NTLG FBT Sub-committee Minutes 12 September 1996

Venue: Taxation Institute of Australia, 7th Floor, 64 Castlereagh Street, Sydney

Attendees:

Peter Achterstraat	ATO (Chair)	Lynette McPhee	NIA
Annamaria Carey	TIA	Trevor Pascall	ATO
Ray Conwell	LCA	Andrew Purdon	ASCPA
Michael Evans	ICAA	Veronica Rempe	ATO
Margaret Gibson	ICAA	Andrew Stephens	ATA
Evan Lancaster	ATA	Amarjit Verick	ATO

Apologies:

Gavan Harkin	ATA
Gary Sebo	TIA
Sylvia Skeels	ATO

Secretariat:

Greg Wild	Australian Taxation Office
Telephone:	(060) 587706
Fax:	(060) 587499

^[H1]Disclaimer

Please note: NTLG - FBT Subcommittee agendas, minutes and related papers are not binding on the ATO or any of the other bodies referred to in these papers. While every effort is made to accurately record the views expressed, the wording necessarily represents a summary of statements of general position only, and care should be taken in interpreting those statements. These papers reflect the position at the date of release (unless otherwise noted) and readers should note that the position on any issue may subsequently change.

1 Opening of meeting, including any changes to the agenda

The chairperson, Peter Achterstraat. welcomed members to the meeting. Apologies were received from Gavan Harkin (ATA), Gary Sebo (TIA) and Sylvia Skeels (ATO).

As per agenda item 19.11 of the NTLG meeting of 3 September 1996, the chairperson advised that the Section 108 - shareholder loan account project would be discussed at this meeting of the FBT Subcommittee. This is listed for discussion under agenda Item 15 "Other business".

The chairperson welcomed Andrew Stephens (attending for Gavan Harkin) and introduced Trevor Pascall. Trevor is the tax counsel at the ATO's Parramatta office and will address the subcommittee on the Section 108 - shareholder loan account project.

2 Minutes of previous meeting of 13 June 1996

The minutes of the previous meeting were accepted without change.

3 Report on the FBT options for arranger provisions paper submitted to the Commissioner

The options paper prepared by the FBT subcommittee which provided 9 options for reducing the compliance costs that arise as a result of the arranger provisions in the FBTAA, has been referred to the small business deregulation task force. The task force's terms of reference include the examination of taxation compliance with particular reference to the administration of FBT. The task force is to report back to Government on revenue neutral measures to reduce the burden of paper work and compliance costs on small business.

The representatives of the professional bodies raised concerns about the application of the arranger provisions as set out in the ruling on meal entertainment - TR 96/9. It was noted that the ruling states "Where the client has no knowledge of the meal or does not consent to the meal being provided to the employee of the client, there is no fringe benefit provided under an 'arrangement' between the employer and the client". There was no guidance in the ruling as to how it could be determined when an employer (particularly an employer company) had knowledge and consented to the provision of meals to employees by third parties.

The ATO responded that if the employee who accepted the entertainment held a position in the organisation that enabled him or her to make a decision on behalf of the employer, then it was considered that the employer had knowledge and consented to the meal being provided.

The representatives of the professional bodies accepted that this statement provided some guidance but raised concerns about the practicality of setting systems in place that could record all these transactions given the vast number of situations and circumstances in which employees may be provided with meals by third parties.

There was a general recognition of the problems with the whole issue of benefits provided under an arrangement. This is the reason why the options paper was prepared.

It was suggested by the representatives of the professional bodies that the ATO might benefit by looking at the arrangements in place in certain large income tax exempt organisations to see if they have come up with some practical ways of dealing with the problem. The ATO will continue to look for any interim solutions that might apply while awaiting the outcome of the decision on the options paper and welcomed further suggestions from the professional bodies that may assist.

4 Items carried over from previous meetings

4.1 Public Benevolent Institutions (230395/4.2)

- review of Public Benevolent Institution (PBI) status of public health organisations following the decision in Metropolitan Fire Brigades v FC of T.

It was pointed out that this is a review of the PBI status of government public hospitals only. It is not a general review of Public Benevolent Institutions. The review has come about because of the restructuring of a number of State Government health systems. The ATO is presently consulting with Government health authorities and hospitals to determine their current organisational structures. The review is expected to take about six months.

