Fringe benefits tax - a guide for employers

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Chapter 9 - Expense payment fringe benefits

Remember, a fringe benefit may be provided by another person on behalf of an employer. It may also be provided to another person on behalf of an employee (for example, a relative).

9.1 What is an expense payment fringe benefit?

An expense payment fringe benefit may arise in either of two ways:

1. where you (the employer) reimburse an employee for expenses they incur
2. where you pay a third party in satisfaction of expenses incurred by an employee.

In either case, the expenses may be business expenses or private expenses, or a combination of the two.

It is important to note that the rules in this chapter apply to expenses incurred by an employee that are reimbursed or paid by you, the employer. They don't apply to goods or services you purchase directly and provide to the employee. Nor do they apply to goods or services purchased using your credit card. Goods or services acquired in these ways are subject to valuation under the property or residual benefit rules discussed in Property fringe benefits and Residual fringe benefits .

9.2 Taxable value

The taxable value of an expense payment fringe benefit is the amount you reimburse or pay. However, you use concessional valuation rules to calculate the taxable value of in-house expense payment fringe benefits.

In an attempt to keep explanations as simple as possible, we sometimes refer to 'the reimbursement' rather than 'the reimbursement or payment'.

9.3 In-house expense payment fringe benefits

An in-house expense payment fringe benefit arises where the expenditure you reimburse or pay for was incurred by the employee (or family member) in purchasing goods or services that you (or an associate) sell to customers or clients 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
2. an in-house residual expense payment fringe benefit.

Example: An employer, who is a manufacturer, markets her products through independent retailers. The employees of that employer purchase those products from the retailers at full retail price, but subsequently receive a reimbursement from the employer for part of the purchase price. The reimbursement is an in-house expense payment fringe benefit.

Taxable value of an in-house residual expense payment fringe benefit

The taxable value of an in-house residual expense payment fringe benefit is equal to the amount that would be the taxable value under the in-house rules explained in Residual fringe benefits if the service or privilege had constituted an in-house residual fringe benefit. For this purpose, the employee contribution would be the amount of expenditure incurred by the employee (or associate), reduced by the amount you reimburse or pay them.

Find out more Residual fringe benefits , explains changes to the valuation of in-house residual benefits provided from 22 October 2012 under a salary packaging arrangement.

Example An employer manufactures petroleum products for sale to the public through independent retail outlets. An employee purchases petroleum from one of the retailers at the ordinary retail price of $1,000. The employer reimburses the employee $250 of that expense. The retailer had purchase the petroleum from the employer for $800. The taxable value of this in-house property expense payment fringe benefit is: $800 - ($1,000 - $250) = $50 The effect is that, irrespective of whether a staff discount is provided directly as a property or residual fringe benefit or indirectly as an expense payment fringe benefit, the taxable value is the same.

9.4 Reduction in taxable value where expenditure would have been deductible to the employee

The taxable value of an expense payment fringe benefit may be reduced in accordance with the 'otherwise deductible' rule, but only if the recipient of the benefit is the employee. Broadly, this means that the taxable value may be reduced by the amount the employee would have been entitled to claim as an income tax deduction if you had not reimbursed them.

For example, if an employee incurred an expense solely in performing employment-related duties, the expenditure would be wholly deductible for income tax purposes. Under the 'otherwise deductible' rule, if you reimbursed the employee for all or part of this expense, the taxable value of the expense payment fringe benefit would be nil.

The 'otherwise deductible' rule does not apply to deductions for the decline in value of depreciating assets, except when the cost is less than $301.

Special rules operate where the expenditure that would have been deductible to the employee is incurred in relation to a car (refer to section 9.6 ).

Applying the 'otherwise deductible' rule produces different results, depending on whether the reimbursement you made was intended to be for the business element of the expense payment fringe benefit. This is because the employee is entitled to an income tax deduction for that portion of the expenditure incurred to derive their assessable income, but not for that portion of the expenditure incurred for private or domestic purposes.

You can apply the 'otherwise deductible' rule using the following steps.

