NTLG FBT Sub-committee minutes - 15 November 2001

QC: 16373 Content revised: No Abstract revised: No

Abstract:

Minutes of the NTLG Fringe Benefits Tax (FBT) Sub-committee meeting held on 15 November 2001.

Venue: Taxation Institute of Australia, 64 Castlereagh Street, Sydney.

Meeting commenced at 10 am.

Attendees:

Lee Beaver (Chair)	ATO	Anthony Greco	TA
Maria Benardis	TIA	Paul Hockridge	CPAA
Graham Clarke	ICAA	Brett Peterson	ATO
Lance Cunningham	NIA	Andrew Purdon	CPAA
James Deliyannis	NTAA	Garry Sebo	TIA
Joanne Dibetta	ATO	Karen Stein	ICAA
Kathryn Fox	TA	Tony Trumble	ATO

Apologies:

Evan Lancaster	TA	Elizabeth Lucas	LCA
Ray Conwell	LCA	Kathy Quigley	ATO
Debbie Hastings	ATO	Ray Regan	NTAA

^[H1]Disclaimer:

Please note: NTLG FBT sub-committee 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.

Meeting discussion: Lee Beaver advised he would be the chairperson for this meeting in the absence of Debbie Hastings. The chairperson opened the meeting and welcomed members.

The chairperson welcomed Brett Peterson, Small Business Assistant Commissioner, whose role includes responsibility for FBT in the ATO, and Tony Trumble, Personal Tax, Tax Technical Network representative attending to discuss the salary sacrifice ruling.

James Deliyannis representing NTAA, Anthony Greco and Kathryn Fox representing Taxpayers Australia at this meeting were also welcomed.

Apologies were received from Evan Lancaster (TA), Ray Conwell (LCA), Elizabeth Lucas (LCA), Ray Regan (NTAA), Kathy Quigley (ATO) and Debbie Hastings (ATO).

2 Minutes of 16 August 2001 meeting.

The minutes of the 16 August 2001 meeting were accepted.

3 Items carried over from previous meetings.

3.1 Register of outstanding issues report

3.1.1 FBTS/C000224/3 - de minimus rule

The ATO advised that the practice statement concerning a de minimus rule will issue shortly.

3.1.2 FBTS/C010816/7 Alternative FBT lodgement program.

The ATO advised the alternative FBT lodgment program submission is progressing through different committees and forums within Client Account Management Lodgement Policy & Practice. The proposal is on the agenda for discussion at the next Lodgement Policy committee meeting on 22 November 2001.

Outcomes will be advised in this forum when final decisions are made.

4 Issue of draft/final TD/TR's and practice statements

Taxation Ruling TR 2001/10 - Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements issued on 10 October 2001.

Taxation Ruling TR 2001/2PW (partial withdrawal) - Fringe benefits tax: the operation of the new fringe benefits tax gross-up formula to apply from 1 April 2000 was partially withdrawn on 12 September 2001 to delete paragraphs 128 to 130.

An addendum to the same ruling TR 2001/2A(2) (second addendum) issued on 12 September 2001 to delete and replace certain section references and to make changes to reflect the changes in GST on new cars as announced in the 2001 Federal Budget.

No taxation determinations have issued since the August meeting.

5 News from the ATO

5.1 Legislation update

Taxation Laws Amendment Bill (No. 2) 2001 received Royal Assent on 1 October 2001 as Taxation Laws Amendment Act (No. 2) 2001 - Act No. 167 of 2001. The Bill amends the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to:

¦ exempt from FBT free public transport provided to police officers to travel between their residence and primary place of employment. Applies from 1 April 2000.

¦ extends the taxation treatment currently given to public benevolent institutions to charitable institutions whose principal activity is to promote the prevention or the control of diseases in human beings. Applies from 1 April 1998.

¦ enable State and Territory Government departments or the equivalent to be treated as an employer for FBT purposes. Applies from 1 April 2001.

Taxation Laws Amendment Bill (No. 5) 2001 received Royal Assent on 1 October 2001 as Taxation Laws Amendment Act (No. 5) 2001 - Act No. 168 of 2001. The Bill amends the FBTAA to provide that:

¦ religious practitioners will be considered employees of their religious institution for the purposes of the FBTAA 1986. This will maintain the existing FBT exemption for a benefit provided by a religious institution to a religious practitioner that is principally for pastoral or other activities directly related to the practice, study, teaching or propagation of religious beliefs. Applies from 1 July 2000.

The Bill amends section 65J of the FBTAA to provide:

¦ a rebate of FBT to an employer which is a non-profit society or association established for the purpose of promoting the development of Australian information and communications technology. Applies from 1 April 2000.

¦ A rebate of FBT to an employer which is a non-profit society or association established to promote the development of Australian acquacultural and fishing resources. Applies from 1 April 1999.

5.2 New brochure for non-profit organisations

A new brochure called Tax help for your non-profit organisation was recently released and is now available on ATOassist (www.ato.gov.au). The brochure is designed to explain the publications and services that the ATO offers to non-profit clients. To view the brochure on ATOassist:

	Go to	http://www.ato.gov.au
	Select	For Non Profit Organisations
	Select	Important Issues/Tax Help
	Select	Tax help for non-profit organisation (PDF or HTML format)

5.3 New and improved E-Record out now

The new E-Record version 2.0 CD-ROM is now available. The CD-ROM includes a number of improvements on earlier versions. It now supports the 2001-2002 financial year activity statements and can be used for one or more businesses.

The new version provides new worksheets for fringe benefits tax.

Businesses can download E-Record Version 2.0 from ATOassist (www.ato.gov.au/erecord) or a copy can be obtained by calling 1300 139 051.

6 TR 2001/10 - Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements - submissions on final rulings

6.1 Salary sacrifice and leave entitlements (CPAA)

Would the ATO please clarify the meaning of paragraph 89 and following of TR 2001/10, in particular paragraph 90, which could be read as meaning that when leave is taken, the mix of salary and benefits must be the same as when the leave was accruing, rather than when it is taken.

