^[_GoBack] NTLG FBT Sub-committee minutes - 20 May 2004

Venue: Taxpayers' Australia, 1405 Burke Road, East Kew

Meeting commenced at 10.00am

Attendees

Lee Beaver (Chair)	Tax Office	Anthony Greco	TA
Maria Benardis	ICAA	Paul Hockridge	CPA Aust
Graham Clarke	ICAA	Frank Klasic	LCA
Ray Conwell	LCA	Evan Lancaster	TA
Stephen Cane	NTAA	Andrew Purdon	CPA Aust
Joanne Dibetta	Tax Office	Stephen Quah	Tax Office
Stuart Dunlop	Tax Office	Garry Sebo	TIA

Apologies

Lance Cunningham	NIA
James Deliyannis	NTAA
Karen Stein	ICAA

Disclaimer
Please note: NTLG FBT sub-committee agendas, minutes and related papers are not binding on the Tax Office or any of the other bodies referred to in these papers. While every effort is made to accurately record 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.

^[H1]Professional bodies represented

CPA Aust	CPA Australia
ICAA	Institute of Chartered Accountants in Australia
LCA	Law Council of Australia
NIA	National Institute of Accountants
NTAA	National Tax and Accountants Association
TA	Taxpayers' Australia
TIA	Taxation Institute of Australia

^[H2]Agenda items

Agenda items are provided by the professional bodies and the Tax Office. They are set out with the description of the item and the response from the Tax Office or the professional bodies followed by any meeting discussion.

1 Opening of the meeting including any changes to the agenda

The chairperson opened the meeting and welcomed members. The chair also welcomed Frank Klasic representing the LCA and Stuart Dunlop, Director PAYG Policy, Law Interpretation and Advice.

Apologies were received from Lance Cunningham, James Deliyannis and Karen Stein.

2 Confirmation of minutes of the 19 February 2004 meeting

The minutes of 19 February 2004 were accepted.

3 Items carried over from previous meetings

3.1 Consumer loyalty program law administration practice statement

A copy of the draft law administration practice statement - Rewards received under consumer loyalty programs, which is intended to replace Draft Taxation Determination TD 1999/D28, as well as a related proposed short addendum to Taxation Ruling TR 1999/6 - flight rewards received under frequent flyer and other similar consumer loyalty programs, were circulated to members prior to the meeting.

This provided an opportunity for members to consider same before the meeting and provide feedback at the meeting.

The Tax Office thanked members for the feedback provided at the meeting, which would be taken into account in finalising this matter.

3.2 Flu vaccinations in the workplace

The Tax Office advised that ATO Interpretative Decision ATO ID 2004/301 issued on 23 March 2004 and provides clarity as to how the Tax Office would treat flu vaccinations in the workplace for FBT purposes.

Meeting discussion:

The CPA Aust suggested that this issue should be flagged for a technical amendment as it is doubtful that a free flu vaccination provided to an employee is wholly or principally in order to prevent the employee suffering from work-related trauma. Work related trauma relates to the contraction of a disease that is related to any employment of the employee. There is probably as much likelihood of an employee catching flu at work as there is of catching it outside of work. So whereas an ATO interpretative decision (ATOID) is a way to clarify the Tax Office view on this issue it is an ex-legislative solution and the more bandaids that are applied to these types of issues the less robust the system becomes. The Tax Office stated that positions contained in ATOIDs are considered fully and carefully before an ATOID is issued. The Tax Office considers that the view expressed in ATO ID 2004/301 is available under the current law, although it was noted, and agreed, that flu vaccinations in the workplace were probably not envisaged when the FBT legislation was drafted in 1986.

4 TR/TDs, LAPS, and ATOIDS issued since the February meeting

4.1 FBT related taxation rulings

The Tax Office advised that no FBT related taxation rulings have issued since the last meeting.

4.2 FBT related taxation determinations

The following taxation determinations have issued:

¦ TD 2004/8 - Fringe benefits tax: For the purposes of Division 7 of the Fringe Benefits Tax Assessment Act 1986, what amount represents a reasonable food component of a living away from home allowance for expatriate employees for the fringe benefits tax year commencing on 1 April 2004?

¦ TD 2004/9 - Fringe benefits tax: What are the rates to be applied on a cents per kilometre basis for calculating the taxable value of a fringe benefit arising from the private use of a motor vehicle other than a car for the fringe benefits tax year commencing on 1 April 2004?

¦ TD 2004/10 - Fringe benefits tax: What are the indexation factors for valuing non-remote housing for the TD 2004/11 - Fringe benefits tax: For the purposes of Section 135C of the Fringe Benefits Tax Assessment Act 1986, what is the exemption threshold for the fringe benefits tax year commencing on 1 April 2004?

¦ TD 2004/12 - Fringe benefits tax: What is the benchmark interest rate to be used for the fringe benefits tax year commencing on 1 April 2004?

¦ TD 2004/16 - Fringe benefits tax: for the purposes of section 39A of the Fringe Benefits Tax Assessment Act 1986 what is the car parking threshold for the fringe benefits tax year commencing on 1 April 2004?

¦ to this meeting the following taxation determinations have issued:

¦ TD 2004/20 - Income tax: Where the Commissioner makes or amends as FBT assessment for an FBT year, when does the taxpayer incur an outgoing for the purposes of section 8-1 of the Income Tax Assessment Act 1997 for the FBT assessed? (Draft TD 2004/D4 has been finalised by TD 2004/20).

¦ TD 2004/21 - Income tax; where a fringe benefits tax liability is deductible to a taxpayer under section 8-1 of the Income Tax Assessment Act 1997, is a later refund or reduction of that liability, as a result of an amended fringe benefits assessment, an assessable recoupment for the purposes of subsection 29-30(3) that must be included in the taxpayer's assessable income under subsection 20-35(1)? (Draft TD 2004/D5 has been finalised by TD 2004/21).

4.3 FBT related law administration practice statements

The following practice statements have issued:

¦ Law Administration Practice Statement PS LA 2004/5 - Administration of shortfall penalties under the new tax system.

This practice statement outlines the Tax Office's position on remission of penalties now that the transition to the new tax system has passed. It deals in particular with penalties in circumstances where a shortfall amount results from a false or misleading statement. These uniform penalties are set out in Part 4-25 of Schedule 1 to the Taxation Administration Act 1953 (TAA), and apply to fringe benefits tax matters for the year commencing 1 April 2001 and later years.

¦ Law Administration Practice Statement PS LA 2004/6 - The Tax Office role in providing information or advice on the potential application of announced changes to the tax law, or where legislative change is contemplated but not announced.

