NTLG FBT Sub-committee minutes 16 September 1999.

Venue: TIA, Level 9, 64 Castlereagh Street, Sydney.

Meeting commenced at 10 am.

Attendees:

 

Lee Beaver	ATO	Paul Hockridge	ASCPA
Maria Benardis	TIA	Kevin Lock	ATA
Ray Conwell	LCA	Elizabeth Lucas	LCA
Lance Cunningham	NIA	Andrew Purdon	ASCPA
Graham Daniel	ATO (Chair)	Kathy Quigley	ATO
Greg Dark	ATO	Garry Sebo	TIA
Joanne Dibetta	ATO	Karen Stein	ICAA
Deborah Hastings	ATO	Paul Voglis	ATO

Apologies:

 

Nick Adams	ATA	Robin Halls	ATO
Graham Clarke	ICAA	Evan Lancaster	ATA

^[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 Chairman, Graham Daniel welcomed members to the meeting.

Maria Benardis (TIA) was welcomed as Michael Payne-Mulcahy's replacement on the Sub-committee and Kevin Lock representing the ATA at this meeting. In addition Greg Dark (ABN), Deborah Hastings (Tax Counsel for FBT) and Kath Quigley (National FBT Team) were welcomed.

Apologies were received from Robin Halls (ATO), Nick Adams (ATA), Evan Lancaster (ATA) and Graham Clarke (ICAA).

2 Minutes of 17 June 1999 Meeting

The minutes of the 17 June meeting were accepted.

3 Items carried over from previous Meetings

3.1 Addendum to TR 97/17

Addendum to TR 97/17 to include an extra column to include reportable fringe benefits and excluded fringe benefits (ASCPA)

ATO Response

The ATO agreed TR 97/17 would be amended to include an addendum.

The matrix provided in Paragraph 25 would be amended to include an extra column and each item would be identified as reportable or not reportable. An analysis of the items in the table revealed only three are reportable fringe benefits. The balance is either meal entertainment and exempt from the reporting requirements or sustenance and not a fringe benefit.

The ATO raised a point for consideration by members regarding the interpretation of item "(k) Meals for accompanying spouses" in the table. An employee, accompanied by his spouse, is travelling on business and stays overnight. The employer pays for all meals. The ruling correctly states the employee's meals are sustenance and not subject to fringe benefits tax. In relation to the associate the meals are also identified in the table as sustenance, subject to fringe benefits tax and a reportable fringe benefit. The ATO stated that the correct view is that the associate is travelling with her spouse, the travel is private and the meals are not sustenance but meal entertainment and not reportable. The members of the Sub-committee supported this view. There is no change to the underlying FBT liability, however there is a benefit by adopting this view for employees and reportable fringe benefits. The ATO agreed to change the item to reflect this interpretation.

The ASCPA asked if additional line items could be included in the matrix to cover additional references eg Entertainment Facility Leasing Expense. The ATO advised it is not proposing to rewrite TR97/17 but to update it to reflect legislative changes and to add the new column. The ATO will look at the questions and answers in the ruling that relate to the arranger provisions and correct them to reflect the changes to the arranger provisions in the FBTAA.

3.2 Tax Reform - Christmas Party (ATA)

This submission was held over to this meeting and is listed for discussion at Agenda Item 8.3.

3.3 Draft ruling released as TR 1999/5

Response received from ASCPA relating to significant changes made to the draft ruling released as TR 1999/5 without seeking further input through consultation.

4 FBT Cell Report

The FBT Cell met on 25 and 26 August 1999.

The Cell discussed the interaction between FBT and GST. This issue was raised at the Special Meeting of the NTLG FBT Sub-committee in Melbourne in July 1999. The issues raised at that meeting were brought back to the GST business line for discussion of the policy implication for both GST and FBT. The Commissioner's announcement of 15 GST Foundation Rulings included one relating to the interaction of GST with FBT. The identification of this as an issue to be addressed by way of a foundation ruling is in part, attributable to the comments made by members at the Special Meeting of this Sub-committee.

The decision in the Knowles case was briefly discussed. This was a Federal Court decision. Subsequent to the decision the applicant has appealed to the Full Federal Court.

The Agenda item carried-forward to this meeting concerning Christmas Parties was discussed. The NTLG FBT Sub-committee minutes of December 1994, which dealt with Christmas parties/minor benefits and the implication for reportable benefits, were also considered.

The other major issue discussed was the policy surrounding deductibility of fringe benefits tax where there are amended assessments raised because of audits and the implications for FBT from the decision in Layala. This was a Full Federal Court decision in 1998 that dealt with payroll tax issues (Layala Enterprises Pty Ltd in liquidation FC of T 1998 ATC 4858). The question is whether the FBT liability is incurred at the point the amended assessment is raised or at some earlier point in time. This issue flows through to FBT from considerations in TR 95/24. This is a timing issue. The current practice of the ATO is to allow a deduction in the year that the amended assessment is raised. The ATO is considering the implications for FBT.

5 Issue of Draft/Final TD/TR

The following FBT Taxation Determinations or Taxation Rulings have issued since the March meeting:

¦ TR 1999/D11 - Fringe benefits tax: meaning of 'business premises'.

¦ TR 95/4 - Addendum - Fringe benefits tax: guidelines for the remission of penalty taxes arising from audit action.

¦ TD 199/44 - Exemption threshold for the FBT year commencing 1 April 1999.

6 News from the ATO

6.1 Fact Sheet on Impacts of Reportable Benefits for Employees

The ATO provided members with a draft copy of fact sheet "Changes to Fringe Benefits Tax Reporting Arrangements: Facts for Employees". The fact sheet is designed for employees to give them some idea of the impact of reportable fringe benefits on the various income tests. The ATO advised comments on the draft fact sheet would be welcomed and can be forwarded to the Chairperson or Secretariat.

The fact sheet will be available to employers to give to their employees. They will not necessarily be sent to all employers but will be available on ATOassist and A Fax from Tax.