Often, records would not be kept (of the details of packages many years earlier).

Arguably, paragraph 89 and following are only referring to the cashing out of leave, rather than the taking of leave, but that is not clear.

Discussion:

CPAA advised that there is a particular concern in relation to the possible interpretations of paragraphs 89 and 90 of Taxation Ruling TR 2001/10. The majority of practitioners and employers would read the reference to leave entitlements at these paragraphs as only relating to the situation where an employee 'cashes out' some entitlement to leave. That is, rather than taking accumulated leave to which an employee has an entitlement, an employee elects to be paid in cash or in kind by way of fringe benefits and foregoes the taking of leave. The issue in this situation is; 'is this an effective or ineffective salary sacrifice arrangement?'

However, an alternative interpretation of the relevant paragraphs of TR 2001/10 could be that when leave is taken, the mix of cash and benefits has to be determined at the time by reference to the mix of salary and benefits an employee had when the entitlement to the leave accrued, ie prior to the salary sacrifice arrangement (SSA) being entered into. This could mean there is an ineffective SSA during the period that accrued leave is taken. The CPAA commented that if this latter alternative is what the ATO is suggesting in TR 2001/10 then this is of real concern and requires urgent discussion/clarification.

The ATO advised that this latter alternative is the correct interpretation of the relevant paragraphs of TR 2001/10. Paragraphs 89 and 90 are not limited to 'cashing out' of leave.

There was general discussion about the implications that would arise should the ATO adopt the alternate view. Following a lengthy discussion on the issues arising upon confirmation of the ATO view at the meeting, the CPAA agreed that the ATO is required to issue a taxation determination setting out clearly the views expressed at this forum as TR 2001/10 inadequately covers this matter, the consequences of which will effect all employers.

However, the CPAA suggested that the more appropriate outcome would be for the ATO to interpret the relevant paragraphs as applying to the cashing out of leave only. The CPAA, with agreement from the other external member representatives, advised they are not seeking an amendment - legislative change is not needed to achieve this outcome. The law has not changed. The CPAA thought it was inconceivable that for every leave payment since 1986, every employer and every tax professional has got it wrong because employers and tax professionals have not interpreted the legislation in the way the ATO is now interpreting the laws.

The TIA expressed serious concern regarding the practical application of the ATO's interpretation. They advised there is no software or payroll system available that is capable of currently undertaking the calculations required. Payroll systems would have to be stopped and the calculations done manually. This would result in a huge compliance cost to all employers, small, medium and large.

The ICAA did not agree that the ATO's interpretation was technically correct. Further, the ICAA felt the compliance cost to employers would be horrendous and this could not be the intended consequence.

The ICAA expressed concern there would be non compliance across the board if the ATO maintains this view.

The CPAA stated the draft determination has to make employers appreciate they will have to account for salary and benefits on a daily accrual basis.

ATO response:

The ATO advised that, in view of the comments made at the meeting, a draft taxation determination will be prepared to address this matter more fully noting however that TR 2001/10 does, correctly, at paragraphs 89 and 90 set out the ATO view.

The issue of a draft tax determination will allow peak bodies to make formal submissions, including the alternative technical analysis that was alluded to at the meeting. The ATO asked members to provide two or three real life examples to be included in the taxation determination.

Also, there was a suggestion that the external members of this forum could provide a written submission on this matter immediately through the sub-committee.

The CPAA agreed to prepare the submission on behalf of the members, including examples, and will forward this to the chairperson of the sub-committee. The chairperson will ensure that the submission is forwarded to the ATO persons who have responsibility for this matter.

6.2 Set off of cross liabilities between employers and employees, in the context of an effective and ineffective SSA.

The NTAA would like the following issue to be considered.

At paragraphs 79 to 83 of TR 2001/10, the Commissioner deals with the set-off of cross liabilities between employers and employees, in the context of an effective and ineffective salary sacrifice arrangement ('SSA').

In particular, at paragraph 82, the Commissioner provides an example of an ineffective SSA involving an employee that has a debit balance loan account with the employer. In this case, the employee and employer mutually agree to set off the value of the liabilities owned by the employee to the employer against the employer's liability to pay salary or wages to the employee. The Commissioner concludes that such a set-off would amount to a payment of salary or wages.

However, at paragraph 83, the Commissioner clearly indicates that, where the employee foregoes salary or wages which is yet to be derived, for a reduction in the employee's debit loan account with the employer, this set-off would amount to an expense payment fringe benefit.

The NTAA believes that this conclusion at paragraph 83 appears to be fundamentally flawed, for the following reasons:

	1.	There can be no 'set-off' as such, because the employee is giving up the right to an amount of salary that is yet to be derived, and therefore, the employer has no legal obligation to pay the amount as salary or wages at this point in time or in the future. To conclude that a 'set-off' can be undertaken in respect of an amount of salary or wages yet to be derived, contradicts the doctrine of 'set-off', as noted at paragraph 81 (that is, there must be mutual liabilities).
	2.	The benefit cannot be an 'expense payment benefit' as such, because: (a) the definition of 'expense payment benefit' in section 20(a) of the FBT Act, requires there to be a 'payment' (normally by the employer). In paragraph 83, there has been no payment by the employer, and it appears that the employer has merely waived the employee's obligation, in return for the employee giving up the equivalent amount in gross salary (yet to be derived); and (b) the definition of 'expense payment benefit' in section 20(a) also requires that any payment (normally by the employer) must be for the purposes of discharging an obligation the employee has to pay an amount to a third party. In paragraph 83, the obligation is to the employer, and there is no third party.

On the basis of the above, the NTAA believes that the benefit provided in the context of paragraph 83 is a 'debt waiver' fringe benefit. Whilst this may have the same effect in that the debit loan balance is still reducing and the employee is only taxed on the reduced salary (because it is an effective SSA), in our opinion, it cannot constitute an 'expense payment fringe benefit'.

Similar comments to the above were also provided by the NTAA in response to the draft ruling TR 2001/D5.