This practice statement replaces PS LA 2000/4 - Provision of advice to taxpayers on the potential application of announced proposed changes to the tax system, which has been withdrawn. At the same time, those parts of PS LA 2001/4 that dealt with NTS advice were amended to accommodate the changes brought about by PS LA 2004/6.

4.4 FBT related class rulings

The following class rulings have issued:

¦ CR 2004/21 - Fringe benefits tax: Contribution to an Approved Worker Entitlement Fund: the Victorian Certified CEPU (Plumbing Division) Enterprise Agreement 2002 to 2005

¦ CR 2004/22 - Fringe benefits tax: Contribution to an Approved Worker Entitlement Fund: the Victorian CFMEU Building and Construction Industry Collective Bargaining Agreement 2002-2005

¦ CR 2004/27 - Fringe benefits tax: Contribution to an Approved Worker Entitlement Fund: the Queensland Building Industry Sub-Contractors Certified Agreement 31 October 2005

¦ CR 2004/28 Fringe benefits tax: Contribution to an Approved Worker Entitlement Fund: the CFMEU Construction and General Division NSW Branch Collective Bargaining Agreement 31 October 2005

¦ CR 2004/41 - Fringe benefits tax: redundancy contributions made by a South Australian employer to the Building Industry Redundancy Scheme Trust Fund

¦ CR 2004/44 - Fringe benefits tax: employer clients of SmartSalary Pty Ltd that make use of a Salary Packaging Payment Card facility

4.5 FBT related ATOIDS

The following ATO interpretative decisions have issued:

¦ ATO ID 2004/211 - Fringe benefits tax - Property fringe benefit: 'in-house property fringe benefit' - house and land package

¦ ATO ID 2004/276 - Fringe benefits tax - Exempt benefits: remote area housing and residential fuel

¦ ATO ID 2004/293 - Fringe benefits tax - Exempt benefits: relocation transport benefits provided to an employee prior to actual relocation taking place

¦ ATO ID 2004/294 - Fringe benefits tax - 'Otherwise deductible' rule: application to HECS fees reimbursed by the employer

¦ ATO ID 2004/301 - Fringe benefit tax - Exempt benefits: Influenza (Flu) vaccinations & work-related preventative health care

¦ ATO ID 2004/385 - Car fringe benefits: cost basis (operating cost) method - log book records not maintained

The following ATOIDs have been withdrawn.

¦ ATO ID 2003/1030 - Fringe benefits tax - exemption: payments to approved worker entitlement funds, was withdrawn on 17 March 2004 because the position stated in the ATOID is included in Class Ruling CR 2004/22.

¦ ATO ID 2001/222 - Fringe benefits tax: Living Away from Home Allowance was withdrawn on 1 April 2004 on the basis that the issue is adequately covered by MT 2030.

5 News from the Tax Office

5.1 Legislation update

¦ Taxation Laws Amendment Bill (No 2) 2004 (previous citation: Taxation Laws Amendment Bill (No. 9) 2003) received Royal Assent on 23 March 2004 as Taxation Laws Amendment Act (No. 2) 2004 - Act No 20 of 2004.

Amendments to the FBT legislation will ensure that the taxable value of a fringe benefit amount is reduced by the amount of the payment that is non-deductible to the provider because of the personal services income rules. The provider of the fringe benefit can be either an individual operating as a sole trader or a personal services entity. This will remove the potential for double taxation.

Date of effect: The amendment applies in respect of fringe benefits provided after 30 June 2000.

Subsequent to this meeting the following Bills received Royal Assent:

¦ Taxation Laws Amendment (2004 Measures No. 1) Bill 2004 received Royal Assent on 29 June 2004 as Taxation Laws Amendment Act (2004 Measures No. 1) Act 2004 - Act No 95 of 2004.

In response to the Report of the Inquiry into the Definition of Charities and Related Organisations the legislation requires charities, public benevolent institutions and health promotion charities be endorsed by the Tax Commissioner in order to access tax concessions. The relevant FBT concessions are the FBT rebate and the $30,000 capped FBT exemption. Where a charity can currently self-assess its eligibility for a taxation concession, from 1 July 2005 it will have to satisfy the Commissioner that it is eligible for the taxation concession.

The Bill also amends the:

¦ ITAA 1936 and ITAA 1997 to provide a tax deduction for eligible contributions to deductible gift recipients (DGRs), where an associated minor benefit is received. The amendments will allow an individual to receive a deduction for eligible contributions to DGRs where the value of the contributions is more than $250, and the minor benefit received in return is no more than $100 or 10% of the value of the contribution, whichever is the less. The amendments apply in relation to contributions made on or after 1 July 2004.

¦ ITAA 1997 to overcome the High Court decision in Commissioner of Taxation v Payne [2001] to allow an income tax deduction for transport expenses incurred in travel between workplaces. The amendment may be relevant to FBT when considering the operation of the 'otherwise deductible' rule or making an entry in a log book record for FBT purposes. The amendments apply to assessments for the 2001-2002 income year and later years.

¦ Tax Laws Amendment (2004 Measures No. 2) Bill 2004 received Royal Assent on 25 June 2004 as Tax Laws Amendment (2004 Measures No. 2) Act 2004 - Act No. 83 of 2004.

The Bill amends the FBTAA:

¦ to allow for continuity of FBT treatment for non-remote housing benefits where the administration and payment of FBT is devolved by State or Territory governments to a departmental level. When FBT responsibilities are devolved, each nominated State or Territory body is treated as the employer of the relevant employees for the purposes of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). The amendments will apply from 1 April 2001.

¦ to provide public ambulance services with the same FBT treatment as is provided to public hospitals. Public ambulance services will be able to access an FBT exemption of up to $17,000 of grossed-up taxable value per employee, and will also be able to access the remote area housing FBT exemption under the same criteria as applies to public hospitals. In addition, the ITAA 97 will be amended to allow public ambulance services to be endorsed to receive tax deductible gifts. The amendments will apply from 1 April 2004.

¦ Tax Laws Amendment (2004 Measures No. 3) Bill 2004 received Royal Assent as Tax Laws Amendment (2004 Measures No. 3) Act 2004 - Act No. 105 on 30 June 2004.

The Bill amends the FBTAA to extend the FBT exemption provided under the transitional arrangements to certain contributions made to existing worker entitlement funds during the FBT year beginning on 1 April 2004. That is, the FBT exemption is extended by one year.

¦ Fringe Benefits Tax Amendment Regulations 2004 (No. 1)

Fringe Benefits Tax Amendment Regulations 2004 (No. 1) (28 of 2004) amends the Fringe Benefits Tax Regulations 1992 to prescribe 9 funds as approved worker entitlement funds for the purposes of s 58PB(2)(a) of the FBTAA. Sections 58PA and 58PB of the FBTAA provide an FBT exemption for certain payments to approved worker entitlement funds. A worker entitlement fund is a fund that provides for the protection and portability of employee entitlements, such as unused leave or redundancy payments.