Step	Action
1	Write down the amount of the employee's gross expenditure - that is, the amount spent before any reimbursement from you.
2	Now suppose that the employee had not been reimbursed for any of the expenditure in step 1. In this hypothetical situation, how much of this expenditure would have been income tax deductible to the employee?
3	Now look at the actual fringe benefit situation. How much of the employee's expenditure are they entitled to claim as an income tax deduction? There are two possibilities: If you reimbursed all or part of the business component of the employee's expenditure, their income tax deduction is calculated as follows the amount of the employee's expenditure is multiplied by the business percentage. This result is then reduced by the amount of the reimbursement. The resulting amount is their income tax deduction. Alternatively, if the amount you reimbursed was not calculated by reference to the business component of the expenditure, their income tax deduction is calculated as follows the amount of the employee's expenditure is reduced by the amount of the reimbursement. This result is then multiplied by the business percentage. The resulting amount is their income tax deduction.
4	Subtract the actual deductible amount (step 3) from the hypothetical deductible amount (step 2). The resulting figure is the amount by which the taxable value of the fringe benefit may be reduced.

Therefore, where the 'otherwise deductible' rule applies, the taxable value of an expense payment fringe benefit is:

• the amount of your reimbursement or payment, reduced by
• the amount obtained at step 4 of the 'otherwise deductible' rule.

Example An employee incurred expenditure of $500, 80% of which was employment-related (and income tax deductible) and 20% private. The employer reimbursed the employee for $250, without regard to whether the employee's expenditure was for business or private purposes. The taxable value of the expense payment fringe benefit (without the 'otherwise deductible' rule) is $250. Apply the 'otherwise deductible' rule as follows. Step Action Result 1 Write down the amount of the employee's gross expenditure - that is, the amount spent before any reimbursement from you. $500 2 Now suppose that the employee had not been reimbursed for any of the expenditure in step 1. In this hypothetical situation, how much of this expenditure would have been income tax deductible to the employee? $500 x 80% = $400 3 Now look at the actual fringe benefit situation. How much of the employee's expenditure are they entitled to claim as an income tax deduction? The amount of the employee's expenditure is reduced by the amount of the reimbursement. This result is then multiplied by the business percentage. The resulting amount is their income tax deduction. ($500 - $250) x 80% = $250 x 80% = $200 4 Subtract the actual deductible amount (step 3) from the hypothetical deductible amount (step 2). The resulting figure is the amount by which the taxable value of the fringe benefit may be reduced. $400 - $200 = $200 5 Finally, the taxable value of $250 may be reduced by $200. $250 - $200 = $50 Example An employee incurred expenditure of $500, 80% of which was employment-related (and income tax deductible) and 20% private. The employer reimbursed the employee for $350, after considering the extent to which the employee's expenditure was employment-related and income tax deductible. (That is, the employer knew that under the 'otherwise deductible' rule there would be no FBT liability for that part of the fringe benefit used to produce income, so they avoided reimbursing the private or domestic part of the employee's expenditure). The taxable value of the expense payment fringe benefit (without the 'otherwise deductible' rule) is $350. Apply the 'otherwise deductible' rule as follows: Step Action Result 1 Write down the amount of the employee's gross expenditure - that is, the amount spent before any reimbursement from you. $500 2 Now suppose that the employee had not been reimbursed for any of the expenditure in step 1. In this hypothetical situation, how much of this expenditure would have been income tax deductible to the employee? $500 x 80% = $400 3 Now look at the actual fringe benefit situation. How much of the employee's expenditure are they entitled to claim as an income tax deduction? The amount of the employee's expenditure is multiplied by the business percentage. This result is then reduced by the amount of the reimbursement. The resulting amount is their income tax deduction. ($500 x 80%) - $350 = $400 - $350 = $50 4 Subtract the actual deductible amount (step 3) from the hypothetical deductible amount (step 2). The resulting figure is the amount by which the taxable value of the fringe benefit may be reduced. $400 - $50 = $350 5 Finally, the taxable value of $350 may be reduced by $350. $350 - $350 = 0

9.4 A The 'otherwise deductible' rule and jointly provided expense payment fringe benefits

As described in section 9.4 , the 'otherwise deductible' rule only applies if the recipient of a benefit is the employee. The FBT law also contains a design feature so that expense payment fringe benefits provided jointly to an employee and an associate are deemed to be provided solely to the employee. In cases where the 'otherwise deductible' rule also applies, it will only apply to the employee's share of any deductible amount and specifically excludes the associate's share of any deductible amount.

