Edited version of private advice

Authorisation Number: 1051844418156

Date of advice: 31 August 2021

Ruling

Subject: FBT and life/totally and permanently disabled insurance policies paid by an employer

Question 1

Is insurance coverage considered a 'benefit' as defined within subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes.

Question 2

Is the benefit of insurance coverage considered to be 'provided' to an employee as defined within subsection 136(1) of the FBTAA?

Answer

No.

Question 3

Are the life insurance/TPD premiums considered to be paid 'in respect of' employment as defined within subsection 136(1) of the FBTAA and detailed in section 138B of the FBTAA?

Not applicable.

Question 4

Should FBT apply to the payment of life/TPD insurance premiums?

No

This ruling applies for the following periods:

FBT Year ended 31 March 20XX

FBT Year ended 31 March 20XX

FBT Year ended 31 March 20XX

FBT Year ended 31 March 20XX

The scheme commences on:

1 April 20XX

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.

Company 'XX' is a privately owned company which owns and operates a mine. Employees employed at the mine are engaged by company 'YY'.

XX and YY will collectively be referred to as 'the employer' throughout this ruling, as per the ruling application.

Employee Benefits

The employer provides Insurance as part of the employees Remuneration Package as detailed below:

Income Protection insurance and Total Permanent Disablement/Death cover insurance.

Applies from the first of anniversary of employment. Level of insurance cover determined by underwriter's policy, including subject to individual health assessments.

The Insurance cover is intended to provide group life cover for when an employee dies, is totally and permanently disabled (TPD) or is diagnosed as being terminally ill. It also provides income protection insurance, such that the employer can continue paying the employee as need be through a period of incapacitation.

It is the Total Permanent Disablement/Death cover insurance which is the subject of this ruling.

Income protection is not subject to this ruling request.

Group Life Policy

XX has entered in a Group Life Policy, effective 1 June 20XX in relation to employees of the employer.

The Insurance Policy provides group life cover for the employees in the event of death, terminal illness and total and permanent disablement (TPD) they may endure, with the following features:

•                    The employer is the Policy Owner;

•                    In accordance with the Policy, all benefits to be paid are paid to the Policy Owner (or a person nominated by the Policy Owner); (i.e. the employer is beneficially entitled to all payments made under the Policy;)

•                    The policy commenced on 1 June 20XX and has been renewed annually with the payment of insurance premiums in advance;

•                    Covered Persons, that is employees, have no personal right of claim under the Policy and are not entitled to receive any payments directly from the insurer. The Policy is merely the employer's mechanism for funding employment termination payments;

•                    The employer has the right to terminate, suspend, discontinue or amend all or part of the Policy at any time;

•                    When a claim is made under the Policy, the procedure for making a claim requires the Policy Owner, the employer, to notify the insurer of an event entitling the Policy Owner to a benefit;

•                    Under the terms of the Policy, where an event occurs, which may result in a claim being made, the employee is required to notify their local Human Resources;

•                    Any subsequent payment from XX and YY to an employee is paid via the employer's payroll system and taxed as normal income or termination payments (if relevant).

The Group Life Policy Document of the insurer includes the following statements:

Eligibility as a Covered Person

Extent of Cover

Cancellation and Termination

Payment of Benefits

Variation of Terms

Policy Schedule

First Schedule

Name of Policy Owner: XX

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 20

Fringe Benefits Tax Assessment Act 1986 section 45

Fringe Benefits Tax Assessment Act 1986 section 51

Fringe Benefits Tax Assessment Act 1986 section 58J

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Income Tax Assessment Act 1997 section 80-10

Income Tax Assessment Act 1997 paragraph 82-135(i)

Reasons for decision

Question 1

The definition of "benefit" as defined in subsection 136 (1) of the FBTAA includes 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 the 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

As a contract of insurance is specifically mentioned at paragraph (c) in subsection 136(1) of the FBTAA, insurance coverage is capable of meeting the definition of a benefit.

Question 2

Is the benefit of insurance coverage considered to be 'provided' to an employee as defined within subsection 136(1) of the FBTAA ?

No

In this situation, the benefit of insurance coverage is not one that is being provided to the employees.

In your circumstances, the employer pays a premium to an insurer in exchange for the provision of insurance coverage for death, terminal illness and accidental death and/or dismemberment of its employees. Any payments claimed under the insurance policy are paid to the Policy Holder (the employer) or a person nominated by the employer.

In effect, the insurance policy is the mechanism for funding the payment of eligible termination payments (ETPs) if an event happens to occur to an employee who has this type of benefit written into their employment contract.