6.2 Exclusion from reportable benefits of housing provided to ADF personnel

The ATO advised the Minister of Defence and the Minister assisting the Minister of Defence announced the exclusion of housing fringe benefits provided to ADF personnel from reportable fringe benefits in a joint media release. A copy of the media release is available to interested members but the ATO is precluded from commenting further on the announcement.

The LCA commented that the very issue the Government has sort to address by exempting housing fringe benefits for ADF personnel is exactly the same issue that faces every other employer and their employees. That is benefits, which are not really in the nature of substitute remuneration, are taken into account affecting a range of Government benefits and surcharges. The principle, which lays behind the Government announcement regarding exemptions for ADF personnel, is exactly the same principle that applies to every employer in Australia. It would be unfortunate if it was not pointed out to Government that it is not an issue peculiar to ADF personnel but is the very issue that impacts on everyone caught by the reporting requirements. The original ANTS Statement said that fringe benefit reporting would be confined to benefits that were substitute for remuneration and the legislation does not reflect that public announcement.

The ATO replied that the words in the ANTS proposal referred to 'remuneration package or award'. The Government enacted legislation on the basis of a wide interpretation of what a remuneration package or award encompasses. It is clear that the Government's intention is for all fringe benefits, other than those specifically excluded, to be included as reportable benefits.

6.3 JCPAA Hearing - 13 August 1999

On 13 August 1999 the Chairperson attended the JCPAA Hearing into the Auditor-General's Report on Fringe Benefits Tax. There were concerns expressed at the hearing that the ATO was not getting information to employees about reportable fringe benefits and many were ignorant of the new measures.

The ATO advised the hearing it was a concern to the office but the employees who were getting the benefits could not be identified directly. The ATO relied on employers and tax agents to get the message to employees. The ATO also indicated the various fax sheets that are available now and the fax sheets that are planned.

6.4 Newsflash to Tax Agents of FBT Reform Frequently Asked Questions

The ATO provided members with a draft copy of fact sheet "Reportable Fringe Benefits - Frequently Asked Questions". The questions were compiled from the reportable fringe benefits seminars. Members were invited to provide feedback on the fact sheet. The Frequently Asked Questions will be sent via Newsflash to tax agents. In the same Newsflash the ATO will advise the agents that the new employee fact sheet "Changes to Fringe Benefits Tax Reporting Arrangements - Facts for Employees" is available.

The TIA noted that it needs to be emphasised in the questions and answers that a benefit ie car parking that is excluded from the reporting requirements, will still be subject to FBT.

6.5 FBT and Receivables Management

The ATO advised that 60 FBT staff would shortly be moving to Receivables Management. Although this will result in changes in the way the ATO administers the processing and debt collection issues around FBT, there should be little impact for clients. At this stage, clients can continue to contact the 133 328 enquiry line in relation to all FBT matters, though this will probably change in the longer term.

6.6 Revision of Penalty Provisions

The ATO is developing a penalty policy for the new tax system that will apply from 1 July 2000 to the new taxes that will be reported on the Business Activity Statement. At the same time tax shortfall and lodgement penalties will be reviewed so there is a simplified and uniform system of penalties across the tax laws.

6.7 Analysis of Employee Contribution Label

The ATO advised an analysis of the new field 'employee contribution label' added to the company, trust and partnership returns, found there were 57,000 entries. The value of the entries was $374 million. The initial analysis of the figures revealed 75% of the entities claiming employee contributions are FBT non-lodgers. The ATO will profile those entities based on previous analysis.

6.8 Tax Determination on Excluded Fringe Benefit

The FBT Newsflash of 26 June 1999 gave details of excluded fringe benefits and indicated further details in relation to the exclusions will be made at a later date - possibly by way of a public ruling. The exclusions were discussed at the recent FBT Cell meeting and it was decided there would be a tax determination prepared on the "cost of occasional travel to a major Australian population centre by employees and their families living in a remote area". The determination will be prepared to define the terms 'occasional travel' and 'major Australian population centre'. These terms are not defined in the FBTAA. The interpretation of the terms will be fairly wide, as the exclusion is not meant to be restrictive.

The second exclusion concerned freight costs of food for employees living in a remote area which the Cell did not consider required a taxation determination. The ATO provided the following information:

The Fringe Benefits Tax Assessment Act 1986 was amended by the New Tax System (Fringe Benefits Reporting) Bill 1998. One of the amendments resulted in paragraph 5E(3)(k), which states that an excluded fringe benefit is a fringe benefit:

"(k) that relates to freight costs for foodstuffs provided to employees resident in a location that is not in or adjacent to an eligible urban area."

The term "foodstuffs" is not defined in the FBTAA. The Macquarie Dictionary has a meaning as "a substance or material suitable for food". The term food is defined in the same dictionary to mean "what is eaten or taken into the body for nourishment"

The ATO would interpret the term foodstuff to be ingredients for food or packaged food, and this would include liquids.

The term "freight costs" is also not defined in the FBTAA. The Macquarie Dictionary defines freight to be "cargo or lading carried for pay either by land, water or air".

The ATO would interpret the phrase freight costs to be the costs charged for carrying goods, whether by land, sea or air.

The exclusion would apply for the costs of transporting food or its ingredients whether by land or air or sea.

The term "eligible urban area" would take its meaning as defined in Section 140 of the FBTAA.

The payment of freight costs for foodstuffs by an employer for an employee residing in a suitable location will not be reportable for FBT purposes. It is a practice in the more remote localities in certain parts of Australia that the freight costs for food imported into the locality is readily ascertainable. If these costs are easily identified, and the employer reimburses an employee for these costs, the amount is an excluded fringe benefit.

This benefit has been excluded from the FBT reporting requirements to help offset the high costs of food in remote and isolated areas of Australia. It is common for carriers to impose a high freight cost on food to isolated areas due to their monopoly.

The ASCPA asked if insurance would be included as a freight cost.