If:	then:
the expense payment fringe benefit was provided, or a salary sacrifice arrangement relating to the benefit was entered into, before 7.30pm AEST on 13 May 2008	the previous law will continue to apply until 1 April 2009.
the expense payment fringe benefit was provided, or the salary sacrifice arrangement relating to the benefit was entered into, from 7.30pm (AEST) on 13 May 2008	the amended law applies.

Previous law

An employer could reduce the taxable value of an expense payment fringe benefit provided jointly to an employee and their associate in relation to an income producing asset owned by both the employee and their associate, to the extent that the asset is applied to produce assessable income by both persons (unadjusted notional deduction).

Amended law

You must adjust the taxable value of a fringe benefit determined under the previous law (unadjusted notional deduction) by only allowing the employee's share of the deduction.

That is, the otherwise deductible amount is calculated as:

Unadjusted notional deduction x employee's percentage of interest, where:

• the unadjusted notional deduction is the deduction calculated as if the amended law did not apply
• the employee's percentage of interest is the employee's (not the associate's) interest in the asset
  • which relates to the expense payment fringe benefit, and
  • is applied or used for the purpose of producing assessable income of the employee.

Example: previous law applies An employee and his wife jointly own a rental property, each with a 50% interest. The rental income from the property is $20,000 and the associated deductible expenses are $10,000. The property is available for rent during all of the FBT year. The employer reimburses the employee and his wife for the rental expenses ($10,000) on the 31 March 2008. There are no employee contributions made by the employee. The 'otherwise deductible' rule applies and that taxable value can be reduced to nil (that is, by both the employee's and their spouse's interest in the deductible rental expenses).

Example: amended law applies If the expenses are reimbursed on 1 June 2008, the 'otherwise deductible' rule would still apply, but the taxable value could only be reduced by the employee's share of the deductible rental expenses - that is, $10,000 x 50% = $5,000.

9.5 Substantiation requirements

Where you use the 'otherwise deductible' rule, you must have certain documentation to substantiate the extent to which the expense payment would have been 'otherwise deductible' to the employee. You must obtain the documentation from the employee before lodging the relevant FBT return or, if you don't have to lodge a return, by 21 May. Where the documentation is a declaration by the employee, it must be in a form approved by the Commissioner.

Travel diary

A 'travel diary' is a diary or similar document that must be obtained from the employee where:

• the employee's expense is incurred for travel within Australia for more than five consecutive nights and the travel is not exclusively for performing employment-related duties (the fact that the business travel requires the employee to stay away over a weekend will not, in itself, mean the trip is not undertaken exclusively in the course of their employment), or
• the employee's expense is incurred for travel outside Australia for more than five consecutive nights.

In determining whether a travel diary needs to be kept, you need to look at the number of nights the employee is away from home. The number of nights away from home includes transit time.

Example: travel more than five consecutive nights An employee lives in Brisbane and travels to Hawaii for work purposes. The employee's flight to Hawaii departs from Sydney. The employee leaves their home in Brisbane on 2 April, flies to Sydney, and departs for Hawaii on 3 April. The employee returns directly to Brisbane on 8 April. The employee is away from their home for six nights in total and would need to keep a travel diary. A travel diary shows the nature of each work or business activity, where and when it took place, the duration of the activity and the date the entry was made. If the provision of the expense payment or residual benefit is covered by an annual 'no private use declaration' (refer to section 20.3 of Fringe benefits tax exempt benefits), the requirement to obtain a travel diary will be waived. That is, if the expense payment benefit is subject to a consistently enforced prohibition on private use and which would result in a taxable value of nil, you will then be able to make an annual no private use declaration. Such a declaration would state that the benefits were provided only for employment related purposes and that there was no private portion.

