provided in Taxation Determination TD 1999/62 Income tax: what are the criteria to be considered in deciding whether clothing items constitute a compulsory corporate uniform/wardrobe for the purposes of paragraph 30 of Taxation Ruling TR 97/12? (TD 1999/62).

2. A compulsory uniform/wardrobe must be prescribed by the employer in an expressed policy which makes it a requirement for a particular class of employees to wear that uniform while at work, and which identifies the relevant employer. The employer's compulsory uniform/wardrobe policy guidelines should stipulate the characteristics of the colour, style and type of the clothing and accessories that qualify them as being a distinctive part of the compulsory uniform/wardrobe. Also, the wearing generally of the uniform/wardrobe should be strictly and consistently enforced. To be a compulsory corporate uniform/wardrobe, the clothing must be unique, distinctive and peculiar to the particular organisation, with a timeless quality unaffected by short term changes in fashion.

The criteria set out in TD 1999/62 are as follows:

(a)  Objective

The company implements a company policy that requires all retail employees to wear a compulsory uniform that ensures a unique and consistent image of its brand globally. The uniform represents a significant part of the look required in the stores as dictated by the company's founder. When the employees wear the uniform in the course of carrying out their duties, they function as brand ambassadors for the company, which enhances the public image of the company as a high-end fashion brand that produces high quality clothing.

(b)  Understanding on how the wardrobe is to be worn

The company uniform policy includes employee's entitlements to uniform items, and a separate 'Dress Code and Grooming' policy provide guidelines to the employees in respect of how they are to wear the uniforms. The instructions include the appearance and state of the uniforms, such as ensuring it is clean and ironed, fitting properly, empty pockets and shoes polished. The policies specifically set out that the uniform provided to employees is to be worn for official duties only and is not to be worn outside of working hours.

(c)  Fabric

The clothing items are limited to certain styles and colours, as determined by the company. There are three or four different fabrics used at any time. The designs of the uniforms are distinctly reflective of the signature company design and colour scheme, and highly visible to customers in the stores who can easily identify the attire to be a company uniform.

The fabric and cut of the uniform are made so that they have a distinctly company design while not being the same as the clothing range generally available to customers of other designer brands. The ties and foulards available to male and female retail employees, respectively, have the company's iconic logo embedded throughout.

(d)  Colours

The uniforms available to men are limited to dark navy jackets and pants, white shirts, black shoes and dark navy ties with the company logo. The uniforms available to women are limited to dark navy jackets or cardigan, dark navy pants, white shirts, black shoes and navy foulards with white grey pattern in the company logo pattern.

(e)  Style

The company's uniform policy stipulates that men employees are provided with one type of jacket, a shirt, a belt, and a tie, while women employees are provided with a jacket or cardigan, pants, skirt, and two foulards with distinctive style.

(f)   Corporate identifiers

The ties and foulards have the company logo. Although the other uniform items do not incorporate a logo, the uniforms are distinctive and uniquely of the company. When customers enter the company's stores, they can easily identify the employees due to the consistency of the clothing style and the overall outfit between employees, as well as in the colour of their clothing items.

(g)  Durability

The company manufactures in-house shoes, ties and foulards as part of the company uniform using third party materials to ensure these items retain the company's quality and identity. Other uniform items are sourced by the company from third party suppliers. The uniform items are picked and maintained by the company to be of the high quality and standard that it is recognised for. Their colour and style are a classic combination allowing the uniform to withstand changing fashions and trends and last for a number of years, albeit with changes to the colour of the tie/scarf from time to time. The high standard demanded by the company in relation to their employee's grooming and professional image, in addition to the alternating of summer and winter uniforms, ensure the items worn by the employees never look worn or outdated.

(h)  Range

There is little or no possibility for making any changes or variations to the fabric, colours or its overall look, as there is a limited number of items provided to employees to wear as uniform (one type of suit, shirt and a limited number of ties for men or two styles of foulard for women). This results in the employees having a cohesive look and identity when wearing their uniforms.

(i)    Accessories

Accessories provided to employees are belts and ties for men, and belts and foulards for women. These accessories worn by the retail employees are unique and distinctive company uniform items. Shoes, belts, foulards and ties carry the company logo. None of these items can be purchased by the public, but rather have been specifically designed for the company uniform. The ties provided to men are of limited style, and foulards provided to female employees only have two styles, making them easily identifiable as uniform items. All belts, ties and foulards provided to employees remain the property of the company, and are required to be returned to the company upon the termination of an employee's employment.

Conclusion

It is considered that the above criteria are sufficiently satisfied in respect of the suit jacket and pants, shirt, shoes, belt and tie or foulard provided to an employee of the company so that those items constitute a compulsory corporate uniform. The cost of the uniform to the employee (if they had to pay for it) is therefore an allowable deduction under section 8-1 of the ITAA 1997.

Accordingly, the 'otherwise deductible rule' will apply to reduce the taxable value of the residual benefit provided to each retail employee (the uniform) to nil.

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