4.2 FBT lodgment program (230395/8)

Consolidated group FBT return (230395/10)

FBT year end - 30 June or 31 March (230395/14.3)

Substituted accounting period for FBT (230395/5.1)

A project team was formed in the ATO's Newcastle office to address each item. A discussion paper has been prepared and the ATO's views will be forwarded to the small business deregulation task force. The paper will not purport to say what tax agents or employers want in this regard. It will only say what the ATO internal systems can do.

The TIA has conducted a survey of their members. The ICAA also submitted a report to the project team. The representatives of the professional bodies considered that these reports provide a good sample of the requirements of agents and accountants.

4.3 FBT tax agent visits (FBT TAV) (150695/4.1)

The ATO will continue to provide feedback on the tax agent visits. A full report will be given at the next meeting.

4.4 Penalty for failure to furnish return (150695/11)

The ATO's previously advised review of penalty policy is continuing. Expected completion date is September 1996.

4.5 Report on the FBT : options for arranger provisions paper submitted to the Commissioner (140396/3)

Details already provided at agenda item 3.

5 FBT cell report

Since the last NTLG FBT subcommittee meeting members of the FBT specialist cell held a meeting from 21-23 August at Albury. The next cell meeting is scheduled for 16-18 October 1996 at Melbourne.

A number of major issues are being currently addressed by the cell, which include the arranger provisions, the interaction between FBTAA and ITAA including cash incentive payments, PBIs and public hospitals, shareholder loan accounts, review of lodgment dates and journal entries including employee contributions.

There is also an ongoing input and reviewing role for the cell in respect of AAT and court cases and decisions upon the administration of the FBTAA system. Input has included the appeal by the taxpayer in Westpac Banking Corporation v FC of T 96 ATC 4366 (waived loan establishment fees) and the decision to discontinue AAT Case 2/96, 96 ATC 131 on minor benefits.

The cell has also had input in draft rulings on car parking and business premises.

6 Issue of draft/final TD/TR

(since the meeting of the FBT subcommittee on 13 June 1996)

Taxation determinations

TD 96/34 issued 31/7/96 - not previously issued as a draft

Fringe benefits tax: where an employer purchases a car free of sales tax, or leases a car which has been purchased by the lessor free of sales tax, how is the sales tax amount determined for the purposes of the statutory formula method of calculating car fringe benefits?

Draft taxation determinations

TD 96/D6 issued 16/6/96

Fringe benefits tax: are contributions made by an employer in cash or in kind to a staff social club subject to fringe benefits tax (FBT)?

7 News from the ATO

7.1 ATO Business 2000

The chairperson gave a brief report on the ATO Business 2000 proposal and its effects on the administration of FBT.

7.2 Electronic lodgment of FBT returns

The chairperson announced that it is anticipated that ELS facilities for FBT returns will be available for 1997 lodgments.

Representatives of the professional bodies advised that it was unlikely that tax practitioners will be able to have systems in place to take advantage of ELS facilities in the 1997 FBT year. It was considered by the representatives of the professional bodies that ELS for FBT was not one of the most urgent priorities. They also indicated a preference for implementation in the 1998 year. They advised that at present there is no commercial electronic product available for FBT to link accounting programs to ELS.

The representatives of the professional bodies encouraged the ATO to liaise with software producers to see if software can be developed that will produce an electronic FBT return for transmission through the ELS system.

Personalised FBT return forms for the 1997 year will be sent to agents and employers as in past years.

(Developments subsequent to meeting.

The ATO has sounded out potential software developers. There was quite a level of interest from software developers.

Due to concerns expressed by the professional body representatives, the ATO will give a special FBT presentation at the Software Developer Forum scheduled for 25 October 1996.)

7.3 Budget changes

A 100% reduction in the taxable value of remote area housing fringe benefits provided by employers who are primary producers will apply from 1 April 1997.

Under the existing law the taxable value of all remote area housing fringe benefits which satisfy a number of conditions is reduced by 50%.

The following press release was handed out to members :

Press release - Fringe benefits tax: remote area housing

Election commitment: fringe benefits tax exemption for remote area housing in the primary production sector

The Government will be implementing its election commitment to provide a fringe benefits tax (FBT) exemption for remote area housing provided by employers in the primary production sector (as defined in the Income Tax Assessment Act 1936).

The exemption will be provided in recognition of the special circumstances of primary industry in remote areas and will be available from the FBT year commencing 1 April 1997.