The ATO advised costs incurred in carrying foodstuffs by air, land or sea are included in the exclusion. Insurance would be a freight cost. If it becomes an issue for persons living in remote areas members can request a tax determination be issued

6.9 Draft Communication Strategy for FBT Reform Phase 2

The ATO outlined the following communication strategies to be implemented:

A general information booklet on phase 2 changes Your guide to Fringe Benefits Tax Reform - Phase 2 will cover all changes in brief. The changes will be listed on the front cover so people can identify that it is relevant to them. The guide will explain the reforms one by one and then refer to other tax reform publications and the FBT enquiry line for more information.

There will also be a fact sheet on each of the changes, which will include a section on the impacts on employees.

Provided the legislation is enacted by then, a mailout is proposed in February 2000 to all FBT lodging employers and employers who receive employee contributions (as indicated by "Employee Contributions" label on company, trust and partnership returns) but do not lodge FBT returns, salary packagers and software developers. The Package will contain the general information booklet plus the facts sheets with specialised letters for rebateable employers, primary producers, miners, salary packagers and software developers.

At the December 1999 NTLG FBT Sub-committee meeting, members will be consulted to obtain feedback on the communication strategy and on information products. A mailout to all tax agents and professional associations of a package containing the general information booklet plus the fact sheets is proposed for February 2000.

An article on changes will be published in the National Tax Agents' newsletter, "The Tax Agent" in March 2000.

Information on the changes will be included in the Tax Agent Portfolio in March 2000.

Seminars for tax agents will be conducted to inform them about the changes.

Liaison with PBI peak bodies will be undertaken to obtain feedback on strategy and assistance in communicating changes to PBI's.

The mailout to PBI's of package will contain the general information booklet plus the relevant fact sheets.

Workshops for PBIs will be conducted covering the changes and FBT generally.

Information for Employees will be mailed out to FBT employers, employers in receipt of employee contributions and salary packagers. All information products will be available on ATOassist. Employers will be able to order bulk copies of fact sheets for their employees.

The ASCPA submitted in relation to seminars, PBI and FBT rebateable organisations need help because many of the organisations have limited resources. The professional organisations on the other hand can digest the information themselves but will have questions needing answers, rulings or determinations. They would prefer ATO resources employed to provide a prompt turnaround to their technical requests so they can disseminate the information amongst members whether it is CPA, Hotline or Latest Tax News.

The ATO offered to assist any groups requiring assistance or advice if these are notified to the ATO.

6.10 Australian Business Number (ABN)

Greg Dark, Acting Assistant Commissioner ABN attended the meeting and provided an overview of the ABN. The following points were captured for the minutes:

The ABN is the new key for business taxes. But it is more than that. It will be the new key for all government regulatory bodies in the future.

^[H21]Origin

Bell Report (service initiative)

Aligned with GST (required a very widespread and public number)

A combination of these two points gave us an ABN.

Its focus is to be good for business and good for government.

^[H22]Number Format

11 digit number (based on ACN where present)

^[H23]Who gets one?

Corporations Law Company

Other entity carrying on an enterprise

^[H24]When does it happen?

Mail out to 2.4 million businesses in November

Opportunity to reply on paper or electronically via www or ELS

^[H25]Impacts

Will be the GST registration number

Will be the number on Business Activity Statement

Will replace ACN for active companies

Will replace SFN for superannuation funds

Is the key to withholding event under proposed amendments to the PAYG legislation

Is the key to endorsement of deductible gift recipients and exempt charities

^[H26]FBT

No change. ABN will be used where present for the Business Activity Statement - for FBT instalments, but annual returns will still use TFN.

^[H27]Phase II

Explained the Whole of Government focus and advised that work is under way with an expected delivery date of 1 July 2001.

7 Cost of Compliance

7.1 Yellow Pages - Survey of attitudes to changes in FBT arrangements for Australian small and medium business

A copy of this recent survey was tabled for information.

8 Tax Reform

8.1 Fringe Benefits Reporting (FBR) (ASCPA on behalf of the external members of the NTLG FBT Sub-committee)

The (non ATO) NTLG FBT Subcommittee members agreed at the 18 March 1999 meeting to provide an outline of some of the difficulties presented by the A New Tax System (Fringe Benefits Reporting) Act 1999 [the FBR Act]. A number of our concerns are as follows:

^[H32]Non Remuneration Items

(i) the ANTS package (on page 49) proposed that only benefits which are part of a remuneration package or award would need to be reported on group certificates. The FBR Act goes further and catches all benefits over the threshold, but for a limited number of exclusions.

We submit that the FBR Act should be amended to limit its application to the original announcement.

^[H33]Income Tax v FBT Rules Create Confusion

(ii) The FBR Act has resulted in considerable confusion. The income tax and FBT treatment of a wide range of expenses varies between different types of expenses and different types of employers and is terribly complex. This necessitated TR 97/17 which deals with over 100 types of expenses.

We now have a new set of different rules as well. The earlier confusion as to the income tax and FBT treatment will be compounded by having additional and different rules for FBR.

As a minimum, we recommend that TR 97/17 be reissued with further columns being added to deal with the FBR requirements.

^[H34]Entertainment Facility Leasing Expenses/Meal Entertainment

(iii) At the 17 June 1999 meeting of the NTLG FBT Subcommittee there was considerable discussion on the complexities of what constitutes meal entertainment and what constitutes entertainment facility leasing expenses. The subtleties in relation to whether there is a lease, license or hiring arrangement would be lost on the vast majority of taxpayers who are required to correctly self assess their liability, or face hefty penalties.

There is also the question of the treatment of say non-food and drink costs at a Christmas party, eg. A band, which would fall outside the definition of meal entertainment, and how this should be applied.

As a minimum, a public ruling is required on the issues discussed at the 17 June 1999 meeting, although an amendment would be preferable to exclude all such non-remuneration items.

^[H35]Allocation of GUV

(iv) The allocation of the grossed-up taxable value (GT) of non-remuneration benefits will come as a surprise to some employees and it could cause them to unexpectedly lose an entitlement to certain tax benefits or to be subject to additional tax (ie. superannuation surcharge or medicare). This could lead to undesirable industrial relation outcomes. The legislation should provide for both a right of objection (by employees) and protection for employers against claims by employees.