Employee declaration

You must obtain an employee declaration except where:

• the employee's expense (other than an expense incurred in respect of a car they own or lease) is incurred exclusively in the course of performing employment-related duties (for example, protective clothing or tools of trade)
• there is a requirement to keep a travel diary
• the requirement to keep a travel diary is waived because the employee is a member of an international aircrew
• the provision of the fringe benefit is covered by a recurring fringe benefit declaration.

To obtain an Expense payment benefit declaration , refer to Declarations .

Recurring fringe benefit declaration

The requirement to obtain an employee declaration is waived if the provision of the fringe benefit is covered by a recurring fringe benefit declaration.

A fringe benefit is covered by a recurring fringe benefit declaration if:

• it is provided no later than five years after the day the declaration was made
• the deductible proportion of the benefit is not significantly less than the deductible proportion of the benefit for which the declaration was first provided (a difference of more than 10 percentage points is regarded as being significant)
• it is 'identical' to the fringe benefit for which the declaration was first made.

Benefits are to be treated as being identical if they are the same in all respects except for any differences that:

• are minimal or insignificant
• relate to the value of the benefits, or
• relate to the deductible proportion of the benefits.

A recurring fringe benefit declaration is automatically revoked by a later declaration made for an identical benefit. This means that the earlier declaration applies to the first benefit and to any identical benefits provided before the later declaration was made. The later declaration applies to the benefit for which it was provided and to any identical benefits provided subsequently.

Example: recurring fringe benefit declaration An employer regularly reimburses an employee for the cost of home telephone expenses. This is an expense payment fringe benefit. The employee gives the employer a recurring fringe benefit declaration which specifies that the deductible proportion of the expenses is 80%. The declaration will cover all further reimbursements in relation to telephone costs over the next five years if the employment-related use of the telephone is not less than 70%. If the employment-related use of the telephone drops to less than 70%, another declaration is required. To obtain a Recurring expense payment fringe benefit declaration , refer to Declarations .

9.6 Reduction in taxable value where an expense that would have been deductible to the employee is incurred in relation to a car

Where an expense payment fringe benefit is provided in relation to a car owned or leased by the employee, there are special rules for determining how much, if any, of your expenditure would have been otherwise deductible to the employee.

These special rules are actually three different methods of calculating the amount of the expense that hypothetically would have been income tax deductible to the employee (that is, step 2 in the four-step procedure explained in section 9.4 ). The differences arise from the extent to which the car is used for business or employment-related purposes, and/or the type of evidence available to substantiate that use.

The first method is substantiated by means of log book records and/or odometer records. The second and third methods are only substantiated by the use of employee declarations.

For full details about applying the 'otherwise deductible' rule and the Employee's car declaration, refer to Employee cars - applying the 'otherwise deductible' rule .

The employee declaration referred to in section 9.5 is not suitable for an expense incurred in relation to a car.

9.7 Other reductions in taxable value

A number of fringe benefits attract concessional treatment. The concession is a reduction in the taxable value of the fringe benefit that results in a reduced amount of FBT, or even no FBT, being payable.

You calculate the taxable value of an expense payment fringe benefit in accordance with the valuation rules explained in sections 9.2 and 9.3 . Where the 'otherwise deductible' rule applies, you then reduce the taxable value as explained in section 9.4 .

If the fringe benefit is of a type that attracts any of the concessions listed below, you may reduce the taxable value further. In some instances, special conditions must be satisfied before the concession applies - for example, keeping certain records.

The following is a list of reductions that may apply to expense payment fringe benefits:

• in-house fringe benefits - tax-free threshold
• remote area residential fuel
• remote area housing assistance
• remote area holiday transport
• remote area home ownership schemes
• overseas employment holiday transport
• relocation transport - where transport is by employee's car
• relocation - temporary accommodation and meals
• employment interviews and selection tests - where transport is by employee's car
• occupational health and migrant language training - where transport is by employee's car
• living away from home - food provided
• entertainment expense payments
• overseas employees - education of children.

For details of the reductions, refer to Reductions in fringe benefit taxable value .