As outlined in Question 1, insurance cover is a 'benefit' as defined in subsection 136(1) of the FBTAA. However, in this situation it is the employer who is provided with the benefit of insurance coverage because they, not an employee or an associate of an employee, can make a claim on the insurance policy and receive any benefit that is payable.

Therefore, while it might be possible that the benefit is in respect of the employee's employment, the benefit of insurance coverage is not one that is being provided to the employees.

The employer may use the insurance benefit paid to it by the insurer under its group policy to fund a payment it makes to an employee, or the employee's associate. The amount of the employer's payment may also be calculated with reference to the employer's group insurance policy, such that the insurance benefit paid to the employer and the amount of the employer's payment are equal.

While appearing to be related, it is important to consider the particular terms of each policy (e.g. insurance contract or employment contract) to understand who is being provided with the benefit.

Despite being named as Covered Persons on the insurance policy, employees are neither the policyholder nor the beneficiary of that policy. We consider the employees' contingent right to receive a payment upon injury or death arises as a result of their employment contract with the employer rather than from the employer's insurance policy with the insurer.

Contingent rights to receive a payment upon injury or death are considered an entirely separate benefit from insurance coverage. Whether FBT applies to these benefits is outlined at Question 4 below.

Question 3

Are the life insurance premiums considered to be paid 'in respect of' employment as defined within subsection 136(1) of the FBTAA and detailed in section 138B of the FBTAA?

Not applicable

For a benefit that is provided to an employee to meet the definition of 'fringe benefit' in subsection 136(1) of the FBTAA, amongst other factors the benefit must be provided 'in respect of the employment of the employee'.

However; as outlined in Question 2, regardless of whether it might be possible that the life insurance benefit is in respect of the employee's employment, this question is unnecessary because the benefit of insurance cover is not one that is being provided to the employees, meaning it will not satisfy the definition of 'fringe benefit'.

Question 4

Should FBT apply to the payment of life insurance premiums to the insurer?

No

The definition of a 'fringe benefit' provides that a benefit will be a fringe benefit when that benefit is provided to an employee or an associate of the employee in respect of the employment of the employee by an employer (or its associate) or under an arrangement between the employer and a third party, unless the benefit is specifically excluded from being a fringe benefit.

However, as explained at Question 2, it is the employer who is provided with the benefit of insurance coverage because they, not an employee or an associate of an employee, can make a claim on the insurance policy and receive any benefit that is payable (i.e. the employer is both the policy holder and the beneficiary of the insurance coverage).

It therefore cannot constitute a 'fringe benefit' as defined in subsection 136(1) of the FBTAA.

FBT treatment of contingent rights of employees to receive a payment upon injury or death

For completeness purposes, we have provided additional information concerning the FBT treatment of the provision of contingent rights of employees to receive a payment upon injury or death, which is written into the employment contracts.

The insurance benefit received by the employer from the insurer and the payment an employee or their associate receives on the happening of the event may be equal.

Where this 'contingent right' is provided to the employee 'in respect of' an employee's employment, because the right is contained in the employee's employment contract, the benefit has a sufficient and material connection to an employee's employment (Knowles case), satisfying those elements of the definition of 'fringe benefit'.

In Taxation Ruling TR 2010/6 Income tax: Pay As You Go Withholding and fringe benefits tax: tax consequences on the issue, holding and redemption of bonus units as part of an employee benefits trust arrangement (TR 2010/6), the Commissioner concludes a right granted to an employee to receive 'salary or wages' is a 'benefit' for the purposes of the FBTAA, but it is not a 'fringe benefit' as defined in the FBTAA.

That is because it ultimately results in the employee receiving 'salary or wages' and the payment of 'salary or wages' is specifically excluded from being a 'fringe benefit' by paragraph 136(1) of the definition of 'fringe benefit'.

In this type of arrangement, the employee is granted a contingent right which confers on them, or their associate, an entitlement to receive either:

•                    an employment termination payment under the Income Tax Assessment Act 1997 (ITAA 1997), which is excluded from the definition of 'fringe benefit' by paragraph 136(1)(lc) of the FBTAA, or

•                    consideration of a capital nature for, or in respect of a personal injury to a person, which is excluded from the definition of 'fringe benefit' by paragraph 136(1)(m) of the FBTAA.

Given these types of payments are specifically excluded from being a 'fringe benefit' by virtue of the definition of 'fringe benefit' as outlined above, we accept, for the reasons outlined in TR 2010/6, that the contingent right provided to the employees, while being a 'benefit' provided 'in respect of' an employee's employment is specifically excluded from being a 'fringe benefit' for the purposes of the FBTAA.

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