(v) The FBR Act requires the allocation of the GTV of car fringe benefits between employees. In some cases it is simply impossible to do so fairly, e.g. where the statutory formula is used (for a car fringe benefit), there are different drivers (at different times) during the year and only one driver's use would ordinarily result in the car falling into a lower statutory percentage category. It is impossible to allocate the value of the benefit fairly.

We recommend that the law be amended to provide for an exception from the usual reporting rules where it is simply impossible to fairly allocate the GTV to employees.

(vi) Another example of the unreasonableness of allocating the GTV of certain benefits to employees is where the employees of tax exempt bodies (e.g. Universities) are required to host visitors, e.g. taking overseas visitors to Healesville Sanctuary (which results in tax exempt body entertainment). This isn't remuneration, nor is it (predominantly) meal entertainment, nor might it be particularly enjoyable, particularly after a number of visits.

We submit that there ought to be an exemption from these rules in such situations. Excluding non remuneration benefits would achieve this most desirable outcome.

(vii) To assist with the above, the legislation should include a list of factors relevant in allocating the GUV of benefits between employees.

^[H36]Alignment of Year Ends

(viii) There are strongly held views both for and against whether the income tax and FBT year ends should be aligned.

An alternative could be to allow businesses to elect which year end to use. This might require an adjustment to collection or reporting dates, in the event of an election to change.

^[H37]Amended Allocation of GUV

(ix)It is easy to anticipate that additional benefits will be identified or FBT returns might require adjustment after group certificates are issued. In some cases the impact on individual employees could be very minor and the costs could outweigh any revenue involved.

We submit that the law should provide some relief in such circumstances.

It should be noted that there is no fiscal mischief apparent in any of the above. On the other hand, there is currently scope for considerable confusion, large compliance costs and exposure to sizeable penalties. This situation should not continue and it would seem that the law would need to be amended to remedy these defects.

^[H38]ATO Response

In relation to point (ii) of the submission, the ATO has agreed to prepare an addendum to TR97/17 - refer Agenda Item 3 of these minutes.

As to the issue in point (iv) relating to the right of an employee as opposed to the rights of the employer, the underlying FBT liability is the liability of the employer. It is not possible for an employee to have rights in this regard. However, the employee has rights contained in the relevant Acts upon which liabilities may arise where a reportable fringe benefit amount creates or increases such a liability, eg Child Support Agency.

It is not possible for the ATO to comment on the requests for amendments to the law at points (i), (iii), (v)-(ix). The matters which are raised are correctly matters for consideration by Government, however, there may be administrative ways in which the ATO can assist employers in relation to the RFB responsibilities. The ATO has provided comment on some of these issues eg at agenda item 6.2 'The Government enacted legislation on the basis of a wide interpretation of what is a remuneration package or award. It is clear that the Government's intention is for all fringe benefits, other than those specifically excluded, to be included as reportable benefits. These issues will be discussed further as appropriate at the meeting of 22 October referred to below.

The Chairperson proposed that a working group be formed consisting of four members from the professional bodies, various people from the ATO and a representative from Treasury (if available) to look at the issues, define the problems and decide possible administrative options to address the problems. The members agreed to the formation of the working group. Four external member representatives from the NTLG FBT Sub-committee were nominated. The meeting was set for 22 October 1999 at a venue to be fixed.

8.2 Tax and GST Reform (TIA)

¦ How the GST applies to fringe benefits and treatment of claiming input credits by employees.

¦ Will any rulings be issued in this area: in terms of interaction with GST.

¦ Ralph and FBT reform given Ralph report has not been released yet.

¦ Will the FBT rate of 48.5% be reduced given adj. To PAYE tax rates will be reduced.

The TIA advised they have kept a register of issues with regard to the interaction of FBT and GST. It was resolved the TIA would co-ordinate and liase with the professional bodies to compile an issues register with regard to the interaction of FBT and GST and provide it to the ATO.

^[H40]ATO Response:

The ATO advised in relation to point one and two the Commissioner announced on 2 September 1999 details of 15 GST foundation rulings to cover GST technical issues. One of the rulings will be Interaction of Fringe Benefit Tax and GST. There are still policy considerations being undertaken in relation to GST issues and it was noted, of the 15 GST foundation rulings announced, the FBT/GST ruling was the only one with the issue date to be announced. The ruling, when released, will cover issues including what is a taxable supply and the claiming of input credits by employers.

Point 3 - Until the Government responds to the Review of Business Taxation Report, the ATO is unable to comment. (Note: The Government response to the Review of Business Taxation was given on 21 September 1999. The Treasurer stated that the Government did not accept the Review's recommendations covering changes to the current treatment of fringe benefits).

Point 4 - The FBT rate of tax is equal to the highest marginal rate of personal income tax plus Medicare levy. Under The New Tax System commencing 1 July 2000 new tax rates and new thresholds will apply resulting in a reduction in personal income tax. However, although the highest marginal rate of income tax plus Medicare levy threshold will rise from $50,001 to $60,001, the highest marginal rate remains at 48.5%, resulting in no underlying change in the FBT rate of tax.

8.3 Christmas Party (ATA)

1. A New Tax System (Fringe Benefits Reporting) Act requires employers, from the year ended 30 June 2000, to include on the group certificate of an employee the grossed up taxable value of fringe benefits applicable to an employee, when the taxable value exceeds $1000.

2. Certain benefits, called "excluded fringe benefits", do not have to be shown on an employees group certificate. Included amongst those (section 5E of Division IIA) is the provision of meal entertainment.

3. Could the ATO give their view on the following scenario:

4 .A large public company holds a Christmas party, which is for employees only, at a five star hotel. The party includes the provision of a sumptuous meal and entertainment by a well known band and a comedian. The cost per head is $160. A reasonable break-up, based upon quotes given by the hotel, is food and drink $110, entertainment $40, and room hire $10.

5. It is assumed for the purposes of this example that each employee attending is, in the relevant year, in receipt of other benefits in excess of $1,000.