The exemption will have the same geographical coverage as the existing 50 per cent FBT housing concession for remote area employers. That is, an area is remote if it is at least 40 kilometres from a population centre of 14,000 or more and at least 100 kilometres from a centre of 130,000 or more and outside the areas of Australia described in the income tax law as zone A and zone B. In the specified zone A and zone B areas, a remote area is one that is at least 40 kilometres from a population centre of 28,000 or more and at least 100 kilometres from a centre of 130,000 or more.

Other conditions that apply to the existing remote area housing concession will also apply, including that it is necessary for an employer to provide residential accommodation to an employee.

The Government has already acted to implement other FBT election commitments.

On 27 June, the Government introduced legislation implementing its commitment to provide an FBT exemption for minor benefits of less than $100 (where the benefits also meet the other conditions under the law). This amendment will help to reduce compliance costs for employers who provide minor benefits to employees and will ensure that employers who only provide irregular minor benefits of less than $100 avoid paying FBT altogether.

In relation to other FBT matters, the Prime Minister announced the establishment of the small business deregulation task force on 2 May this year, which is to report back to the Government on revenue neutral measures to reduce the burden of paper work and compliance costs on small business. The task forces terms of reference include the examination of taxation compliance with particular reference to the administration of FBT and a range of other taxes. The Government will give consideration to other FBT election commitments after the task force has reported; including entertainment, car parking and the issue of aligning the FBT and income tax years.

Implementation of these election commitments is proof of the importance the Government places on addressing employer concerns with FBT compliance costs.

20 August 1996

CANBERRA

7.4 Audit projects/results

A summary of the audit statistics for the year ended 30 June 1996 of those audit cases where there was a FBT adjustment was provided to members. Whilst adjustments were made across all fringe benefit types, the largest number of adjustments were made to :

Loan fringe benefits - 46% of adjustments made

Car (statutory formula) - 21% of adjustments made, and

Expense payment fringe benefits - 17% of adjustments made.

The representatives of the professional bodies said that the statistics provided were far too general to give much guidance. It would be more helpful if more comprehensive statistics could be produced giving, for example, the total number of cases audited and the number of adjustments made in those audits. It would also be useful to know the types of taxpayer by size (e.g. small business - large business). Statistics that show, in general, the groups where most adjustments were made and the areas of FBT where the most mistakes were made would provide the kind of information that is needed to target the educational needs of employers.

The ATO agreed to examine the suggestion.

7.5 The small business motels project:

A summary of the results of this project was provided to members (enclosed as attachment A).

The representatives of the professional bodies asked if there was any data to explain why the compliance rate for trusts was so much lower than for companies. The question was raised as to the correct treatment of housing benefits when provided to beneficiaries of a trust. Should this be treated as a benefit provided in respect of employment or as a benefit provided as a beneficiary entitlement under the trust? The ATO replied that this would depend on the specific facts of the particular case.

The professional body representatives also questioned the high percentage of adjustments attributed to "lack of reasonable care". Was this due to poor business systems in place; - did it occur in areas of FBT that are particularly difficult; - was it more common in small business rather than large business? If data was available to provide this information then agents could focus on specific educational needs of their clients. It was suggested that this data would also be useful for the ATO to focus its educational activities on the areas of need.

The ATO said that it will provide a summary of the findings on the project and a list of common errors as per the handout to motel industry associations for dissemination in their industry journals.

The ATO sought views of professional bodies as to other possible industry projects. Suggestions were : - large tax-exempt bodies and industries where particular benefits are prevalent.

7.6 FBT non-lodgment project - tax agent visits.

The level of activity on this project has been significantly scaled down. A full report will be provided at the next meeting.

7.7 School fees payment project

The school fees payment project was initiated to ascertain whether or not the payment of school fees made by family companies and trusts to private schools were treated correctly by the paying entity for FBT purposes.

The project involved the examination of the school fees records for a number of private schools and the extraction of details of the payment of school fees made by family companies and trusts. Questionnaires were sent to a random sample of payers to ascertain the treatment of the payments in the accounting records of the paying entity.

Information from the project reveals that in most cases examined, the payment of school fees was offset by a journal entry to loan accounts or beneficiary accounts by a similar amount to the payment.

Although there were a few cases that required an adjustment, including some with income tax adjustments e.g. undisclosed receipts, at this stage it is not intended to extend the project in the 1996/97 year. However, auditors will continue to examine these type of payments as part of their normal enforcement activities.