The Regulations commenced on 1 April 2003, and apply for the 2003-2004 fringe benefits tax year and later years.

¦ Fringe Benefits Tax Amendment Regulations 2004 (No. 2)

Fringe Benefits Tax Amendment Regulations 2004 (No. 2) (50 of 2004) amends the Fringe Benefits Tax Regulations 1992 to prescribe approved child tuition assistance that is provided for the child of an Australian Defence Force (ADF) member where the child is required to change schools as a result of the ADF member being directed to change residence by the Department of Defence, as an 'excluded' fringe benefit for fringe benefits reporting purposes only. Child tuition assistance benefits will continue to be subject to fringe benefits tax.

The amending regulations commence on 1 April 2003, and apply from the 2003-04 FBT year and later years.

¦ Fringe Benefits Tax Amendment Regulations 2004 (No. 3)

Fringe Benefits Tax Amendment Regulations (No. 3) (51 of 2004) amends the Fringe Benefits Tax Regulations 1992 to prescribe 7 funds for the purposes of paragraph 58PB(2)(a) of the FBTAA as approved worker entitlement funds.

The Regulations commenced on 1 April 2003, and apply for the 2003-2004 FBT year and later years.

5.2 Payments to worker entitlement funds

On 1 April 2004, the Minister for Revenue and the Assistant Treasurer announced that employers will now have until 31 March 2005 to comply with the fringe benefits tax exemption for payment into worker entitlement funds.

The one year extension to transitional arrangements helps address concerns that the emerging interpretation of the law would deny many employers access to the FBT exemption.

5.3 FBT Publications

Subsequent to this meeting the fact sheet Changes to fringe benefits tax and payments to worker entitlement funds has been modified to take into account that on 1 April 2004 the Government announced an extension to the transitional period to 31 March 2005 for funds to meet the prescription criteria and for employers to put industrial agreements in place.

5.4 FBT information on ato.gov.au

The fringe benefits page on ato.gov.au has been updated to improve navigation.

The changes include:

¦ extra headings have been added and there are links to all FBT forms and calculators

¦ all FBT publications and fact sheets are listed under their respective headings

¦ Categories of fringe benefits - new web pages have been included that give an overview of each category of fringe benefit with links to further reading

¦ Record keeping - all FBT declarations are included in PDF format for ease of downloading and printing, and

¦ Frequently asked questions have been updated to include all the 2004 rates and information.

5.5 Business portal

The Business Portal, an internet gateway for business to access the Tax Office's online services was launched by the Commissioner on 17 March 2004. Businesses can now lodge their Business activity statements (BAS) and view their account online at the Tax Office website.

The portal provides 24-hour, seven-day-a- week, secure access to a range of information, services and functions. Business can:

¦ lodge activity statements and view previously lodged statement

¦ view business account information including individual postings for fringe benefits tax accounts

¦ view and update business registration details

¦ request transfers and refunds of credit amounts, and

¦ send and receive secure messages on a range of topics.

Businesses can access the portal at ato.gov.au. To use it, businesses must have a valid ABN, an ATO digital certificate and internet access.

6 Payment advice slips (ICAA)

At the last meeting the Tax Office reported the following:

5.4 Mailout of 2004 FBT return

the annual return mailout to all FBT clients is scheduled for early March 2004. This year the mailout will be tailored for electronic and paper lodgers.

electronic lodgers will receive a letter with a personalised payment slip with a business reply envelope for the payment slip, and

all other registered FBT clients, including new registrations, will receive a letter with a personalised payment slip with a business reply envelope for the payment slip, a paper return, the return guide and a notice of non-lodgment.

There are two main changes to the 2004 FBT return:

Item 2: this item requires you to provide your Australian business number (ABN) if applicable, and

Item 11: In response to feedback from clients, this item now requires you to provide the value of all reportable fringe benefits amounts provided to employees in the current FBT year from 1 April 2003 to 31 March 2004. This is the total of all reportable fringe benefits amounts shown on all employee payment summaries you issue for the year, 1 July 2003 to 30 June 2004.

This change does not effect your reporting obligations for employees' payment summaries and only applies to the information required in the FBT form.

The ICAA has been informed that some tax agents/taxpayers have not received their payments slips to be able to make their FBT payments. When the tax practitioners call the Tax Office they are advised that they have to write a letter and request the EFT codes for each of their respective clients and the Tax Office will then send a letter back advising the tax practitioner of the EFT codes so that they can then make the respective payments.

The ICAA is seeking clarification as to whether the update provided at the February 2004 meeting is still current and whether the Tax Office has recently changed its practice on this issue?

Tax Office response
The Tax Office advised that the mailout of the 2004 FBT return went as planned. The mailout occurred on 19 March 2004 (to all registered FBT clients). The only exceptions would have been those clients with an unclaimed notice/return mail indicator on their account and any new registrations that missed the cut off date for the data being sent to the printers.

There has been no change in procedure regarding making payments without a preprinted payment slip. Agents can either write in to request an EFT code or send the payment by mail with details of the tax file number, name, address and type of payment to:

(for those in WA, SA, NT, TAX and VIC)

Australian Taxation Office
Locked Bag 1936
ALBURY NSW 1936

(for those in ACT, NSW and QLD)

Australian Taxation Office
Locked Bag 1793
PENRITH NSW 1793

7 Reimbursements for items exempt under the FBT legislation (ICAA)

An employee is reimbursed for the purchase of a lap top computer. The employee proposes to use the lap top predominantly for business purposes and as per TD 93/145 they can claim depreciation on the lap top for the business usage portion.

The cost of the lap top would be an exempt benefit to the employer as per section 58X of the FBT Act 1986 and not subject to FBT.

In relation to the employee section 51AH(1)(c) of the ITAA 1936 would apply so that the reimbursement is not included in assessable income.

In addition section 23L of the ITAA 1936 also states that income derived by a taxpayer by way of the provision of a fringe benefit is not assessable income and is not exempt income to the taxpayer.

It would appear that section 20-30(1) of the ITAA 1997 may unintentionally under item 1.9 (Division 40 - capital allowances) make such recoupments/reimbursements now assessable. Could the Tax Office please confirm whether this is correct?

Tax Office response
The Tax Office stated that sub-division 20-A of the Income Tax Assessment Act 1997 (ITAA 97) does not apply to make the reimbursement for a lap top computer, as set out above, where a deduction is available under Division 40 - Capital Allowances, an assessable recoupment.