In the event that these comments may have been overlooked, at draft ruling stage, the NTAA seeks the ATO's guidance in respect of its comments at paragraph 83 of TR 2001/10.

ATO response:

The ATO agreed with the NTAA that the benefit provided in the context of paragraph 83 of Taxation Ruling TR 2001/10 is a debt waiver fringe benefit. The ATO further advised that an addendum to TR 2001/10 was not warranted at this stage. Although acknowledging that the correct technical position was that the benefit was a debt waiver benefit, the purpose of paragraph 83 was to indicate that FBT would apply. The valuation of an expense payment or debt waiver, in this situation, would be the same.

7 Tax Reform - Taxation Ruling TR 2001/2 and Goods and Services Tax Ruling GSTR 2001/3 - submissions on final rulings -

7.1 Concepts of remuneration and work related benefits (ICAA)

This is a continuation of an issue that was discussed at the last meeting of the sub-committee. The CPAA is to prepare a submission on the outstanding issues and the matter will be included in the agenda of the next meeting of the sub-committee.

Discussion:

CPAA apologised for the delay in forwarding their submission. Work was still being undertaken in relation to the content and examples that need to be discussed. The ATO agreed to discuss out of session the concerns of the CPAA upon receipt of the submission. It was also agreed that CPAA and ATO would report on those discussions at the next meeting.

7.2 Div 71 and the alternate view on meal entertainment

The TIA submitted this agenda item.

Background

The issue centres on GSTR 2001/3 and meal entertainment calculations given the confirmed ATO position at the last meeting.

As per the meeting held on the 21 June 2001 agenda item 6.1.2 this issue was discussed at great length. In particularly there were discussions with regard to the below (extracts from minutes):

¦ the ATO had originally intended to treat all entertainment, by its very nature, as remuneration benefits and therefore not subject to Division 71. Paragraph 56 of the ruling lists entertainment as a remuneration benefit.

¦ However, there remains an alternate view, which interprets the statements at paragraphs 55 and 56 of the ruling to mean that where meal entertainment is provided in a 'business context', for example, entertaining clients, that the benefit is a work benefit. This is not clear in the ruling and requires urgent clarification if this view is at all correct.

¦ it was submitted that, all entertainment should be viewed as remuneration benefits and seeks confirmation of this from the ATO. This would also be the simplest approach, providing the least costs of compliance, as it would eliminate the need for employers to review each item of expenditure to determine whether it was a work or remuneration benefit.

¦ The ATO considers that Division 71 of the GST Act does not apply to acquisitions resulting in entertainment benefits to employees (and their associates). For entertainment, the FBTAA allows employers to make elections for meal entertainment and entertainment leasing facility benefits. Therefore, the ATO considers that Division 71 does not apply to acquisitions that result in entertainment benefits . Also, an employer who does not make an election can claim input tax credits for a meal entertainment and entertainment leasing expense to the extent that the expense results in benefits provided to an employee and will be subject to FBT. Consistent with this Division 71 approach to entertainment acquisitions, paragraph 11-15(2)(a) does not apply either.

Issue

The issue is with regard to the compliance costs and issues of adopting the ATO view where an input taxed supplier has adopted the alternate view and have lodged their FBT returns and BAS returns accordingly. This resulted as a consequence to the late clarification of ATO position on the treatment.

Some of the compliance costs (additional work required) and issues that small business has communicated to the Institute include:

¦ adjusting prior BAS returns if the correction threshold is exceeded;

¦ review of entertainment acquisitions for the last 6 months (1 April to September) where the actual method was used.

Question 1

Proposed transitional solution recommended given late announcement:

¦ for the ATO to allow taxpayers to adopt their view and position expressed above for the FBT year (return) ending 31 March 2001 and the BAS for the period ending 30 June 2001 where the net effect to 'revenue' is neutral;

Small business wish to avoid amending their BAS returns for these months where they have adopted the alternate view.

What is the ATO's view with regard to this issue?

Question 2

Issue for consideration:

¦ income tax deduction issues under Division 27 of the ITAA 97 Act - if a client does nothing on the basis that deductible entertainment will be overstated by the amount of GST denied under Division 71 of the alternate view.

Some ATO tax officer's advice at present when tax agents have phoned is as follows:

"Even if you have not claimed input tax credits, you cannot claim income tax deductions for GST portion (Section 27(5) of ITAA 1997) and must still apply the higher gross up formula".

Can the ATO please comment?

ATO response:

The ATO acknowledges the compliance and interpretational issues around these specific matters.

Where an input taxed supplier has determined entitlement to input tax credits, fringe benefits tax liability and income tax deductions on a basis consistent with an understanding that Division 71 of the GST Act would apply to disallow entitlements relating to some employee entertainment, the ATO will accept lodgment of that entity's FBT, income tax returns and BAS consistent with that understanding. This will be accepted as applying up to the time that it was reasonably practicable for the entity to comply with the ATO views stated in the FBT sub-committee on 21 June 2001. Minutes of that meeting provided clarification of the relevant matters and paragraphs of GSTR 2001/3, as noted in the TIA submission.

In practical terms this means that, as requested by the TIA, acceptance by the ATO of the application of this alternative interpretation of the FBT/GST interaction for Division 71 will extend to the FBT return for the year ending 31 March 2001 as well as relevant income tax deductions and BAS requirements up to 30 June 2001. Naturally, Division 71 employers may be required to carry some of this forward to the FBT return for the year ended 31 March 2002 for the period 1 April to 30 June 2001.

The ATO noted the comments attributable to the ATO at the end of question 2 of the TIA submission. It is not clear what question was put to the ATO on these occasions. This statement is correct where an entitlement to an input tax credit exists. The wording of section 27-5 of the ITAA 1997 is as follows;

"You cannot deduct under this Act a loss or outgoing you incur, to the extent that the loss or outgoing includes an amount relating to an input tax credit to which you are entitled…"

However, in the circumstances of these matters, it is an arguable position, which is acknowledged, that such an entitlement did not exist until the point at which the ATO provided clarification (June 2001). That is, where it is shown that input tax credits claims have been made on the above basis, income tax deductions for that expenditure will also be calculated on the basis that there is no entitlement to input tax credits.