6. Because the $160 benefit is not a minor benefit, FBT is payable on the total. For reporting purposes, neither the $110 meal entertainment nor the $10 room hire is recorded because they are excluded fringe benefits (being meal entertainment and entertainment facility leasing expenses).

7. None of the other categories of "excluded benefits" would appear to exclude the value of the band and comedian entertainment.

8. The next issue is whether the $40 for entertainment is a minor benefit under section 58P (FBTAA) and therefore would not be a taxable benefit and would not have to be included in the individual employees' taxable value for reporting purposes. In this regard the FBT sub-committee minutes of 1 December 1994 record at p.9 that "The ATO advised that the entertainment provided to the employee and associates of the employee are associated benefits and the value of each benefit must be taken into account when determining the amount that is small...". It is further recorded at p10 that "The ATO also advised that all benefits associated with the Christmas function should be grouped to determine whether the benefit had a total value in excess of (the then) $50. For example, the cost of bottles of wine and hampers distributed at a Christmas function would be treated as associated benefits". This view would seem to be consistent with the terms of section 58P(2) in relation to "associated benefits".

9. If the ATO was to take the view that the $40 was nevertheless a minor benefit, then this would impact on the provision of minor benefits in that employers could obtain a break-up of expenses to fall within the exemption.

10. If the conclusion reached in para.8 is correct, then the $40 value attributable to "entertainment" would need to be included on the group certificate of each employee attending the function. The definition of an excluded benefit would therefore seem to be deficient and in many cases would not result in a reduction in compliance costs

11. Would the ATO consider recommending to the Government that benefits associated with the provision of meal entertainment be prescribed by regulation for the purposes of sub paragraph (3)(i) of the definition of "excluded fringe benefit"?

12. Would the ATO view be the same if the scenario in para.4 related to a similar Christmas party where the break-up of costs was: meal and drinks $80 and entertainment $25?

^[H42]ATO Response:

The ATO advised Christmas parties, associated benefits and minor benefits were discussed at the NTLG FBT Sub-committee Meeting of 1 December 1994 and the policy decided at that meeting on those issues has not changed. However, the notional taxable value of the minor fringe benefit under 58P(1)(e) has risen from less than $50 to less than $100 due to the legislative amendment that changed 'small' to $100.

The 'associated benefit' test under section 58P(1)(f)(ii) remains the same. In the 1 December 1994 minutes it was decided that all benefits associated with the Christmas function should be grouped to determine whether the benefit had a total value in excess of $50.

In the present case all benefits associated with the Christmas function should be grouped together to see if the total exceeds $100. If it does then each benefit will not be minor. In the present case, the $40 band cost is under $100 and would satisfy paragraph 59P(1)(e). However, having regard to the cost of this benefit and associated benefits, which in this case is a total of $160, as the total exceeds $100 the band cost of $40 would not be a minor benefit. Accordingly, the $40 value attributable to recreation entertainment in this scenario would need to be included on the group certificate of each employee attending the function.

Referring to paragraph 12 in the submission, the ATO view would be the same if the scenario in paragraph 4 related to a similar Christmas party where the break up of costs was meal and drinks $80 and entertainment $25. The total benefit is the Christmas party, which is $105. Applying the tests in 58P(1)(f)(ii), as the sum of the taxable values of the two associated benefits exceed $100, those benefits are not minor benefits as the Commissioner considers it is not unreasonable to treat the benefits as fringe benefits in these factual situations.

With regard to the ATA request for the ATO to consider recommending to the Government that benefits associated with the provision of meal entertainment be prescribed by regulation for the purposes of sub paragraph (3)(i) of the definition of 'excluded fringe benefit', the ATO is not in a position to make this recommendation. However, this may be an issue that could be considered at the special meeting to be held on 22 October 1999.

9 Reportable Fringe Benefits and Medicare Levy Surcharge

^[H44]Clarification of Agenda Item 13.3 of the minutes of 18 March 1999.

At the March meeting of the FBT Sub-committee an item was raised on the new group certificate reporting arrangements and what affect it will have on the Medicare levy rules.

The following is now provided as an ATO response with further detail to that given previously.

^[H45]Medicare levy surcharge on taxable income (Medicare Levy Act 1986)

Before the introduction of reportable benefits, higher income individuals and families who did not have private patient hospital cover paid the Medicare levy at a higher rate. This increase was an additional 1% of taxable income and is generally referred to as the Medicare levy surcharge.

To determine whether a person was a higher income individual, the threshold test that applied was based upon $50 000 taxable income. For families, the threshold test was $100 000 combined taxable income (higher amounts apply with dependant children).

The Reportable Fringe Benefits Total (RFBT) is now included in these threshold tests. The actual threshold amounts (eg. $50 000 for single taxpayers) remains the same. The RFBT is added to taxable income (or combined taxable income plus combined RFBT for families) to determine whether a taxpayer has exceeded the relevant threshold. If that threshold is exceeded then the taxpayer is required to pay an additional 1% of taxable income under the Medicare Levy Act 1986.

^[H46]Medicare levy surcharge on reportable fringe benefits (A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999)

The Medicare levy surcharge is imposed by section 10 of the ANTS (Medicare Levy Surcharge-Fringe Benefits) Act 1999. This Act applies the Medicare levy surcharge to the taxpayer on a similar basis as described above (within the Medicare Levy Act 1986) except that in this case the Medicare levy surcharge is applied only to the taxpayer's RFBT.

Note: The 'basic' Medicare levy is not applied to a taxpayer's RFBT. This is because FBT paid by the employer includes this component.

^[H47]Medicare Levy and Medicare levy surcharge example:

Peter's taxable income is $35 000. Peter also has a RFBT of $20 000. Peter is single, has no dependants nor does he have private patient hospital cover. Peter is liable for the additional 1% Medicare levy on his taxable income. This is because Peter's taxable income plus RFBT is greater than the $50 000 (single) threshold.

Peter is also liable for the Medicare levy surcharge on his RFBT.