The relevant section is sub-section 20-20(1) of the ITAA 97 - Assessable recoupments, which states that an amount is not an assessable recoupment to the extent that it is ordinary income, or it is statutory income because of a provision outside this subdivision.

For example, in Taxation Ruling TR 2001/10 - Income tax, fringe benefits tax and superannuation guarantee: salary sacrifice arrangements, at paragraph 28, it is stated that 'benefits provided to or on behalf of an employee under an effective salary sacrifice arrangement may be derived as ordinary or statutory income by the employee'.

8 Section 65A of the FBTAA and education of children for overseas employees (ICAA)

The ICAA seek clarity as to whether the concession under section 65A of the FBT Act, can apply to the Australian education costs, related to the children of an overseas employee in the below instance.

During the period the employee is overseas, the Australian employer pays for the school fees of the employee's children, who attend a pre-school in Australia.

The benefit is provided in accordance with an award or industry custom and documentary evidence of the expenditure incurred by the employee has been supplied to the employer.

The ICAA seeks clarity as to whether a pre-school satisfy the requirements of the term of 'full-time education'. Section 65A of the FBT Act defines 'full-time education' to mean an educational institution (that is, a school, college, or university) or 'by a tutor'.

Can the concession in section 65A of the FBT Act apply to the pre-school fees?

Tax Office response
There are a number of conditions which must be satisfied before the reduction contained in section 65A of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) can be applied by an employer. In the above scenario, the employer would need to determine whether the benefit relates to the full time education of the child at an education institution; or by a tutor.

An educational institution is defined in section 136(1) of the FBTAA to mean 'a school, college or university'. It was agreed that a 'pre-school' would not be a college or a university. It was also agreed that a 'pre-school' would not easily fit within the requirement of being 'full time education provided by a tutor'.

However, can a 'pre-school' be a 'school'? If it is, can 'full time education' be provided at a pre-school?

Taxation Ruling TR 96/8 - Income tax: school and college building funds, provides guidance as to what is a school or college. As there is no definition of school in the FBTAA, it was indicated that this ruling could assist in ascertaining whether a pre-school can be a school. The ruling discusses at paragraph 10-12, what 'is a school or college'. The ruling states at:

Paragraph 10 - ....school or college means a place (not being a university) having the dominant function of providing organised or systematised instruction or training, usually in class form, which is given on a regular and a continuing basis.

Paragraph 11 - The recreational nature of the instruction or training provided (if any) should be merely incidental to the main purpose of study or instruction.

What is meant by the term 'school' and the reasoning behind the statements are further discussed at paragraph 43-50 of the ruling. Paragraph 46 states that the term 'school' would usually connote a place where instruction is given by qualified persons in accordance with a set curriculum and there is some form of student assessment and correction.

The ruling goes on to state at paragraph 81 that a child care centre is not considered to be a school, however, a pre-school kindergarten may qualify as a school.

Further guidance can be found in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) which defines education course to include (amongst other things) a pre-school course.

Goods and Services Tax Ruling GSTR 2000/30 - Goods and services tax: supplies that are GST-free for pre-school, primary and secondary education courses, provides further explanation of what is a pre-school course for the purposes of the GST Act. The ruling states at paragraph 15:

	A pre-school course means a course that is delivered:
	(a) in accordance with a pre-school curriculum recognised by:
		(i) the education authority of the State or Territory in which the course is delivered, or
		(ii) A State or Territory body that has the responsibility for recognising pre-school curricula for courses delivered in that State or Territory, and
	(b) by a school that is recognised as a pre-school under the law of the State or Territory.

The Tax Office advised that this is one of those issues where there is no clear response to the question posed. Further, it could be presumed that, depending on which State or Territory is concerned, that there will be different meanings attaching to the words 'pre-school' or 'kindergarten'. An employer would have to make an enquiry and obtain the necessary detail of the course/s offered by a pre-school/kindergarten to determine whether or not the requirements of the term 'full-time education' and 'school' are in fact satisfied.

However, it is possible that a 'pre-school' can be a 'school' and further that a 'pre-school can provide 'full time education' to children.

Discussion

The LCA raised the question of what is full-time education in relation to a pre-school course. For example a pre-school runs a curriculum based education course which runs for 12  hours per week. The course is run in two streams and students attend 2  days per week. Is this a full time course for the purposes of Section 65A? The Tax Office advised that it is a question of fact. It is probable that the 2  days per week could be 'full-time education' for the purposes of section 65A.

9 Car fringe benefits - personalised number plates and the definition of 'car expenses' in S.136(1) of the FBTAA (NTAA)

The NTAA would like the Tax Office to clarify whether the cost of personalised number plates in relation to an employer provided car qualifies as a 'car expense' under the definition in S.136(1) of the FBT Act. In the event the Tax Office believes this is not a car expense, can the Tax Office please clarify whether it qualifies as a 'non-business accessory'?

NTAA view
The definition of a 'car expense' in S.136(1) includes an 'expense incurred in respect of the registration of a car'.

The NTAA is of the understanding that when an individual orders personalised number plates, a one-off fee is payable (which will vary according to the type of plate ordered). Furthermore, the processing of an application for a new (personalised) number plate will involve changes to an individual's registration details in relation to the car.

On this basis, the NTAA believes that the cost of a personalised number plate in relation to an employer provided car is an expense that is 'in respect of the registration of the car'. Therefore, the expense qualifies as a 'car expense' for FBT purposes.

Tax Office response
The Tax Office referred to the definition of 'car expense' in section 136(1) of the FBTAA.

'Car expense', in relation to a car, means an expense incurred in respect of:

a) the registration of, or insurance in respect of, the car …

Therefore, an expense incurred in respect of the registration of the car will be a 'car expense'.

Personalised number plates have become increasingly popular over time.

In the factual scenario where the registration certificate lists the registration fee, which is a nominal amount, vehicle tax and charges which relate to personalised number plates, the total payment due on the registration certificate can only be expenses incurred in respect of the registration of the car.

Motor vehicle registration fees are levied by the State or Territory government where a vehicle is registered and the fees, taxes and charges are listed on the registration certificate. The fees and charges methodology in relation to personalised number plates can vary according to which State or Territory a vehicle is registered.

As an example, some States have a fee structure which is simply a one-off fee incurred when registering a vehicle for the first time with personalised number plates. This may occur when the car is new or at some other time. The fee may vary according to which type of personalised plate is chosen, for example, some 'premium' plates incur a larger fee. There are coloured number plates, European number plates, premium number plates and even special occasion number plates.

In some States, on the other hand, an up-front fee (similar to the one-off fee discussed above) is payable and thence a yearly fee is payable thereafter (as recorded on the registration certificate).