Any entity that wishes to now claim input tax credits to which is entitled under the current ATO view (as set out in GSTR 2001/3) may do so either in the relevant tax period or within the policy expressed in the Correcting GST Mistakes Fact Sheet, NAT 4700. In this case there would need to be an appropriate adjustment to FBT and income tax liabilities.

8 PBI's other than hospitals - benefits arising from private credit card reimbursement or reimbursement of employees private entertainment expenses.

Agenda item submitted by CPA Australia.

Meal entertainment and entertainment facility leasing expenses are outside the $30 000 limit and therefore do not result in PBIs (non hospitals) having an FBT liability, regardless of the cost.

The statutory authority is found in subsection 5B(1A), then subsection 5B(1D), then subsection 5B(1E), then subsection 5B(1F) and (1G), then subsection 5B(1H) and (1J), and then subsection 5B(1K) and (1L), particularly step 1 in subsection 5B(1L), which takes us to subsection 5E(3).

The provision of meal entertainment (ME) is defined in section 37AD and entertainment facility leasing expenses (EFLE) is defined in section 136. It is these definitions which cause our concern.

It seems that your fact sheet on the calculation of FBT by PBIs (other than hospitals) reflects common industry practice. While we query the strict technical correctness of that interpretation, we would like to see that view confirmed.

In particular, the fact sheet says that where a CEO has $2,000 of private dining costs on his credit card paid, that is meal entertainment and it is disregarded when calculating the PBIs FBT.

This raises at least two issues. The first issue is whether the payment of a credit card debt constitutes ME or EFLE, or whether it is a residual fringe benefit.

For practical reasons, (subject to resolving the second issue), we submit that such payments should be treated as ME or EFLE's.

The second issue is whether the reimbursement of an employee's private entertainment can ever be ME or EFLE.

The crux of this issue is that section 37AD refers to the provision of entertainment and so on, and sec 136 refers to expenses incurred by the person in hiring or leasing. Subsection 5E(3)(a) does not change the context, nor does paragraph (a) of step 1 of subsection 5B(1L) in relation to meal entertainment, whereas subsection 5E(3)(c) and paragraph (c) of step 1 of subsection 5B(1L) might, as they refer to taxable values being attributable to EFLE.

The question therefore is whether the employer is providing entertainment when, say, it pays a cost after the event.

Arguably, other parts of the FBT legislation get around this sort of problem by, for example, in section 58X(1)(a), referring to expense payments in respect of an eligible work related item.

The drafting of section 5B, 5E, 37AD and 136 is not as wide.

Again, for practical reasons, we submit the ATO ought to confirm the approach taken in its fact sheet, which we understand is common industry practice.

Discussion:

The CPAA referred to the fact sheet Fringe Benefits Tax Reform - calculation of fringe benefits tax by public benevolent institutions (other than hospitals) and in particular the example where the CEO has $2000 of private dining costs on his personal credit card reimbursed. The fact sheet says that the reimbursement constitutes meal entertainment that is an excluded fringe benefit. 'Meal entertainment' is specifically disregarded when calculating a PBIs fringe benefits tax liability.

The CPAA stated that the Fringe Benefits Tax Assessment Act (1986) (FBTAA) requires that the employer provides meal entertainment to another person, the recipient. Generally this would be an employee for the purposes of the FBTAA. The question is, and using the facts of the example contained in the fact sheet, did the employer provide meal entertainment to an employee when the relevant entertainment was, as submitted by the CPAA, provided by a third party prior to the reimbursement of private credit card expense?

The CPAA sought clarification and confirmation from the ATO that the fact sheet is correct and that the ATO will continue to apply the law as set out in the fact sheet given that it is possible to interpret the law in a manner which leads to an outcome that the employer, in these situations, cannot provide meal entertainment.

During the discussion, the TIA advised that the reimbursement of the private credit card expense can be provision of meal entertainment. Under Section 37AC of the FBTAA the employer has to provide meal entertainment to another person. However, the meaning of provision of meal entertainment is further defined in section 37AD. Section 37AD(c) effectively says that the payment or reimbursement of expenses incurred in providing entertainment by way of food or drink is a reference to the provision of meal entertainment.

The TIA submitted that by reading section 37AC and substituting into that 37AD(c), 37AC reads as follows:

Where at a particular time an employer provides the payment or reimbursement of expenses incurred in providing entertainment by way of food or drink that provision is taken to constitute a meal entertainment fringe benefit provided by the provider to the recipient at that time. The provider is defined in line one to be the employer.

ATO response:

The ATO confirmed that 37AD(c) of the FBTAA is the applicable paragraph in concluding that the reimbursement of private dining costs on the CEOs credit card constitutes the provision of meal entertainment. The reimbursement by an employer of a private credit card expense that relates to 'meal entertainment' therefore will constitute 'meal entertainment' as defined in section 37AC. The ATO agrees with the TIA's analysis of the relevant provisions as set out in the discussion above and the conclusion that these types of reimbursements are correctly treated as the provision of meal entertainment by an employer.

Meal entertainment is specifically disregarded under sub-section 5B(1L)(a) when calculating a PBIs fringe benefits tax.

Note: This agenda item raised issues in relation to entertainment facility leasing expenses as well as reimbursement of 'meal entertainment' on employees' personal credit cards. The EFLE issue was not discussed at the meeting. The ATO view provided above applies only to the 'meal entertainment' issue. The EFLE issue will be discussed at the next meeting of the sub-committee.

9 Interaction of FBT & alienation of PSI (TIA)

An issue arises where a personal services entity, for example a company or trust is providing benefits other than cars.

Reading the exemption in section 8(4) of the FBTAA it is confined to car fringe benefits. Accordingly FBT may apply to other benefits. Section 86-60 of the ITAA 97 is supposed to prevent deductions for all fringe benefits across the board other than those specifically allowed in section 86-70. Therefore, double taxation can and may arise. The first amount is the FBT, the second layer of taxation is the income tax on the attributed income under the PSI legislation.