8 Identification and progression by the subcommittee of ways to reduce costs of compliance and to further streamline the operation of FBT

To continue as an open item on the agenda for the submission of items from members.

The chairperson also encouraged submissions to the small business deregulation task force.

9 Social club contributions (LCA)

The LCA has submitted the following item :

Would the ATO please elaborate on how it came to the conclusions expressed in TD 96/D6 regarding employer contributions to a staff social club. The LCA believes the draft determination is flawed, as is discussed below.

When is the benefit provided?

According to its definition, a "fringe benefit" does not arise until such time as a benefit is provided to an employee (or associate). The definition of "provide", in relation to a benefit, includes allow, confer, give, grant or perform.

In most, if not all cases, prior to a staff social club actually putting employee contributions to use, no employee (or associate) has been provided with a benefit? At the point of subscription to the social club, nothing has been allowed to, conferred on, given to, granted to or performed for an employee unless under the constitution of the club individual employees have a vested interest in the club funds.

Depending on its constitution, the social club may even decide to use the funds in a manner that does not result in any benefits to employees (or associates), for instance, a donation to charity, the provision of benefits to non-employees/clients or benefits that would be otherwise deductible.

The mere fact that a social club has a specific purpose which may be social or recreational cannot affect this timing issue of when a benefit is provided.

Is the benefit subject to FBT at all?

Until such time as benefits have been provided to employees (or associates), the employer will not know whether the benefits are to be subject to FBT at all. Numerous exemptions from FBT exist that may apply in circumstances typical to social clubs. For instance, the minor fringe benefit exemption (s 58P), the exemption for property consumed by employees on a working day on the business premises (s 41) and the work-related counselling exemption (s 58M).

Therefore, the LCA submits that no liability to fringe benefits tax arises at the point of subscription and it is incorrect as a matter of law to rule that employers have a liability to pay FBT on the full value of contributions, when part of that contribution may never be taxable as a fringe benefit.

Exempt contributions?

The draft determination considers the minor fringe benefit exemption in respect of employer contributions. However, as discussed above, the contributions themselves are not benefits. In addition, there is no mention of whether the amount of each contribution should be apportioned across the number of employees to determine whether it is small in value! It may well be that the average contribution is below the new threshold of $100.

The ATO has, on a preliminary review of the comments received, decided to withdraw draft taxation determination TD 96/D6. The above comments will be fully considered in conjunction with other submissions received when drafting the replacement advice.

10 Exemptions from FBT for items used etc on employer's premises (ICAA)

The ICAA has submitted the following item :

Can the ATO please explain how they will interpret the exemptions contained in section 41, 47(2) and 47(3) of the Fringe Benefits Tax Assessment Act in the light of the view expressed in Draft Tax Ruling TR 96/D6 that when a business does not have exclusive proprietary rights or exclusive occupancy rights in respect of premises, those premises would not be regarded as business premises of the employer.

It would appear that the ATO view in TR 96/D6 will affect not only the provision of in-house child care and recreational facilities but also the provision of :

§ seats in a staff room

§ toilets

§ bathroom facilities

§ food or drink vending machines

§ telephones

§ tea or coffee making facilities

§ tea, coffee or other beverage

§ sandwich or other light lunch

§ biscuits

§ water dispensers

§ water

§ photocopiers

§ facsimiles

§ computers.

The ICAA submits that the provision of these items or the use of the facilities may no longer be exempt where they are provided by the employer on premises not exclusively occupied by the employer.

The ICAA does not consider that this result was intended by the legislature.

The ICAA has advised that typical examples where this interpretation may cause a problem include:

i) Serviced offices (i.e. where an employer pays a fee, usually under a licensing arrangement, for the use of the premises and associated services to another person, for use in carrying on its business operations).

ii) Copy/printing service centre (e.g. a contracted copy centre) is situated in a section of business premises leased by another employer, and provides copy/printing services to that employer. In these circumstances, the premises occupied by the copy centre would likewise not be treated as business premises of the copy centre according to the ATO's interpretation in the draft ruling.

iii) A contracted caterer operating in the premises of the contacting entity; long term barter, or contra, arrangements whereby one employer operates on the premises of another entity without necessarily having risk or control of the premises. This arises in clubs, hotels, company canteens, dining rooms and the like. A common example may well be the dining room and bistro caterers in the Federal parliament house.

iv) At trade shows, a company will lease certain floor space and will be provided with telephone, facsimiles etc.

v) Similar consequences follow at such places as Flemington markets.