The decision to have personalised number plates is clearly voluntary and is not mandatory. This fact, in itself, however, does not mean that an expense incurred in obtaining personalised number plates cannot be an expense incurred in respect of the registration of a car for the purposes of the FBTAA.

The Tax Office noted that costs incurred to acquire personalised number plates at auctions and so on (refer discussion) would not be expenses incurred in respect of the registration of a car.

Also, the Tax Office noted that the above discussion is not in any way related to how an expense is to be treated for the purposes of deductibility for the purposes of section 8(1) of the ITAA 97.

Discussion

There were a number of issues discussed by members at the meeting, arising from this agenda item. There was no general agreement by members as to the correct treatment of expenditure incurred in relation to 'personalised number plates', particularly one-off up-front payments. It was also agreed that there were variations between different States & Territories as to how costs relating to 'personalised' number plates were raised and further how they are in fact treated by each State. A further, interesting, issue arose during the discussion. That is the situation where a person acquires the 'rights' to a particular number plate (for example, collector's item) at an auction. Expenses in acquiring such rights to number plates may exceed many thousands of dollars. Clearly, the costs incurred in such situations would not be 'registration costs'. Such costs are an outgoing unrelated to 'registration' being a transaction between individuals.

10 Car fringe benefits - replacement cars under operating cost method (NTAA)

The NTAA would like the Tax Office to clarify a number of issues related to the application of S.162K of the FBT Act (that is, the replacement car rules) in the context of the following typical scenario put forward by a number of NTAA members.

Example

An employer provides a car ('Car 1') to an employee ('Bill') during the 2004 FBT year under the operating cost method. Car 1 was acquired by the employer on 1 April 2002 at a cost of $44,000. On 1 February 2004, the employer buys a new car ('Car 2') at a cost of $33,000 and provides it to Bill under the operating cost method. The employer makes an election under S.162K of the FBT Act for Car 2 to be treated as a replacement car for Car 1, from 1 February 2004. Car 1 continues to be held by the employer and is provided as a car fringe benefit to another employee ('Peter').

Questions
1) Can the employer use the statutory formula method in respect of Car 1 from the time it is being provided to Peter (that is, from the time the election under S.162K is made, being 1 February 2004)?

If the statutory formula method can be used for Car 1:

2a) How do you determine the base value of the car?

2b) Are the car's kilometres annualised for the 2004 FBT year, for the purposes of S.9(2)(d)?

2c) Does Car 1 have to be held for another 4 full FBT years from 1 February 2004 before the 1/3 reduction in the base value can apply under S.9(2)(a)(i)?

NTAA view
The NTAA believes that the employer can use the statutory formula method for Car 1, from 1 February 2004. This is because the effect of S.162K is to treat Car 1 as a different car from 1 February 2004, and to treat Car 2 as standing in the place of Car 1.

This basically means:

¦ the log book records kept for Car 1 can be used for Car 2, and

¦ the operating costs of Car 1 up to 1 February 2004 are deemed to be the operating costs of Car 2.

Therefore, as Car 1 is now deemed to be a different car, the employer can use the statutory formula method, in this case, from the 2004 FBT year.

Following on from the conclusion in 1 above, the NTAA believes that the questions raised in 2(a) to (c) above would be dealt with as follows:

Question 2(a)
The base value of a car that is owned by an employer is basically the 'cost price' of the car (as defined in S.136(1) of the FBT Act) at the earliest holding time (that is, the earliest time before the current time when the car was held by the employer). Refer to S.9(2)(a)(i) and S.162 of the FBT Act.

If Car 1 is treated as a different car from 1 February 2004 (under S.162K), it is arguable that the earliest time the car was held by the employer was 1 February 2004. If this were the case, technically, the car would not have a 'cost price' at that time, as it was originally purchased by the employer on 1 April 2002.

However, on a literal reading of the legislation, the alternative argument is that the car was first held by the employer on 1 April 2002 and, therefore, its base value is $44,000 (that is, the 'cost price' at that time).

Question 2(b)
If Car 1 is taken to be held by the employer for the entire 2004 FBT year, despite that it is a different car under S.162K, the car's total kilometres for the year should be taken into account in calculating the relevant statutory fraction under S.9(2)(c) of the FBT Act.

If Car 1 is taken to be held from 1 February 2004 (because of S.162K), then the kilometres travelled from 1 February 2004 to 31 March 2004 should be annualised under S.9(2)(d) of the FBT Act.

Question 2 (c)
As to how the 1/3 reduction under S.9(2)(a)(i) applies will ultimately depend on the conclusions reached in (a) and (b) above, regarding whether Car 1 is taken to be held from 1 February 2004.

Tax Office response
Section 162K has effect for the purposes of the application of section 10 ('operating cost' method) of the FBTAA only. This provision allows an employer to elect to replace a car with another car and have the replacement car treated the same as the original car, without having to re-establish a nominated business percentage by keeping new log book records.

However, through the operation of subsection 10(3B), this change of identity does not apply for the purposes of calculating the operating cost of a car in ascertaining the taxable value of car fringe benefits under section 10.

Question 1
Applying this to the scenario outlined in the submission from the NTAA, the Tax Office agrees that the statutory formula method can be used for car 1 from 1 February 2004. This is because under subsection 10(4) an election to use the operating cost method does not need to be made until the end of the FBT year. It is therefore a decision by the employer as to whether the statutory method will be applied to that car or whether the employer wishes to elect that the 'operating cost' method is to be used.

If the employer were to elect to use the operating cost method then a new business percentage will need to be determined through the maintenance of a new log book (FBT NTLG 11/6/98).

The Tax Office agreed that section 162K deems that from the replacement date car 2 is to be treated the same as the original car, and the log book records that were kept for car 1 can be applied to car 2.

However, through the operation of subsection 10(3B) the operating costs for car 1 up until 31 January 2004 are not part of the operating costs of car 2. It is only the log book percentage from car 1 that is applied to the operating costs of car 2 from 1 February 2004.

Question 2(a)
The Tax Office agrees that the base value of car 1 is the cost price of the car at the earliest holding time being, in this example, 1 April 2002.

Even though, through the application of section 162K, car 1 is to be treated as a different car from 1 February 2004, section 162K does not impact on the operation of subparagraph 9(2)(a)(i) (statutory formula method) in determining the base value of that car.

Question 2(b)
As explained in the response to 2(a) car 1 is only treated as a different car because of section 162K for the purposes of section 10. Therefore, for the purposes of section 9 an election under section 162K has no effect and the kilometres travelled by car 1 for the entire year will be used to determine the statutory fraction to be applied.

Question 2(c)
No. For the reasons previously given, car 1 was first held on 1 April 2002 and the 1/3 reduction in base value should be made with reference to that date.