Alternatively, does section 23L of the 1936 Act alleviate the double taxation on the cost of the benefit plus any FBT? Is there a generic section in the FBTAA that prevents FBT being payable on other kinds of fringe benefits in these circumstances as there does not appear to be a section in the other specific sub divisions that exclude these other fringe benefits where they are not deductible under section 86-60 of the ITAA 97. Some examples that spring to mind are loan fringe benefits, expense payment fringe benefit, property fringe benefits and residual fringe benefits.

Can the ATO please comment?

ATO response:

The ATO is aware that in some circumstances an expense or outgoing, that is not deductible by virtue of section 85-15 or section 85-20, will give rise to a taxable fringe benefit under the FBTAA. This effectively will mean that the amount of the denied deduction is taxed twice. However, the amount of fringe benefits tax incurred by the individual or the personal services entity is an allowable deduction. The ATO is currently considering how the double taxation issue should be addressed.

10 FBT & recreational facilities (TIA)

Section 47(2) of the FBT Act 1986 outlines the exemption for recreational & child care facilities

	Section 47(2) [Recreational or child care facilities] Where
	(a)	a residual benefit provided to a current employee in respect of his or her employment consists of:
	(i)	the provision, or use, of a recreational facility; or
	(ii)	the care of children of the employee in a child care facility; and
	(b)	the recreational facility or child care facility, as the case may be, is located on business premises of:
		(i)	the employer; or
		(ii)	if the employer is a company, of the employer or of a company that is related to the employer;
	the benefit is an exempt benefit.

At Section 136 of the FBTAA 1986 the term 'recreation' is defined to include:

(a) amusement;

(b) sport or similar leisure-time pursuits; and

(c) recreation or amusement provided on, or by means of, a vehicle, ship, vessel, or aircraft;

Can the ATO please confirm if the exemption would also apply to the instructors for example a gym instructor or a personal trainer for employees on employer's premises using the employer's facilities?

Discussion:

The members of the sub-committee agreed that the availability/provision of gym instructors and/or personal trainers was becoming more widely available to employees. There are numerous ways in which employers are now providing these types of benefits. It was suggested that the ATO interpret sub-section 47(2)(a)(i) of the FBTAA in a way which would allow an exemption under this provision not only for the recreational facility (for example, gym) but also the gym instructor (not being a personal trainer).

ATO response:

There is a further definition in section 136(1) of the FBTAA, 'recreational facility', that applies when analysing this submission. 'Recreational facility' is defined to mean a facility for recreation, but does not include a facility for accommodation or a facility for drinking or dining. The definition of 'recreation' contained in the TIA submission provides the definition of recreation.

The ATO noted that there is a discrete but important difference in the wording of sub-sections 47(2)(a)(i) and 47(2)(a)(ii) of the FBTAA. In relation to the exemption for the care of children of an employee in a child care facility, sub-section 47(2)(a)(ii), that is 'the care of children…..in a child care facility', applies not only to the child care facility but also to the staff required to care for the children.

However, the words in sub-section 47(2)(a)(i) of the FBTAA relating to the exemption of a recreational facility that is 'the provision, or use, of a recreational facility', with reference also to the relevant definitions, are not as inclusive as those dealing with the exemption for the care of children of an employee in a child care facility.

Accordingly, the words, and it was suggested, the intent of the exemption contained in sub-section 47(2)(a)(i) relating to residual benefits arising from the provision or use of a recreational facility indicate that this exemption relates only to the provision or use of the recreational facility and does not extend to gym instructors and/or personal trainers.

The ATO confirmed the exemption does not apply to a personal trainer or, except as noted below, a gym instructor. The availability of a personal trainer or gym instructor which can be used by an employee would be separate residual fringe benefits.

The ATO agreed that where staff are employed to operate a recreational facility, being limited to staff who, for example, are required to provide instruction on the correct and safe use of the equipment, oversee the use of the facility and so on, there would be no residual fringe benefit arising in relation to employees using the recreational facility as the 'provision and use' of the recreational facility is exempt by virtue of sub-section 47(2)(a)(i).

It was noted that a recreational facility, for the purposes of applying the exemption, must be located on 'business premises'. The ATO view on what constitutes business premises is set out in Taxation Ruling TR 2000/4.

11 FBT & novated leases (TIA)

Section 9 of the FBT Act 1986 calculates the taxable value (base value of the car - A) of car fringe benefits by reference to 'the leased car value of the car at the earliest holding time'. Where the lessor purchased the car at or about the time when the employer commences to lease the car from the lessor (by way of a novation between the lease company and the employer's employee), then the leased car value is the cost price of the car to the lessor.

An example:

A new employee may request that an employer novate a lease agreement that relates to a motor vehicle that the employee was provided with by a former employer. In this situation, as the car was not purchased by the lessor at or about the time when the new employer commences to lease the car from the lessor (by way of a novation of the lease agreement), the cost price of the car to the lessor is not the 'leased car value' for the purposes of calculating FBT.

Section 136 of the FBT Act provides that the 'leased car value' where the lessor did not purchase the car at or about the time when the provider commenced to lease the car from the lessor is the arm's length purchase price of the car at the time when the provider first held the car. The FBT Act does not specify how the arm's length purchase price is to be determined in this situation.

The lease company can provide the new employer with the GST inclusive market value of the car at the time that new employer first commences to provide a car fringe benefit in relation to the car. The GST inclusive market value is based on the lease company's information from selling thousands of motor vehicles each year.

For the purposes of compliance with section 9 of the FBT Act, may the new employer use and rely on the GST inclusive market value as advised by the lease company in the calculation of FBT on novated lease motor vehicles?

ATO response:

The analysis of the relevant FBTAA provisions set out in the above submission is correct. 'leased car value', in this scenario, requires reference to the amount that the person (employer) could reasonably be expected to pay to purchase the car from the owner (lessor) at that time under an arms length transaction.

Accordingly, if the lease company in this scenario provides a GST inclusive valuation to the employer, and this is a market value which the employer would reasonably be expected to pay for the car in an arms length transaction, the valuation would be acceptable.