The ICAA submits that in all cases set out above, if the view in TR 96/D6 prevails, the employees would be required to provide declarations to the extent any telephone, facsimiles etc were used for business purposes. It follows that any private use of telephones, photocopiers etc will be subject to the FBT as well as the use of toilets, showers and the provision of tea , coffee etc.

The meeting discussed the issue of the validity of the legal interpretation of the definition of "business premises" set out in draft Taxation Ruling TR 96/D13 and the problems caused by the exclusive occupancy test. The ATO took note of the points raised above and will consider these in the finalisation of the draft Taxation Ruling TR 96/D13.

11 Fringe benefits tax registration (ASCPA)

The ASCPA has submitted the following item :

Foreign representative offices ("the office") located within Australia are not required to lodge income tax returns in Australia as they are neither residents for income tax purposes nor do they derive Australian sourced income.

However, should the office provide fringe benefits to its employees in Australia, the office will be required to register as a employer for FBT purposes. In doing so, the employer must also apply for a tax file number ("TFN") at the same time.

This TFN registration subsequently initiates repeated requests from the ATO to lodge an income tax return.

The ASCPA requests consideration be given to a registration procedure to be put in place such that an FBT TFN only be provided to such employers.

The ATO advised that applications for registration forwarded direct to FBT for such employers will result in the issue of a FBT only TFN.

For other TFN registration applications received, procedures are in place, as part of normal proof of identity requirements where the employer is identified as not being required to lodge an income tax return, to bar demands to lodge. It is important, however, that applications for income tax exempt registrations are made on the "Tax File Number Application / Enquiry - Other Organisation" form. The form reference is NAT 1930.11.94. A redesign of TFN registration forms is in course to also assist in these cases.

Please advise details of problem cases to the relevant ATO office FBT team for necessary corrective action.

12 Expenditure incurred for travelling clients meals (ASCPA)

The ASCPA has submitted the following item :

Pursuant to paragraph 71 and 82 in Income Tax Ruling TR 96/9, where an employee and a client are both travelling and dine together, any meals consumed by either party would not amount to meal entertainment as long as there is no other form of entertainment involved.

Any meals consumed by the travelling parties would be considered to be sustenance and accordingly would no longer be defined as meal entertainment.

Further, paragraph 86 of TR 96/9 states that where an employee and client are travelling separately, any meals consumed by either party would still not amount to meal entertainment. In addition paragraph 86 also states that:

"The important point is that both parties are travelling. The fact that the employee and the client dine together does not change the character of the meals consumed by each."

Employee travelling dines with non-travelling employee

Where a client is travelling in the course of performing their work duties, any meals consumed by them would constitute sustenance rather than entertainment. This would even be the case where either the employee or client paid for the meal.

Issue for consideration

Where a taxpayer who is not travelling has paid for their own meal and their client's meal who is travelling in the course of business, is the client's portion of the meal considered to be sustenance and not meal entertainment (assuming no floor show etc)?

The ASCPA is of the opinion that the client's meal is still sustenance and should therefore be deductible.

ATO Response:

The ATO agrees with this view. Taxation Ruling TR 96/9 provides that the cost of meals provided to a person who is travelling in the course of employment where that travel includes an overnight stay is not denied a deduction under subsection 51AE(4) of the ITAA because the meal does not constitute entertainment. This is the result irrespective of who incurs the expenditure. As the client's meal is not meal entertainment the cost is deductible where the tests in subsection 51(1) of the ITAA are met. The cost of the employee's meal is also deductible where it is a cost incurred in providing a fringe benefit (section 51AE(5AA).

13 Remote area transport arrangements (ASCPA)

The ASCPA has submitted the following item :

Section 47(7) of the Fringe Benefits Tax Assessment Act 1986 ("FBTAA") provides a FBT exemption for employer provided transport between an employee's usual place of employment (located on an oil rig or in a remote area) and nearby residential accommodation that is provided to the employee (by the employer, an associate of the employer or a third person under an arrangement with the employer or a associate).

To qualify for the exemption :

§ the employee must regularly work for a number of days and have a number of days off;

§ on completion of the working days, the employee must regularly travel from that usual place of employment to his or her usual place of residence and, on completion of the days off, must regularly return to his or her usual place of employment; and

§ having regard to the location of the usual place of employment and the location of the employee's usual place of residence, it must be unreasonable to expect the employee to travel between those places on a daily basis.