11 Salary packaging arrangements - adjustments to an employee's salary to recover FBT shortfall (NTAA)

Under an effective salary sacrifice arrangement, where the FBT cost of providing a benefit was initially underestimated, an employer will normally recover the shortfall amount by way of a further reduction in the employee's future gross salary. This can be illustrated by the following typical example.

Example

From 1 April 2003, Andrew is provided with a car fringe benefit. It was estimated that the total cost of the benefit to the employer (including FBT) was $12,000. From 1 April 2003, Andrew's gross salary was reduced by this amount. After the end of the 2004 FBT year, the car's FBT liability was actually $2,000 more than what was originally estimated. Under the salary packaging agreement, Andrew's employer is able to make a further adjustment to Andrew's gross salary to recover the shortfall amount of $2,000. Andrew's gross salary over the next 10 fortnightly periods is reduced by $200 per fortnight.

Questions
1). Does the above arrangement give rise to a loan fringe benefit?

2). Would the answer to 1. be any different if Andrew was required to pay back his employer in after-tax dollars?

NTAA view

Question 1
Despite the broad meaning of a 'loan' in S.136(1) of the FBT Act, the NTAA believes that the arrangement outlined above does not give rise to a separate loan benefit.

It is submitted that the recovery of the $2,000 shortfall amount by the employer is merely part of the process of an employer recouping the full cost of providing a fringe benefit to an employee under an effective salary sacrifice agreement.

Furthermore, to treat the repayment of the shortfall amount as a loan benefit would not be consistent with the intention of the FBT legislation. That is, FBT is already payable in respect of the car benefit provided to the employee - therefore, if the recovery of the shortfall was considered a loan benefit, it would mean that two benefits are being taxed essentially from the one transaction (that is, the provision of the car to the employee).

Question 2
The NTAA submits that the conclusion in 1. above should not be any different if the employee was required to repay the shortfall amount to their employer in after-tax dollars, for the same reasons noted.

Tax Office response
The Tax Office noted that, as has been discussed in this forum previously, as alluded to in ATOID 2003/233, and as noted in the NTAA submission, the definition of 'loan' in section 136(1) is very broad.

'Loan', as defined for the purposes of the FBTAA, includes:

(a) an advance of money

(b) the provision of credit or any other form of financial accommodation

(c) the payment of an amount for, or on account of, on behalf of or at the request of a person where there is an obligation (whether expressed or implied) to repay the amount, and

(d) a transaction (whatever its terms or form) which in substance effects a loan of money.

Clearly, given the broad meaning of 'loan' for the purposes of the FBTAA, whether in fact there is a 'loan benefit' or not in these types of salary sacrifice/remuneration arrangements will depend on the terms of the contracts between the parties.

The outcome, from an FBT perspective, will be dependant on the contractual arrangements and understandings between the employer and employee. The Tax Office noted that in some of these arrangements, the technical position may be that a 'loan benefit' arises however the minor benefit exemption in section 58P would generally apply.

As the example put forward does not provide the full details of the arrangement between the parties the Tax Office could not provide a more concise answer. In fact, such issues, where they are of concern to an employer, should be dealt with through the private binding ruling request.

12 Hire car provided to employee for less than 12 weeks - 'otherwise deductible' rule (NTAA)

Where a hire car is provided to an employee for a continuous period of less than 12 weeks, the car is not considered to be a car fringe benefit. Therefore, the statutory formula method and the operating cost method cannot be used in valuing the benefit for FBT purposes. Refer to S.7(7) of the FBT Act and the FBT sub-committee minutes of meeting dated 15 June 1995.

Instead, a hire car provided in these circumstances is treated as a 'residual fringe benefit'. The taxable value of this benefit will normally be equal to the arm's length hire fees, and may be reduced under the 'otherwise deductible' rule. Refer to S.51 and S.52 of the FBT Act.

The NTAA would like the Tax Office to clarify an issue that has been commonly raised by NTAA members in the context of the following example.

Example

Mike is provided with a car fringe benefit whose taxable value is determined under the operating cost method. On the basis of log book records kept by Mike and provided to his employer, the car's business use percentage has been estimated at 70%. During the 2004 FBT year, Mike's car was involved in an accident and was garaged at the panel beaters for 10 weeks. During this period, the employer provided Mike with a hire car. The total cost of the hire car to the employer was $550.

Question
Is Mike's employer able to rely on the log book records related to the car fringe benefit, to reduce the taxable value of the residual benefit (that is, the hire car) by 70% in this case?

NTAA view
Under S.52(1)(c) of the FBT Act, before any reduction in the taxable value can occur, Mike is required to provide his employer with a declaration to verify the extent to which the hire car was used for income producing purposes.

It should be noted that S.52(1)(c) applies, because the benefit does not qualify as a 'car residual benefit' (as defined in S.136(1) of the FBT Act). This is because the hire fees related to the car would not qualify as 'Division 28 car expenses' (as defined in S.136(1)), if Mike had hired the car himself. Refer also to S.28-165 of ITAA 1997.

Given that the declaration must relate to the income producing use of the hire car, it appears that Mike would need to at least maintain some form of diary (or log book) recording his business trips for the hire car, rather than being able to rely on the log book records that were kept for the other car (that is, the car at the panel beaters).

If this is the case, the NTAA submits that the Tax Office take an administrative approach and allow an employee to rely on the log book records kept for the other car, in order to estimate the business use of the hire car. Naturally, other factors would also have to be considered, such as any variations in the pattern of use of the hire car, relative to the other car.

Tax Office response
The Tax Office agreed that a short-term hire car provided by the employer to the employee in the above circumstances is a residual fringe benefit. Miscellaneous Taxation Ruling MT 2034 at paragraph 19 states that where an employer takes out a vehicle on short-term hire for the specific purpose of making it available to an employee, the taxable value would be determined under paragraph 51(1)(a) or (b) as the arm's length amount paid by the employer. Paragraph 21 of the ruling states that the valuation rules that apply to private use of motor vehicles other than cars apply equally to cars taken out on short-term hire.

The Tax Office noted that in relation to record keeping and calculation of the taxable value of motor vehicles other than cars the Fringe benefits tax: A guide for Employers, at paragraph 16.6, states the following:

Detailed log book requirements of the kind specified for the determination of the value of car benefits are not required in the case of vehicles other than cars. However, many businesses would in any event, maintain some form of log book records and these should be utilised where possible in determining the extent of private use of the vehicle. In the absence of such records soundly based estimates of the number of private kilometres travelled will be accepted.

The guide also states that:

A reduction for business travel will apply only where the employer obtains a declaration from the employee. The declaration must be in an approved format specifying the deductible percentage of the operating costs, that is, the business proportion of total kilometres travelled. If using the cents per kilometre method it would be acceptable for the declaration to state the number of private kilometres travelled rather than the deductible percentage.