12 Operating cost method - log books (TIA)

Section 162 of the FBTAA 1986 states that a reference in the FBTAA to a period during which a car was held by a person means a period where the car was continuously held by the person.

The interpretation of section 162(2) is of increased significance in the context of s 162(4) , which states that a reference to a period during which a car was held by a person is a reference to a period during which the car was continuously held by a person. Thus if section 162(2) refers to the actual use of a car to provide fringe benefits, any break in that use will cause a break in the period the car is 'held by' a person.

MT 2026 does not seem to offer any additional guidance on the 'continuously held' requirement other than to say:

12. Sub-section 161(1) of the Act simplifies the log book entry requirements by authorising the use of a single entry to record consecutive business journeys undertaken on a particular day. Thus, for example, if a salesman travels on business continuously throughout a day, only one log book entry would be required for that day. If those journeys were broken in the middle of the day by private use of the car, two composite entries would be required.

The Institute seeks clarification as to whether the following examples would meet the test of 'continuously held' for the purposes of the log book requirements under the operating cost method:

1. Assume a person keeping the log book is overseas for two weeks during the 12 week period, will it still count as part of the 12 week period?

Would it be accepted that it is still being kept 'continuously' as all travel is recorded but there is no travel for the two week period whilst the person is overseas?

In our view, the business use percentage should not be affected as there is no travel during the two week period while the person is absent overseas.

If in the ATO's view this is not acceptable, how does a regular overseas traveller who is away for two weeks in each quarter keep a log book?

2 . If it is acceptable to the ATO, will it also be accepted where someone keeps a log book for two weeks then goes overseas for the remaining 10 weeks and the car is garaged at home and not used provided the weeks the car is used is representative?

Clarification is required.

ATO response:

Miscellaneous Taxation Ruling MT 2026 (issued 10 September 1986) has been withdrawn with effect from 3 September 1997.

Section 162(4) of the FBTAA states that a reference to a period during which a car was held by a person is a reference to a period during which the car was continuously held by the person. The term 'continuously held' in this section refers to the person who 'holds' the car, the provider.

Section 162H of the FBTAA provides that for the purposes of section 10 of the FBTAA a reference to the applicable log book period is a reference to a continuous period of not less than 12 weeks that begins and ends during the holding period except where a car is held for less than 12 weeks.

The requirements that need to be met in respect of a log book are set out in the section 136(1) definition 'log book records'. Log book records must be in English and entries must be made at the end of the trip or as soon as reasonably practicable afterwards. The period during which the log book is kept must be specified.

The following details must be entered for each business journey:

¦ the date on which a the journey began and ended

¦ the odometer readings at the start and end of each journey

¦ the kilometres travelled in the course of the journey and

¦ the purpose or purposes of the journey.

A log book is for the purpose of demonstrating the pattern of use of the car during the period that the log book is maintained, for example generally 12 weeks (section 162H).

Section 162F of the FBTAA requires that the number of kilometres that represents a reasonable estimate of the number of business kilometres applicable to a car held by a person during a period in a year of tax shall be determined having regard to all relevant matters including any log book records, odometer records or other records maintained by or on behalf of the person, and any variations in the pattern of use of the car.

Example 1:

As noted above the requirement of 'continuously held' refers to the person holding the car for example, employer. It would be assumed that the car has been continuously held in this example by the employer.

In this scenario, where a person travels during the 12 week period for a period of 2 weeks, it will be a question of fact as to whether the 12 week period is representative or not, that is whether log book records that are maintained during this period demonstrate the pattern of use of the car or not.

If the log book records are not representative those log book records covering the 12 week period could not be relied upon, in total, notwithstanding the employer can still make some reference to them when determining the reasonable estimate of number of business kilometres.

In such cases, an employer would need to have regard to 'other records', as well as the non-representative log book and odometer readings, in accordance with section 162F, when ascertaining a reasonable estimate of business kilometres in relation to that car. The ATO stated that it would be prudent for an employer to ensure that log book records in fact demonstrate representative use of the vehicle as they can be relied upon easily as forming part of the matters referred to in section 162F.

Example 2:

In the second example, again, it is a question of fact as to whether the 12 week period is representative. Clearly, if the 10 week trip is a one off business trip, a log book would not be representative and, as stated above for example 1, cannot be simply relied upon as demonstrating the use of the vehicle.

It is unlikely that the period where an employee travels for 10 weeks out of the 12 would be representative. It could be representative if that employee travels 10 weeks out of 12 weeks consistently as the log book may demonstrate the actual use of the vehicle during the 12 month period, for example no business trips undertaken. Factually, this would appear to apply in a minority of cases.

13 Cost of compliance

13.1 Simplification of FBT (CPAA)

What are the ATO's plans to consult on the simplification of the FBT legislation, following the Asst. Treasurer's response to the Chairman of the JCPAA on 2 Oct 2001?

ATO response:

This issue arose following commentary contained in a tax reporting service, the text of which was as follows;

The Assistant Treasurer, Senator Rod Kemp, has advised that, following concerns raised by the Joint Committee of Public Accounts and Audit (JCPAA), the costs of compliance with FBT laws will be monitored by the ATO. The ATO will establish a project to identify areas where business and its advisers find FBT legislation complex. Senator Kemp said that from this project, the ATO would make recommendations to Government to simplify the FBT legislation.

Source: Advice from Assistant Treasurer to Chairman of the JCPAA, 2 October 2001.

The ATO stated that the response referred to above was in relation to recommendations of the JCPAA in the Review of Auditor-General's Reports 1998 - 00, Second Half, tabled in Parliament on 16 March 2000. In particular relating to Audit Report No. 34.

The ATO had established, as a result of one of the recommendations in that report, an ongoing project to monitor the costs of compliance in relation to the FBTAA. This monitoring has been ongoing, including those matters raised at this forum. Where feedback or suggestions from businesses and their advisers have suggested amendments to the FBTAA, those proposals are examined to see if those parts of the law can be simplified without compromising the integrity of the FBTAA or its administration.