9.8 Exempt expense payment benefits

The following is a list of exemptions that may apply to expense payment fringe benefits:

• no-private-use declaration
• living away from home accommodation
• car expenses - expense payments
• employment interviews and selection tests - transport
• relocation - removal and storage of household effects
• relocation - engagement of a relocation consultant
• relocation - sale or acquisition of dwelling
• relocation - connection or reconnection of certain utilities
• living away from home - leasing of household goods
• relocation - transport
• motor vehicle parking
• newspapers and periodicals
• compensable work-related trauma (including workers' compensation insurance cover)
• travel in a foreign country to obtain medical treatment
• travel for compassionate reasons
• occupational health and migrant language training
• emergency assistance
• minor benefits
• long service awards
• safety awards
• Australian Traineeship System
• provision of certain work-related items
• membership fees and subscriptions
• taxi travel
• provision of certain non-entertainment meals.

For details of the exemptions, refer to Fringe benefits tax exempt benefits .

9.9 Common expenses reimbursed or paid for by employers

The following are some of the most common expenses reimbursed or paid for by employers and how they are treated for FBT purposes.

Car expenses

The payment or reimbursement of employee car expenses, such as registration, is an expense payment fringe benefit.

The taxable value is the amount you reimburse or pay, reduced by the 'otherwise deductible' rule (refer to section 9.4 ). There are special rules determining the otherwise deductible amount for car expense payment benefits (refer to Employee cars - applying the 'otherwise deductible' rule ).

Car expenses - reimbursed cents per kilometre

Reimbursement of car expenses on a rate per kilometre basis is not a fringe benefit, except in relation to remote area holiday transport (refer to section 19.2 of Reductions in fringe benefit taxable value) and overseas employment holiday transport (refer to section 19.3 of Reductions in fringe benefit taxable value). This is the exception to the general rule that reimbursement for expenses incurred by an employee gives rise to an expense payment fringe benefit.

The employee will need to show this reimbursement as income in their tax return. They can claim a deduction for any work-related car expenses and TaxPack has more information on the records they will need to do this.

Car parking expense payment benefits

Car parking fringe benefits arise when you provide car parking facilities for an employee and certain other conditions are met (refer to section 16.1 of Car parking fringe benefits).

By contrast, a car parking expense payment benefit may arise if an employee incurs expenditure on car parking, and:

• you subsequently reimburse the employee or you pay for the car parking expenses on behalf of the employee, and
• the car is parked at or near the employee's primary place of employment for more than four hours between 7.00am and 7.00pm on the day the expenses are incurred, and the car is used by the employee to travel between home and work on that day.

In the case of car parking expense payment benefit, the proximity to a commercial parking station and the daily fee charged by it are not relevant.

Exempt employers

The following employers who are otherwise liable to pay FBT are exempt from car parking expense payment benefits:

• a scientific institution (other than an institution run for the purposes of profit or gain to its shareholders or members)
• a religious institution
• a charitable institution
• a public educational institution
• a government body, but only in relation to an employee who is employed exclusively in, or in connection with, a public educational institution.

Health insurance premiums

The reimbursement or payment of employee health insurance premiums is an expense payment fringe benefit.

The taxable value is the amount you pay.

Home/desktop computer

This is an expense payment fringe benefit and the taxable value is the amount you reimburse or pay.

Even if the computer is used for work, the taxable value can't be reduced under the 'otherwise deductible' rule. This is because the computer is depreciated, not claimed as a one-off deduction in the year it was purchased.

Home mortgage

The taxable value of this benefit is the total amount you reimburse or pay.

Payments you make to an employee's mortgage account are an expense payment fringe benefit. However, payments made into an employee's home mortgage offset facility are not an expense payment fringe benefit, but rather a payment of salary and wages.

Home telephone

The reimbursement or payment of employee home telephone costs is an expense payment fringe benefit. To work out the taxable value, you need to know the business use of the telephone and apply the 'otherwise deductible' rule. The use of the 'otherwise deductible' rule must be supported by certain records (refer to section 9.5 ).

Laptop computer

This is an exempt benefit, if the expense payments in the FBT year are in relation to the employee's purchase of the one laptop computer.