Practical application of Section 47(7) of the FBTAA

It is clear to the ASCPA that this exemption is likely to apply where an employee is required to work in a remote area on a fly-in fly-out basis and that accommodation is provided to employees at or adjacent to a mine site during the employees "on period".

This ASCPA submission is however requesting clarification as to whether this exemption would apply given the following circumstances :

Example 1

Employees reside in a town located in a remote area and adjacent to a mine site. The accommodation is provided to the employees by their employer and this accommodation represents the employees' usual place of residence.

The employees' rosters requires the employees to work for 7 days after which the employees receive 2 days off.

The employees' usual place of residence is located (say) 50km from the mine site and, given the state of the access road and the fact that there is no accommodation available at or closer to the mine site, the employer provides transport (in a 4 wheel drive) for the employees between the employees' home and the mine site each day (including on the days when the on and off period begins and ends). Given these circumstances, it could be argued that having regard to the location of the employees' home and the work site, it would be unreasonable to expect the employees to personally arrange travel between those places on a daily basis.

Example 2

The same facts as in example 1 except that given the nature of the employees' job, the employees can only work at a particular site for 3 months in the year and therefore does not have a "day off" during that 3 month period. The next year at the same time (after the employee has 9 months off), the employee resumes employment with this employer and works for another 3 month period.

Example 3

An employee's usual place of residence is in town A. The employees works (on a fly-in fly-out basis) at a mine site in a remote area adjacent to town B. The employees' work roster is a 5 week on, 1 week off cycle (such that the employee is considered to be living away from home during this period). The employer provides accommodation to the employee at town B which is located 25km from the mine.

Given the location of the mine site, the employer provides transport by plane between town A and town B at the beginning and end of the "on period". In addition, given the proximity of the mine site to town B, the employer also provides transport for employees' in a 4 wheel drive vehicle between town B and the mine site on a daily basis.

It would be unreasonable for employee's to arrange their own transport between town A and town B and town B and the mine site.

In this example, clarification is sought on the FBT treatment of the transport costs between town B and the mine site.

The ASCPA is of the opinion that the wording of Section 47 (7) of the FBTAA was intended to cover all the above mentioned examples and accordingly, provide an FBT exemption for employer provided transport between an employee's usual place of employment and nearby residential accommodation.

ATO Response:

The ATO advised that subsection 47(7) provides an exemption from FBT for transport provided to employees who work in remote areas and on oil rigs etc when the transport is between the employee's usual place of residence and usual place of employment. The provision requires that the employees be away from their usual place of residence for a number of days. The exemption is limited to cases where "having regard to the location of the usual place of employment and the location of the employee's usual place of residence, it would be unreasonable to expect the employee to travel between those places on a daily basis." The relevant test relating to this limitation is whether it is unreasonable to expect the employee to travel on a daily basis and not whether it is unreasonable for the employee to personally arrange the travel.

Examples 1 & 2

These examples cover situations where the employee is travelling between their usual place of employment and their usual place of residence on a daily basis. The exemption cannot, therefore, apply in these situations.

Example 3

Travel between the mine site and accommodation at town B would not be exempted by section 47(7) because, amongst other reasons, the accommodation is not the employee's usual place of residence. The provision of travel between town A and town B, at the completion and commencement of work cycles, would be exempt under subsection 47(7).

14 Minor benefits (ATA)

The ATA has submitted the following item :

Section 58P FBTAA : Exempts minor benefits from FBT where :

The notional taxable value of the minor benefit in relation to the current year of tax is "small"; and

Having regard to the following it would be unreasonable to treat the benefit as a fringe benefit :

§ frequency & regularity with which similar or identical benefits are provided;

§ sum of values of such benefits provided in the year;

§ practical difficulty for employer in determining value of such benefits; and

§ circumstances in which such benefits are provided - including whether benefits are provided otherwise than wholly or principally by way of a reward for services rendered, or to be rendered by the employee.

The ATA advises that there have been two recent events affecting the definition of "minor benefits" contained in S58P of the FBTAA:

1. A proposed amendment to S58P [Taxation Laws Amendment Bill (No 2)1996] omits the word "small" above and substitutes the words "less than $100". The result of this amendment is that a minor benefit, as long as it is provided irregularly and infrequently etc., is one that costs less than $100. This Bill is still in the House of Representatives and is to be debated after Parliament resumes on 20 August 1996. There is a strong expectation that the Bill will be passed by Parliament.