The Tax Office indicated that in the scenario put forward the employee could rely on the log book records relating to the car that the employee usually drives to establish the business use of the short-term hire car (clearly this is on the assumption that there was a similar pattern of use of the hire car relative to the damaged car). The employer is required to obtain a declaration, in the approved format, from the employee specifying the business proportion of total kilometres travelled to reduce the taxable value of the residual benefit.

13 Car fringe benefits and the minor benefit exemption in S.58P of the FBTAA (NTAA)

The NTAA seeks the Tax Office's views on whether the minor benefit exemption under S.58P could apply in the following typical scenario.

Example

XYZ Ltd ('employer') has a fleet of 10 vehicles which are available for its 70 employees to use for local and long distance travel. When a vehicle is not being used by an employee, it is parked on the employer's business premises. Generally, when an employee is required to undertake a long-distance business trip (for example, a 2 hour trip), the employee will take a pooled vehicle home the night before so that the employee can make an early start in the morning. The employee will usually return home with the vehicle (whether on the same day or a couple of days later) and then drive into work the next business day. For FBT purposes, all vehicles are valued under the statutory formula method. Assume that, during the 2004 FBT year, Mary (an employee) used a pooled car on one occasion for a country business trip. Mary took the car home the night before her trip and returned home on the day of her trip (in the evening). The car was returned to work the day after her trip. Assume also that Mary's share (under S.5F of the FBT Act) of the notional taxable value of that car for the 2004 FBT year is less than $100.

Question
Can the minor benefit exemption in S.58P of the FBT Act apply in respect of the benefits provided to Mary?

NTAA view
In the above circumstances, Mary has been provided with 3 car fringe benefits under S.7 of the FBT Act, for the 2004 FBT year. That is, the car was garaged at her place of residence on 3 days - the day before her trip, the day of her trip, and the following day when she returned the car to work in the morning. On the facts, the overall taxable value of these benefits is less than $100.

On this basis, the NTAA believes that the conditions in S.58P(1)(e) and (f) are satisfied. Assuming the remaining conditions in S.58P(1)(f) are met, the NTAA submits that the minor benefit exemption in S.58P would apply in these circumstances.

Tax Office response
The Tax Office noted that the explanatory memorandum relating to section 58P of the FBTAA includes the following statement:

The occasional use of an employer's vehicle by an employee for a special purpose such as rubbish removal or travel to and from work during a transport strike would be exempt benefits provided the employee in question did not have a general entitlement to use the vehicle for private purposes. However, in some cases, the benefit would be of sufficient value to override considerations of irregularity or lack of frequency.

To determine whether a car benefit is an exempt minor benefit it is necessary to consider the tests set out in section 58P of the FBTAA, which include the following:

¦ the notional taxable value of the benefit. To be a minor benefit, the notional taxable value must be less than $100. For a car benefit, the notional taxable value is the amount that would be the taxable value if the benefit was valued as a residual benefit

¦ how frequently and regularly similar or identical benefits were provided

¦ the sum of the notional taxable values of the benefit and other similar or identical benefits

¦ the sum of the notional taxable values of the minor benefit and other benefits provided in connection with the benefit, and

¦ the reason for the benefit being provided, for example, was it provided to assist the employee to deal with an unexpected event.

The Tax Office stated that, by reference to, and application of, the relevant tests in section 58P, it would, in most cases, be appropriate to conclude that a car benefit be treated as a fringe benefit, that is the minor benefit exemption is not available. It was noted that in many cases, the 'associated benefits' tests in sub-section 58P (2) would also need to be considered.

However, it was acknowledged that there may be certain limited situations where a car benefit could be a minor benefit as contemplated in the explanatory memorandum.

The Tax Office stated that it is only by applying the relevant tests to particular facts that a determination could be made as to whether or not section 58P applied to a particular car benefit.

As a general proposition, the Tax Office stated that minor benefits exemption would not apply to car benefits arising from an employee's use of 'pooled cars' where the statutory formula is used by the employer and the employee garages the car at home overnight.

If a particular car benefit does satisfy the requirements of section 58P, it will not be a car fringe benefit. There is, it was noted, no relationship between section 5F of the FBTAA and reaching a decision as to whether section 58P applies to a car benefit.

14 Base value of car and luxury car tax (NTAA)

Where an employer purchases a luxury car and no luxury car tax was payable, a number of NTAA members have received advice to the effect that the base value of the car provided to an employee must be increased by a notional amount of luxury car tax.

Therefore, the NTAA would like the Tax Office to clarify whether the base value of a car is notionally increased in the typical scenario noted below.

Example

Bob's Car Yard buys a luxury car for $80,000. The purchase of the car did not attract luxury car tax because Bob's Car Yard is holding the luxury car as trading stock (refer to S.5-10(2)(a) and S.9-5 of the Luxury Car Tax Act 1999). While the car was available for sale, Peter (an employee) was able to take the car home in the evening and return it back to work in the morning. The employer values the car for FBT purposes using the statutory formula method.

Question
Is the employer required to increase the base value of the car provided to Peter by a notional amount of luxury car tax?

NTAA view
The NTAA believes that there is nothing in the definition of 'cost price' in S.136(1) which requires an employer to include in the base value of a car, a notional amount of luxury car tax.

Consequently, the 'cost price' of the car for FBT purposes would remain at $80,000.

Tax Office response
The Tax Office agreed with the NTAA that the cost price, in accordance with the definition contained in sub-section 136(1) would, in the example, be $80,000. There is no legislative requirement to add back a notional amount of luxury tax.

15 Salary advances - loan fringe benefits (NTAA)

The NTAA would like the Tax Office to clarify whether a salary advance in the following circumstances constitutes a 'loan' fringe benefit.

Example

Maria is an employee, who is paid $2,000 gross salary per week. As a result of an unexpected personal liability, she requests her employer to pay her salary to her for 2 weeks in advance. Maria's employer pays her $4,000 in advance. There is an implicit agreement between the parties that, if Maria terminates her employment before performing the services for which the advance salary was paid, she would be required to pay back the balance owing to her employer.

Question
Is the salary advance a 'loan' benefit to Maria?

NTAA view
The NTAA submits that, the salary advance paid to Maria is a payment of 'salary and wages' and, therefore, excluded from the definition of 'fringe benefit' under S.136(1) of the FBT Act. This is the case, despite that the payment to her could fall within the definition of 'loan' under S.136(1) (that is, it could be argued that it is an 'advance of money').

Tax Office response
The agenda item raises a matter that would be fairly common business practice in managing employee's entitlements and leave, that is an advance of 'salary' to an employee.