The other types of exempt benefit that can arise from providing a laptop are as follows.

• Where you own the computer and give it to the employee to keep, this is a property benefit. This exemption is limited to one computer per employee per year.
• Where the computer belongs to you and the employee will have to return it, this is a residual benefit.

There are certain conditions that must be met for the exemption to apply (refer to section 20.8 of Fringe benefits tax exempt benefits).

If the employee receives a laptop as part of a salary sacrifice arrangement, they are entitled to an income tax deduction for the decline in value of the asset for the 2007-08 and earlier financial years, to the extent they use it for a taxable purpose.

The laptop must be purchased, or the contract for purchase must be entered into, at or before 7.30pm on the 13 May 2008 for the employee to be eligible for the decline in value. If the laptop was purchased, or the contract for purchase was entered into, after 7.30pm on the 13 May 2008, the employee is not entitled to a deduction for the decline in value of the laptop.

Mobile phone

If the mobile phone is primarily for use in the employee's employment, the benefit is an exempt benefit (refer to section 20.8 of Fringe benefits tax exempt benefits).

Personal credit card payments

This is an expense payment fringe benefit.

The taxable value is the amount you reimburse. This will be regardless of the items of expenditure incurred under the credit card agreement - that is, purchases of goods, services or cash advances. If the goods or services bought by the employee are work-related, the taxable value can be reduced by the 'otherwise deductible' rule (refer to section 9.4 ).

Home rental expenses

Unless the home is in a remote area, this is an expense payment fringe benefit. The taxable value of this benefit is the total amount you reimburse or pay.

If you incur the rental expenses and the premises are the employee's usual place of residence, the benefit is a housing fringe benefit (refer to Housing fringe benefits ).

If you incur the rental expenses and the premises are not the employee's usual place of residence, the benefit is a residual fringe benefit (refer to Residual fringe benefits ).

If you incur the rental expenses for an employee who is required to live away from their usual place of residence, the benefit is an exempt benefit (refer to section 20.4 of Fringe benefits tax exempt benefits).

Self-education expenses

This is an expense payment fringe benefit.

The taxable value is the amount you pay. If the self-education expenses are work-related, the taxable value can be reduced by the 'otherwise deductible' rule (refer to section 9.4 ). The use of the 'otherwise deductible' rule must be supported by certain records (refer to section 9.5 ).

Unlike when claiming an income tax deduction, for FBT you don't have to reduce self-education expenses by $250 when working out the otherwise deductible amount.

Higher Education Loan Program (HELP) charges are not otherwise deductible for the employee, and the full value is subject to FBT if paid by you. All HELP debt repayments and HECS-HELP student contributions in the form of upfront payments for Commonwealth supported higher education are not otherwise deductible for the employee. This means that the full value is subject to FBT if paid by you.

Taxi travel

Taxi travel is an exempt benefit if the travel:

• is a single trip beginning or ending at the employee's place of work, or
• arises as a result of sickness or injury to the employee.

Other non-work-related taxi travel generally gives rise to an expense payment fringe benefit. The taxable value is the amount you pay or reimburse.

More information

For more information, refer to:

• FEE-HELP and VET FEE-HELP - tax deductibility
• OS-HELP and tax deductibility
• Taxation Ruling
  • TR 92/15 - Income tax and fringe benefits tax: the difference between an allowance and a reimbursement.
  • TR 98/9 - Income tax: deductibility of self-education expenses.
• Taxation Determination
  • TD 93/90 - Income tax: does the 'otherwise deductible rule' apply to reduce the taxable value of fringe benefits provided to associates of employees?
  • TD 93/96 - Fringe benefits tax: does an employer have a liability under the Fringe Benefits Tax Assessment Act 1986 in relation to the payment of costs for a home telephone of an employee?

Changes and updates

The following tables detail any major changes and updates made to this chapter.

November 2013

Section	Changes and updates
9.3 In-house expense payment fringe benefits	Added in reference to chapters 17 and 18 regarding the changes to the valuation of in-house property benefits provided under a salary packaging arrangement from 22 October 2012.

Last Modified: December 2013

ATO references:
NO NAT 1054