13.2 FBT and GST accounting (NIA)

When completing the FBT return for 2000/2001, items to be included need to be GST inclusive (where it was a GST creditable supply). But, general accounting principals and practice involves splitting the supply between P&L (the supply excluding GST) and balance sheet (the GST proportion of the supply). Completing the FBT return becomes an accounting & taxation nightmare.

One cannot simply just add 10% to the items included in the FBT return (to account for the GST), from totals extracted from the general ledger as these items may be made up of some expenses that were not subject to GST or have a different GST treatment ,for example motor vehicle registration (no GST) and green slip (subject to GST but unable to claim same in 2001*). Unless you go through each and every account in the general ledger and extract those expenses that are not subject to GST or are treated differently for GST purposes, the FBT return will be overstated by FBT on the GST proportion of supplies where GST was not charged or not claimed as an input tax credit. Furthermore, the reportable fringe benefit will be incorrect and effect individuals.

ATO response:

The ATO acknowledged that there would be compliance difficulties for businesses that do not have an accounting package and/or records that efficiently records entitlements to GST input tax credits in these situations. Clearly, without an electronic accounting package manual records would need to be maintained in such a way that correctly reflect the entitlement to input tax credits in relation to the provision of fringe benefits.

14 Other business

14.1 Minor benefit threshold

Clarification of previous sub-committee minutes (22 February 2001, agenda item 8.2) concerning gala/award dinner or similar function and the application of the minor benefit exemption.

The ATO has received a number of queries concerning the application/interpretation concerning agenda item 8.2 of the minutes of the sub-committee meeting of 22 February 2001 to Christmas parties.

The agenda item concerned compliance issues arising for employers where there are functions which include, typically, a band which the employer has engaged separately that does not form part of 'meal entertainment'.

Members of the sub-committee, on a number of occasions, contended that there were particular compliance difficulties for reporting purposes in these situations. The matter discussed in the previous minutes arose as a result of compliance issues around reporting requirements. For example the 'meal entertainment' component is not reportable yet the 'recreational entertainment' component, for example a band, would be reportable where the 'associated benefits' exceeded, in total, $100 per employee.

At this agenda item there is an administrative concession agreed to by the ATO for some functions where the total cost per employee does not exceed $125 per employee. This $125 threshold for application of the minor benefits exemption only applies where the function includes the provision of a band or entertainment ('recreational entertainment' rather than 'meal entertainment') where the employer has separately engaged the band or the expenditure is itemised on an invoice relating to the function.

The administrative threshold of $125 does not apply to all Christmas functions.

The following 3 paragraphs are an extract from the agenda item referred to. Further clarification is provided below with the addition of the words in 'bold' to the extract from the original minutes to assist in understanding the administrative undertaking that was given by the ATO:

1. Previously the ATOs stated position has been that section 58P (minor benefits exemption) applies to Christmas functions only where all benefits associated with the function are grouped together and do not exceed $100. In applying the tests in paragraph 58P(1)(f), the ATO, in raising the total amount to $125 in these situations , is acknowledging the practical difficulties that the employer will encounter in determining the notional taxable value of the minor benefit, being the band, and the associated benefits.

2. The incidental nature of the band is determinative in deciding whether the minor benefits provisions apply or not. Clearly where the band or entertainer is not incidental, this policy position does not apply to exempt the recreational entertainment. Incidental in this regard is limited to $25 per employee. Also, the other requirements set out in section 58P continue to be relevant, eg the frequency and regularity of identical or similar benefits which are provided.

3. In those cases where the total cost of the function relating to 'meal entertainment' exceeds $100 and there is 'incidental' recreational entertainment which was separately invoiced, the ATO does not consider that the minor benefit exemption is applicable. For example, where the 'per head' total of a function is $175, being $150 for 'meal entertainment' and $25 in respect of a band, it is considered that the $175 is a fringe benefit. $150 is not reportable, however, the $25 relating to the band will need to be reported on the relevant employee payment summaries (assuming the reportable fringe benefits $1000 threshold is exceeded).

For a full understanding of this issue, reference should be made to the minutes of the sub-committee meeting of 22 February 2001 agenda item 8.2.

As noted in the minutes of 22 February 2001, the ATO administrative position re application of the minor benefits exemption to Christmas functions, in general, remains limited to less than $100 per employee. That is, except where there is a 'band' which has been separately engaged/invoiced/itemised, all 'associated benefits' (as defined in sub-section 58P(2)) are grouped together and where their aggregated total is less than $100 per employee an employer can apply section 58P to treat the minor benefits as a exempt benefits for each employee (so long as infrequent, and so on.).

The $100 per employee noted is an administrative application of sub-section 58P(1)(f) which requires that it be concluded that it would be unreasonable to treat the minor benefit, having regard to the requirements listed, as a fringe benefit. The $125 threshold contained in the minutes of the sub-committee of 22 February 2001 is a further administrative position agreed to by the ATO but has limited application to the situation considered at that meeting.

It should be noted that neither the $100 nor $125 administrative threshold being discussed here and in the previous minutes referred to is an application of sub-section 58P(1)(e). Sub-section 58P(1)(e) contains the test that requires that the notional taxable value of each minor benefit must be less than $100.

14.2 Update on the ATO's audit program

The NTAA would like an update on the ATO's FBT audit program for the 2002 FBT year. Are there any problems being identified with the 2001 FBT return, and in particular, any problems relating to the interaction between the GST and FBT, for example, using the correct gross-up rates? If so, what problems have been identified

ATO response:

FBT 2002 compliance activity

From an FBT point of view our focus remains on activities providing service and assistance to maximise voluntary compliance with FBT legislation.

The major emphasis in 2002 will be research activities using external and internal information to identify those employers that match a FBT profile but have not lodged a 2001 FBT return. Those employers who are in this category may be contacted initially by letter with follow up advisory visit where necessary.

An analysis of the 2001 FBT returns has indicated that some FBT lodgers are having problems with the FBT/GST interaction and the use of type 1 and type 2 gross-up rates. A phone questionnaire will be used to establish the problems encountered and how these can be resolved.