Peter's total Medicare levy liability would be calculated as follows:

 

	$
Medicare levy-1.5 per cent of $35 000	525.00
Additional Medicare levy (on taxable income)-1 per cent of $35 000	350.00
Medicare levy surcharge (on reportable benefits)-1 per cent of $20 000	200.00
Total Medicare levy and Medicare levy surcharge payable	1075.00

The date of application of the additional Medicare levy and the Medicare levy surcharge provisions commenced with effect from 1 July 1999.

10 Other Business

The following two submissions were accepted as late agenda items.

10.1 Fringe Benefits Tax - Treatment of E-tags (LCA)

^[H50]Introduction

We, wish to make a submission to the National Tax Liaison Group - FBT Sub-Committee, to request a review of the current FBT treatment applicable to the payment by employers, of bridge and road toll expenditure incurred by their employees.

The purpose of this submission is to bring to your attention several issues of concern we have identified for employers, who provide cars, sometimes vans or fleets, which arise from the current FBT treatment of these payments. This is particularly in relation to the increased compliance that is associated with the new fringe benefits reporting requirements and the accurate allocation of benefits between employees. Our overall opinion is that in its current format, the Fringe Benefits Tax Assessment Act 1986 ("the Act") does not adequately provide for companies that pay toll expenditure on behalf of employees with "company" cars. We believe there is a clear need, in this instance, either for the legislation to be amended to reflect current business practice, or for administrative guidelines to be issued in relation to simplifying the issue.

We suggest that a legislative amendment to Section 136(1) of the Act, to include within the definition of a car expense, "the payment of bridge and road tolls by employers" would be the best solution. We believe that the resulting exemption under Section 53 of the Act would be the most sensible approach, thereby excluding these payments from the reporting requirements as a separate benefit. This Sub-committee has previously forwarded a recommendation that this legislative change be made.

As an alternative to this, or in the meantime, a public ruling could be released, either treating the payment of all tolls on behalf of employees, as minor fringe benefits and therefore exempt from FBT, or providing a generally accepted approach to treating a certain percentage of the costs as subject to FBT, to ease the administrative burden associated with the tax.

^[H51]Background - CityLink and E-Tag

Although tolls have been in operation in various states for some time, these issues of concern have been brought to a head by the opening of City Link in the State of Victoria.

The existing interstate toll collection systems currently operate by using a combination of on-site cash payments and the use of on-site prepaid cards. Receipts are available using either of these options. In Queensland, for an additional cost, there is also the option of having an account per registered vehicle and users of these accounts are tolled electronically. This is similar to the planned CityLink tolling system.

CityLink has been set up to encourage users to use the E-Tag system and does not offer the option for users to manually pay the tolls at the actual site. The E-Tag has been introduced as "the key to using CityLink", making it possible for motorists to pay tolls at freeway speeds via a tag mounted inside the windscreen. The "benefits" of electronic tolling for business are said to include reduced employee travel time, convenience of monitoring and recording tolling expenditure by employees, and also, a reduction in administrative compliance, as there will no longer be any requirement to reimburse cash or supply pre-paid cards to employees.

A computerised system will match the vehicle travelling through the toll zone with their E-Tag class type and deduct the appropriate toll from the user's pre-paid account. The types of account available for business include the standard account for small business, the commercial account for large business and day passes for trips on the CityLink less than six times a year. The type of vehicle driven determines the amount to be paid. Broadly, the classifications of vehicles include motor cars, light commercial vehicles (1.5 - 4.5 tonnes GVM), heavy commercial vehicles (over 4.5 tonnes GVM) and motorcycles.

^[H52]Current FBT Treatment

Currently, when an employer pays toll expenditure on their employee's behalf, this payment attracts an FBT liability where the travel was for private purposes. The taxable value of the fringe benefit is the amount of the expenditure paid by the employer reduced by the "otherwise deductible rule". However, the benefit may be exempt, for instance, where it constitutes a minor fringe benefit.

In accordance with the new FBT reporting requirements, fringe benefits need to be allocated to particular employees for the purposes of reporting benefits on employees' group certificates, subject to some exclusions. If tolls paid on employees' behalf are to be included in this requirement where no exemption applies, accurate records will need to be kept indicating both whether tolling expenditure incurred on a journey was of a personal or business nature, and which employee was using the car. We therefore submit that simpler administrative arrangements are required if employers are expected to comply with these rules.

^[H53]Specific Issues

It will be very difficult for employers to monitor on an employee-by-employee basis, vehicle use, for the purposes of allocating benefits between employees and satisfying the new FBT reporting requirements.

Tolling expenditure is measured per account, rather than per employee or vehicle. For small business, two account options are available:

Up to four vehicles of any, or the same class, to be attached to the one Standard Toll Account and one E-Tag per vehicle will be received.

When different employees use different vehicles, all of this usage will be recorded on the one account. How will the employers breakdown this information down per employee for the FBT reporting requirements?

A solution could be to keep a logbook with each vehicle, recording who undertook and the purpose of, each tolled journey. If more than one employee is involved, apportioning of toll expense for FBT purposes may be required if there is any personal use of the vehicle. We submit that this method of recording by employees and the subsequent analysis by employers will be administratively burdensome.

The second option for small business is to share one E-Tag amongst up to four registered vehicles of the same class that are attached to the Standard Toll Account.

The same recording issues as above will exist. In addition, if one logbook is kept with the mobile E-Tag to record all journeys, employers will have the additional complexity of accurately recording trips taken in the other registered vehicles, which do not have the E-Tag with them for that journey.

A solution in this instance may involve having a logbook in each of the four registered vehicles, recording every journey. Once the toll account is received, the employer will need to cross-reference this with the logbooks and determine whether any private usage occurred. The relevant amounts for FBT will then be able to be calculated and allocated accurately between employees. Employers will need to be mindful of the additional fee that registered vehicles who use CityLink without an E-Tag will incur and need to incorporate this into any FBT calculations they perform. This will be a complex task to accurately administer.