2. It was held in AAT case 2/96 - Multigroup Distribution Services Pty. Ltd., that less than 48 taxi trips per annum was "infrequent and irregular" and therefore the taxi benefits were "minor benefits". The decision in Case 2/96 is on appeal, however the AAT's decision is "authority" [s222C(4) of the ITAA] to adopt a "reasonably arguable position" pursuant to s 222C(1) of the ITAA.

The combination of these two events leads the ATA to the conclusion that benefits with a value less than $100 provided to employees less than 48 times per annum are exempt from FBT pursuant to sec 58P of the FBTAA.

Questions

It is therefore requested that the ATO confirm that the following benefits would be exempt from FBT as minor benefits :

1. An employee is provided with taxi travel on an irregular basis during daylight hours, less than 48 times per year with a value of less than $100. (Due to the exemption provided by section 58Z of the FBTAA, it is only the employee's travel between work and home which commences after 7.00am and before 7.00pm that is subject to FBT).

2. An employee is provided with restaurant meals, on 20 occasions during the FBT year with a per head value of less than $100 each.

3. An employee attends social functions provided by the employer on 20 occasions during the year with a value of less than $100 each.

4. An employee is provided with entertainment, in addition to food and drink, whilst travelling, on 20 occasions during the year with a value of less than $100 each time.

5. An employee is reimbursed licence renewal fees of $98 once every 5 years.

6. An employee is provided with car parking benefits on 20 occasions during the year.

7. An employee receives prizes on 10 occasions during the year with a value of less than $100 each.

8. An employee receives property benefits on 20 occasions during the year with a value of less than $100.

9. A company car is normally garaged at the employer's premises, but on occasion an employee is allowed to take it home and uses it for private purposes. The value of each usage averages less than $100.

The ATA asks:

Assuming that the provision of the benefit in each is not in respect of a salary package, is not by prior arrangement with the employer, can the ATO confirm that the benefits will constitute minor benefits for the purposes of section 58P of the FBTAA?

The ATA view:

Section 58P sets out the conditions for exemption as a minor benefit. Basically, these are that :

§ the notional taxable value is small;

§ it would be unreasonable for the benefit to be treated as a fringe benefit;

§ the benefit is not an exempt benefit.

The ATA is of the view that provided the benefits provided are not part of an arrangement or salary package, are not provided in conjunction with another benefit, and are infrequent, irregular etc., the benefits would be treated as minor benefits under section 58P.

Note : The purpose of this item is to stimulate debate on the issue. There is considerable uncertainty in the business community about the application of section 58P and because the value involved in some businesses are potentially very large because of the $100 value, there is a need to explain the ATO view of the law.

ATO Response:

The ATO advised that the Commissioner had decided not to prosecute the appeal to the Federal Court in Case 2/96 on the advice of counsel. The ATO also advised that the case raises a narrow issue and can be confined to its facts.

Section 58P decisions depend very much on the facts of each case. It is necessary to consider all the tests in section 58P of the FBTAA. It is also necessary to have regard to each of the tests in paragraph 58P(1)(f) and apply them to the particular facts of the case and to then conclude that it would be unreasonable to treat the minor benefit as a fringe benefit.

The representatives of the professional bodies expressed concern with the administration of the minor benefits exemption particularly the amount of time needed to determine if the requirements are met verses the revenue collected.

15 Other business

15.1 Section 108 - shareholder loan account project

This issue was referred to the FBT subcommittee meeting from the NTLG meeting of 3 June 1996.

The chairperson summarised the project to date.

Phase 1 of the shareholder loan account project was the research phase and is now complete. The objectives of phase 1 were to determine whether there is a problem in the interaction of the FBT and income tax systems such that there is a revenue loss in respect of private company shareholders/directors and/or trust beneficiaries drawing company/trust funds or profits for personal use through interest free or low interest loan accounts and to determine the reasons for that problem.

During phase 1 of the project, a preliminary survey of employers chosen from a base of 400,000 was conducted. A larger survey was conducted from April to August 1995 in which 4200 questionnaires were sent out. This was followed by 684 individual case audits/examinations which were carried out from July 1995 to April 1996.

The project team has developed the following broad statistical picture of the private company and trust populations.