A number of audits will also result from referrals from other ATO Field Staff and from information supplied by the public.

FBT 2001 return

Analysis of FBT 2001 returns indicated that 32% of lodgers had used type 2 gross up rate only. This indicated that many benefits were being provided that did not have GST input tax credit. A project has been established to determine what type of benefits are being provided and if the taxpayer has sufficient knowledge of the GST/FBT interaction. Early indications show that there are many reasons for the higher then expected use of type 2 only and that most FBT lodgers have a basic understanding of the FBT/GST interaction. The project at this stage is for education purposes and for the ATO to collect further data.

The 2001 FBT returns showed that 11% of lodgers used Type 1 rate only while the rest 57% used a combination of both rates.

Reportable fringe benefit update

Projects completed in 2001 indicated that most employers who lodge FBT returns have a good understanding of reportable fringe benefits. There were some errors in relation to calculations but on the whole employers had fulfilled their obligations. However there was a problem with employees not including the reportable fringe benefits amount on their 2000 income tax return and this was followed up by compliance action with some employees.

14.3 ATO interpretative decisions

Following discussion at the meeting the ATO agreed to include in future minutes FBT related ATO interpretive decisions (ATOIDS) that have issued since the last meeting. The following FBT ATOIDS have issued to 15 November 2001

ATO ID 2001/120 - 'Otherwise deductible' rule

ATO ID 2001/222 - Living away from home allowance

ATO ID 2001/253 - Waiver of a levy payable by a unit owner/employee

ATO ID 2001/255 - Car parking fringe benefits

ATO ID 2001/294 - Status of a cemetery trust

ATO ID 2001/298 - Public benevolent institution health care provider status

ATO ID 2001/304 - 'Otherwise deductible' rule

ATO ID 2001/309 - Child care facility exemption

ATO ID 2001/313 - Exempt residual benefit

ATO ID 2001/332 - Religious practitioner's exemption

ATO ID 2001/333 - Administrative costs of salary packaging

ATO ID 2001/425 - Car parking expenses - car parked at primary place of employment for more than four daylight hours in a day (indirect ref to FBT)

ATO ID 2001/532 - Salary sacrifice arrangements involving loans with redraw facilities (listed under salary sacrifice)

ATO ID 2001/543 - FBT: exempt benefits: work-related counselling

14.4 Content rating feedback facility on ATOassist (NIA)

The ATO has a 'comments' box in the NTLG minutes on their Internet site. What happens when a person makes a comment? Is there any trace of whom the comment came from and means to reply - or is it just there for the webmaster to see how many people have read and understood the minutes?

ATO response:

1. The content rating feedback facility was introduced on all content pages across the ATOassist website in June 2001. It is a means by which site users can comment on the usefulness (or otherwise) of specific content pages. If a particular content page does not meet user needs, the webmaster can determine why (if the site user uses the text box to comment). The aim is to improve the user experience through providing content, which meets user needs.

2. ATOassist does not use 'tracking' and the ATO is unable to identify specific users or track where they have been on the site.

3. The NTLG minutes are published by the small business line (SB). The feedback facility is a one way mechanism for SB to obtain feedback on their content pages to help improve the services they offer. Unfortunately SB are currently unable to respond to feedback, or answer tax questions posed. For questions about law interpretation, contact the ATO information line that refers to your enquiry. The contact numbers are listed on ATOassist. For questions about FBT law interpretation contact the fringe benefits tax information line on 13 33 28 .

14.5 FBT fact sheets and guides

The NTAA asked if a complete list of current FBT fact sheets and guides could be published on ATOassist.

ATO response:

The ATO advised that a current list of FBT fact sheets and the 'FBT A guide for employers' and '(FBT) Car guide and workbook' can be located on ATOassist at:

	Go To	http://www.ato.gov.au
	Select	For Businesses
	Select	Pay tax and claim rebates
	Select	Finding what taxes are relevant to my business (find.......)
	Select	Fringe benefits tax (FBT)

New fact sheets and guides will be added to the list when they are released. Fact sheets are reviewed periodically and if the fact sheet information is out of date or if the information contained therein has been incorporated into the 'FBT: A guide for employers', the fact sheet will be withdrawn. A review of current FBT fact sheets will be conducted in the near future and several may be withdrawn.

Subsequent to this meeting a link to the current FBT publications and fact sheets is now available on ATOassist at:

	Go to	http://www.ato.gov.au
	Select	For Tax and Superannuation Professionals
	Select	Newsletters and fact sheets
	Select	Fringe Benefits Tax

Alternatively, a list of all FBT products can be obtained by conducting an 'FBT' keyword search on ATOassist and extracting the relevant FBT documents required.

15 Close of meeting

15.1 Meeting dates for 2002

The meeting dates agreed for 2002 are:

Date	Hosts	Place
21 February 2002	CPAA	Melbourne
16 May 2002	ATO	Sydney
15 August 2002	TA	Melbourne
21 November 2002	TIA	Sydney

15.2 Next meeting

The next meeting will be held on Thursday 21 February 2002 at William Buck Chartered Accountants, 215 Spring Street, Melbourne.

^[H36]Register of Outstanding Issues

Item	Agenda Item Ref	Subject	Action	Progress
FBTS/C000224/1	7	Maintain register of issues which require further action	ATO	Ongoing
FBTS/C000224/3	8	De minimus rule -	ATO	Ongoing
FBTS/C010816/7	7	Alternative FBT lodgement program - being reviewed by CAM Lodgement Policy and Practice	ATO	Ongoing
FBTS/C011115/10	6.1	CPAA to prepare a submission on issue relating to final ruling TR 2001/10.	CPAA
FBTS/C011115/11	7	CPAA to prepare a submission on outstanding issues relating to final rulings TR 2001/2 and GSTR 2001/3	CPAA
FBTS/C011115/12	8	Issue relating to whether the reimbursement of an employee's private entertainment can ever be an entertainment facility leasing expense.	CPAA