The Commercial Toll Account has been designed specifically for business who use four or more E-Tags. It differs from the above Standard Toll Accounts in that each vehicle will have its own E-Tag and unlike for the standard account, there is no sharing of E-Tags amongst vehicles of the same class. In addition to the issues identified above, the following will also need to be addressed:

If more than one employee uses the motor vehicle (eg pooled cars) and there is some private use, employers will need to decide how they are going to calculate the FBT allocation. Will apportioning between travellers be required, or allocated against a particular employee?.

Employers will also need a method of identifying and recording tolled journeys made by unregistered vehicles coming from interstate offices and whether the employee who took the journey incurred any private usage of the vehicle.

Again, logbook recording will be required for each journey undertaken by each vehicle. It will be particularly important for employers to have their intended recording methods and allocation methodologies clearly determined for FBT reporting purposes. In addition, employees will require information and training in these methodologies to ensure the overall recording process is a success. In light of the above, this will be a huge administrative task for all employers.

The type of vehicle driven on the CityLink will determine the amount of toll to be paid. Although the taxable value of the fringe benefit is reduced by the otherwise deductible rule, if the vehicle is used for private purposes, the amount of FBT payable on the remainder will be directly proportional to the amount of toll paid (and the type of vehicle driven).

Although it is more likely that any personal usage of vehicles will be of the motor and light commercial vehicle type, there is still the possibility that some personal use of a heavy commercial vehicle may occur. Under the current FBT treatment of expense payments, for companies with vehicle fleets composed mainly of light and/or heavy commercial vehicles, their FBT liability will be greater in comparison to competitors, who may have vehicle fleets composed of mainly motor vehicles. In addition, employees with private portions showing on their group certificates may also be disadvantaged by the type of vehicle driven.

Another issue for employers with mixed vehicle fleets, relates to the fact that vehicles greater than 1 tonne are exempt from FBT. However, a fringe benefit can still arise from the use of these vehicles on CityLink and FBT will be payable on any private use. This FBT treatment seems to be at variance with the original intention of the Act, that is, to exempt this type of vehicle from FBT in the first instance.

^[H54]Proposed FBT Treatment

In consideration of the issues outlined above, to ease the administrative burden for employers and in the meantime match the "anticipated benefits" that users of CityLink will obtain, we propose the following FBT treatment for bridge and road toll expenditure paid by employers.

1. Legislative Change: Section 136 - Car Expense Definition

As previously recommended by this Subcommittee, we suggest a legislative amendment to the Act to include within the definition of a "car expense" in Section 136 of the Act, "the payment of bridge and road tolls by employers". This would result in exemption from FBT under Section 53 of the Act and no problems regarding the reporting requirements.

2. Public Ruling

As an alternative to the above, or until the change is made, we suggest the following:

^[H55]Treat payments of E-Tag accounts as Minor Fringe Benefits

The payments associated with tolls on CityLink are small in value (always much less than $100 each time), difficult to value per employee, are often infrequent and irregular in occurrence and would generally not be seen as a reward for services for employees. We, therefore, suggest the release of a public ruling, to treat the payment of tolls on behalf of employees as minor fringe benefits in all circumstances and therefore exempt from FBT and the FBT reporting requirements.

We submit that this does not represent a cost to the Revenue, since FBT collections in respect of those costs would never have been contemplated at the time of writing the law.

^[H56]Use a fixed percentage as an estimate of reasonable amount

As an alternative to the above, we suggest the release of a public ruling that provides taxpayers with administrative guidelines as to how employers can determine the taxable value of such fringe benefits between employees.

We suggest that employers be permitted to elect to use a fixed percentage of total toll costs as subject to FBT and that this percentage be given in a public ruling. This would be on the basis that, "across the board", for all employees, this percentage represents a reasonable estimate of the private use. Employers could then use any reasonable basis, such as per head, to allocate this amount across employees using the cars.

Similar principles are used in rulings released under other taxing regimes. These rulings provide administrative guidance for taxpayers, assisting them in circumstances where there are difficulties in determining or calculating taxable values using the normal general principles outlined in the legislation. Examples of such rulings that provide "fixed-percentage" formulas to be used to calculate tax or taxable values, include those issued by the Commissioner in respect of calculating the tax payable in respect of certain vehicles and printed matter, under the Sales Tax Assessment Act 1992.

We believe that the release of an FBT ruling using similar principles outlined above, would assist both employers and employees, by removing the need for diligent and accurate recording of journeys by employees and the administrative task of the allocating these benefits by employers.

^[H57]Summary of Recommendations

¦ Amend Section 136 of the Act to include within the definition of a car expense, "the payment of bridge and road tolls by employers".

¦ A public ruling to treat all payments of tolls made on behalf of employees as minor fringe benefits and therefore exempt from FBT.

¦ A public ruling providing taxpayers with a percentage that may be used as the private portion of all toll costs paid on behalf of employees.

^[H58]ATO Response:

The ASCPA raised the issue of road tolls at the March meeting of this forum. The sections of the FBTAA that would apply to these expenses and methods of reducing compliance and employer liability such as employee declarations and minor fringe benefits provisions, were discussed. Those options are set out in the minutes of that meeting.

The outcome of that agenda item was a request for an amendment to include road tolls in car expense in Section 53 of the FBTAA. That request was passed on to Law Development and Design for initial consideration who, because of ANTS Phase 2 and the Review of Business Taxation, has not treated this request as a priority.

The inclusion of road tolls in Section 53 of the FBTAA has implications for income tax. There are policy considerations about the symmetry between income tax and FBT that need further analysis and consideration. From an income tax perspective there is a purpose test that applies to determine if road tolls are deductible under the general provisions of the ITAA or not. In addition there are a number of occupational rulings that rely on the 'purpose test'. One of the rulings is TR 98/6 which deals with employee work related deductions and case Y43 (91 ATC 412) where the Tribunal found expenses such as parking fees and bridge tolls are not included in Section 51AF car expenses.

Regarding the LCA's first recommendation, FBT will discuss with other ATO stakeholders, eg INB and LDD, the possibility of including 'road tolls' in the definition of car expense in Section 136(1) of the FBTAA.