		Private Companies	Trusts
	Debit Loans* to:
		Natural Persons (DNPs)	22.2%	17.3%
		Non-natural Persons (DNNPs)	9.3%	3.9%
	Credit Loans only from:
		Natural Persons (CNPs)	42.2%	40.5%
		Non-natural Persons (CNNPs)	5.5%	4.9%
	No Loans (NLs)	20.8%	33.4%
	Total	100.0%	100.0%

* In these cases, there may also be credit loans to other persons

22.2% of private companies would extrapolate to approximately 90 000 entities and 17.3% of trusts to approx 50 000 entities which have debit loans to natural persons.

The representatives of the professional bodies expressed concerns that they had experienced situations where auditors who were working on this project had approached the issue of loan accounts with a narrow view i.e. they had taken the view that FBT applied to the interest free loan and would not consider other options such as that the loan was provided to a shareholder or beneficiary and was not provided in respect of employment. This is contrary to the policy set out in MT 2019.

The professional body representatives said that in most cases loans provided to the shareholders of small family companies, where the shareholders are the only employees, will not be provided 'in respect of employment'. This is because the shareholders use the company as a bank account and this is not a benefit that would be provided to an arms length employee.

The ATO did not agree that, just because a person was a shareholder/beneficiary and similar loan benefits would not be provided to arms-length employees, meant that the loan could not be in respect of employment. Other factors must be considered, e.g. inadequate remuneration for services provided.

The ATO advised that all the facts of each case need to be considered and weighed-up to determine the tax consequences of the particular case. As a guide, cases should be examined in the following order :

(i) is the loan a dividend under subsections 6(1) and 44(1) of the ITAA; or

(ii) does section 108 of the ITAA apply; or

(iii) is the loan a fringe benefit under the FBTAA; or

(iv) none of the above.

The representatives of the professional bodies said that the ATO should make sure that the policy set out in MT 2019 is adhered to and that its auditors are well trained in that policy before they embark on audit projects. It should also ensure that auditors have a very good understanding of commercial reality with regard to small business.

The ATO agreed that it would ensure that training provided to auditors on this project covers the points set out above.

The ATO is currently considering the value of a follow up audit program. The professional body representatives suggested that the ATO could run a test case on this issue which would give more guidance on the correct treatment of interest free loans provided to shareholder/employees and beneficiary/employees. The ATO indicated it would look into this option.

The professional body representatives also raised concerns with the loan account question at label X on the 1996 Company Income Tax return form. They indicated that there was a need to clarify the meaning of the term 'natural person'. Does this apply to a person acting in the capacity of a trustee? The ATO confirmed that the term did include a natural person acting in that capacity.

The ATO agreed to provide members with a brief paper on the project. This is enclosed as attachment B.

15.2 Discussion paper - review of ATO joint liaison forums, local tax liaison groups and forum protocols

In 1995 the NTLG requested a review of the various consultative forums sponsored by the ATO. As part of the review process a discussion paper has been produced which aims to create discussion and feedback on suggestions for changes to the way the local forums operate. Copies of this paper were given to members for consideration. Responses may be provided via the FBT subcommittee secretariat or direct to Mark Neal at the professional associations liaison unit.

16 Close of meeting

Next meeting will be held on Thursday 12 December 1996 at NIA, 371 Flemington Road, North Melbourne. Final date for submission of agenda items is 14 November 1996.

^[H32]Summary of action items carried forward

Agenda item	Topic	Action required
230395/4.2	Public Benevolent Institutions - review of PBI status of public health organisations following the decision in Metropolitan Fire Brigades v FC of T.	Review is limited to PBI status of Public Hospitals. The ATO is presently consulting with State Government health authorities and hospitals re their current organisational structures. The review is expected to take about six months.
230395/8 230395/10 230395/14.3 150695/5.1	FBT lodgment program. Consolidated group FBT return. FBT yr end - 30 June or 31 March. Substituted accounting period for FBT.	A Project Team has been formed in the ATO's Newcastle office to address each item. A discussion paper has been prepared and the ATOs views will be forwarded to the small business deregulation task force. The paper will only say what the ATO internal systems can do.
150695/4.1	FBT tax agent visits.	The ATO will continue to provide feedback on the tax agent visits. A full report will be given at the next meeting.
150695/11	Penalty for failure to furnish return.	The ATO's previously advised review of penalty policy is continuing.
140396/3	Report on the FBT 'arranger provisions' options paper.	Options paper referred to the small business deregulation task force. The ATO will continue to look for interim solutions and welcomed further suggestions from the professional bodies.