The LCA's second recommendation requested a public ruling to treat all payments of tolls made on behalf of employees as minor fringe benefits and therefore exempt from FBT. The ATO advised this recommendation could not be accepted because the factual issues between the employer and employee have to be taken into account to determine the fringe benefit. In the case of an employee with a salary sacrificed car using CityLink to travel to and from work each day the road toll expenses incurred in a year could exceed $2000. However, if an employee is provided with infrequent private use of a car including road toll expenses, the employer can apply the minor benefit provisions.

The ATO advised it could not accept the third recommendation in the submission that the ATO issue a public ruling providing taxpayers with a percentage that may be used as the private portion of all toll costs paid on behalf of employees. There are too many varying factors to put into a public ruling and then apply a fixed percentage.

The LCA submission focused on road tolls in particular E tags following the opening of CityLink in the State of Victoria. The ATO acknowledged the compliance problems facing employers identifying the road toll expenses incurred by individual employees given the combination of accounts and varying tolls paid under the CityLink system.

The ATO recommended this issue be discussed at the special meeting to be held in October with a view to identifying options to assist employers to comply with the Act, in particular the reportable fringe benefits legislation

10.2 Fringe Benefits Tax - Entertainment Facilities (LCA)

^[H60]Introduction

We, wish to make a submission to the National Tax Liaison Group - FBT Sub-Committee, in relation to the fringe benefits tax ("FBT") treatment applicable to "owned" facilities used for entertainment purposes, for example boats or corporate jets. This is compared to the treatment afforded to similar facilities that are "leased" for entertainment purposes, and is relevant to the reporting of such benefits on group certificates. We bring particular attention to the increased compliance costs that companies with owned facilities could have, if the new fringe benefits reporting requirements are interpreted as applying to these benefits, requiring the accurate allocation of these benefits on an employee-by-employee basis.

Our overall opinion is that in its current format, the Fringe Benefits Tax Assessment Act 1986 ("the Act") and A New Tax System (Fringe Benefits Reporting) Act, No. 17, 1999 ("the Reporting Act") do not specifically cover the provision of this type of benefit. We believe there is a need for this issue to be addressed by a public ruling giving administrative guidelines in relation to this issue.

^[H61]Background and current FBT Treatment

Companies often have significant capital assets, such as yachts or corporate jets, which they make available for employee and client use as an entertainment facility. Usually, these facilities come fully equipped, have full-time crewmembers and are available for use by employees and clients for entertainment purposes. Entertainment in the form of food and drink is often provided in these facilities.

The provision of a cruise on a boat, or flight on a plane owned by a company is subject to FBT, where this is for private purposes. The taxable value of these trips is calculated using notional market values of similar trips taken in similar boats/planes, that undertake comparable journeys, ie "the amount that the person could reasonably be expected to have been required to pay to obtain that benefit from the provider under an arm's length transaction". Where food and drink are also provided to employees and all are paid for by the company, this is also treated as subject to FBT.

The costs of leasing boats or corporate jets for similar entertainment purposes would constitute "entertainment facility leasing expenses" ("EFLEs") for FBT purposes and as a consequence, would be excluded from the fringe benefits disclosure requirements relating to group certificates. We believe the circumstances where owned facilities are provided for employee entertainment, are fundamentally the same as those included within the EFLE definition and as there is a notional leasing cost, should be treated in a similar manner. In addition, we also believe that it was not the intention of the FBT legislation to be interpreted so narrowly as to purposefully exclude "owned" boats from the exclusion from the reporting requirements afforded to EFLEs.

^[H62]Specific Issues^[H63]Entertainment Facility Leasing Cost

The Reporting Act, excludes EFLEs from being required to be reported on employees' group certificates. The definition of EFLEs for this purpose is found in Schedule I, Part IIA, Division 3, Section 5E(3)(c) of the Reporting Act, which refers to section 136(1) of the Act.

Section 136(1) of the Act defines "entertainment facility leasing expenses" for a person, to mean expenses incurred by the person in hiring or leasing, amongst other things "a boat, a plane, for the purpose of the provision of entertainment".

Whilst there is no actual leasing expenditure in the case of the owned boats or planes, there is a notional leasing cost under the notional valuation rules for the purposes of determining the taxable value of the benefit provided. We therefore submit that the value of the benefit provided in the owned facility should be treated as a notional cost that constitutes an EFLE, that is not required to be reported on employee's group certificates.

In support of this broad interpretation of the definition of EFLEs, we point out that the recently released June 1999 minutes of the FBT subcommittee of the National Taxation Liaison Group, discussed whether licensing could be included within the definition of the EFLEs, as the legislation only includes the words leasing and hiring. The Australian Taxation Office ("ATO") advised that where there is a license only, this will not be sufficient for the purposes of satisfying the strict definition of an EFLE, however for practical purposes "a commonsense approach should be applied to the entertainment facility leasing expense provisions rather than a strict legalistic interpretation of the definition".

In consideration of this discussion, we believe that, from a "common sense approach", owned entertainment facilities should be treated in the same manner as leased facilities for FBT purposes. This will mean that the benefits in question do not need to be reported on the relevant employee's group certificates.

^[H64]Recommendations

It will be very difficult for employers to monitor on an employee-by-employee basis, entertainment facility use, for the purposes of allocating benefits between employees under the new FBT reporting requirements. In fact, this is why EFLEs are excluded from these requirements.

We believe the notional cost of the provision of the use of a boat or corporate jet that is owned by a company and is used as an employee entertainment facility, is included within a broad reading of the definition of "entertainment facility leasing expense" within section 136 of the Act therefore does not have to be reported on the relevant employees' group certificates.

We therefore recommend that a public ruling be issued, to include owned entertainment facilities within a broad reading of the definition of an "entertainment facility leasing expense".

^[H65]ATO Response:

The ATO advised that the definition of entertainment facility leasing expense could not be interpreted so widely so as to include owned entertainment facilities. The ATO indicated that the minutes of the previous meeting of this Sub-committee sufficiently cover the ATO's view in relation to these matters.

11 Close of Meeting

The next meeting will be held on Tuesday, 7 December 1999, at the NIA, 371 Flemington Road, North Melbourne.