In such situations, the advance is not 'salary or wages' at the time of the advance being made, as services are yet to be rendered by the employee. As a generalisation, employers in this situation can in fact advance a net amount (net of anticipated PAYG, other deductions and so on). However, once the services have been rendered, for example, in the subsequent fortnight, a pay advice would indicate 'salary paid' and a corresponding 'recovery of advance', which is offset.

Accordingly, the Tax Office did not agree with the NTAA that the advance was a payment of 'salary' to Maria at the time of payment.

The Tax Office stated that, at a technical level, as the payment of $4 000 was an 'advance', this would constitute a 'loan' as defined in subsection 136(1) of the FBTAA. To an extent therefore, the reasoning adopted in ATOID 2003/233; agreement made for the repayment of overpaid salary, could apply.

However, as noted above, this is an academic exercise, as the advances in these situations would be minimal and the time that the advance is outstanding is also relatively short such that the minor benefit exemption in section 58P would apply to any loan benefit that in fact arises.

16 Division 13 exempt item benefits, evidence of 'use in the employees employment' (CPA Australia)

Division 13 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) deals with a number of benefits that are exempt from FBT. Some of the benefits described in this Division are only exempt from FBT where they are provided for work-related purposes.

Section 58H states the costs of providing newspapers and periodicals to employees in respect of his or her employment is an exempt benefit. The exemption does not apply where the business use in merely incidental.

Section 58X(2) of the FBTAA provides for an FBT exemption in respect of eligible work related items such as briefcases, calculators, electronic diaries, laptop computers. However, section 58X(2)(f) requires that an item of computer software must be for use in the employee's employment, and Section 58X(3) provides that a mobile phone must be primarily for use in the employee's employment.

In relation to the work related items outlined in the above provisions, namely newspapers and periodicals, mobile phones and computer software, what evidence is required by the Tax Office in supporting, that the work related item provided to the employee is provided for use (or primarily for use) in the employee's employment.

For example should it be the employer providing a declaration or some other statement stating that the role of the employee warrants them to be provided with such an item, to be used primarily for their employment; or should the onus fall with the employee who has been provided with the work related item, to complete a declaration or some other statement, verifying that the particular work related item is required for (or primarily for) use in the employee's employment.

Tax Office response
The Tax Office noted that generally an employer will know if the cost of providing newspapers and periodicals to employees is for the purposes of their employment. The onus is on the employer to determine if the benefit is an exempt benefit under section 58H. There is no obligation on the employer to complete a declaration or statement to that effect however there should be a sound basis upon which the employer is applying the exemption.

Section 58X contains an exemption relating to the provision of certain work related items provided by an employer to an employee in respect of the employee's employment. The eligible work related items are listed at subsection 58X(2).

An employer will know the nature of an employee's duties when an eligible work related item is provided to an employee. In relation to an item of computer software for use in the employee's employment, paragraph 58X(2)(f), that is sufficient

Subsection 58X(3) provides that a benefit arising in relation to a mobile phone will only be an exempt benefit where the mobile phone is 'primarily for use' in the employee's employment.

The following two examples of the application of this subsection were provided in the explanatory memorandum to Taxation Laws Amendment (FBT Cost of Compliance) Act 1995 (145 of 1995):

Example 1: Natalie, a real estate agent, is provided with a car phone by her employer for use in contacting her clients and contacting her office when on inspections. Natalie generally uses her phone for these purposes. Occasionally, however, she uses the phone for private purposes such as cancelling a private lunch booking or ringing home to say that she will be working late. The private use of the phone is considered to be incidental to its primary employment use.

Example 2: Quentin, a bank manager, uses the mobile phone provided by his employer to help his wife run her catering business. On his wife's behalf he deals with various suppliers and banks on a regular basis. The use of the phone will not be considered to be primarily for employment purposes.

An employer applying section 58X to a mobile phone needs to have a basis for concluding that the mobile phone was primarily for use in the employee's employment. Generally, an employer will know whether the phone is being provided to enable the employee to undertake their employment duties. For example, the employee's job description, duty statement or employment contract may provide a basis for concluding that the phone was primarily for business use.

The documentation that needs to be kept was one of the issues raised about section 58X in agenda item 14 of the FBT Sub-committee of the National Tax Liaison group held on 13 June 1996. The Tax Office provided the following response:

In establishing 'primarily for use in the employee's employment' there is no obligation to keep extra documentation beyond what is required by section 132. Paragraph 132(1)(a) requires an employer to keep records that record and explain all transactions and other acts engaged in by the employer or any other person that are relevant for the purpose of ascertaining the employer's liability under the FBTAA.

The ICAA had concerns in respect of employees whose use of a phone is for receiving business calls (with very little, if any, need to actually make outgoing calls), resulting in any occasional private use being, in the circumstances, a major proportion of the small account for calls.

The ATO advised that the provision of a mobile phone or car phone to an employee 'primarily for use in the employee's employment' is a question of fact with each case decided on its own merits. The vast majority of employers should need to go no further than a current employee job description / duty statement / employment contract. Alternatively they could document such factors as:

¦ the reason the phone was provided to the employee

¦ the type of work performed by the employee

¦ how the use of the phone relates to the employee's employment duties, and

¦ the employer's policy and any conditions set on phone use.

Accordingly, an employer or an employee is not required to complete a declaration for the purpose of an employer applying the exemption in section 58X. However, in some circumstances, particularly those where normal business practices do not clearly support a position that the exemption is available, an employer could document the reasons which support the decision to apply the exemption.

17 Share appreciation rights (SARs) (CPA Australia)

In ATO ID 2002/645 (ATOID 2002/645) the Tax Office has suggested that employers may be subject to fringe benefits tax (FBT) when an employee receives a right under a SAR plan.

ATOID 2002/645 states that a SAR is a non-cash benefit provided in respect of employment and the 'discount is not to be included in the taxpayer's assessable income under section 139B of the ITAA 1936 as it is not in respect of a right to acquire a share'.

The ATOID comes to the conclusion that a SAR is an intangible property fringe benefit.

Further, in private rulings (No.9969 and 9974) the Tax Office has reiterated the view that employers may be subject to FBT when an employee receives a right under a SAR plan.

These private rulings appear to be in respect of rights under a SAR plan being disposed of as part of a merger.

The private rulings discuss the position where the companies were taken over and as a result the SARs were exercisable immediately. The rulings state that the SARs are a non-cash benefit provided in respect of employment. The non-cash benefits are stated in these rulings not to be salary and wages as defined in subsection 221A(1) of the ITAA 1936. The rulings state the SARs are stated to be intangible property fringe benefits, the taxable value being the notional value on acquisition by the employee. The definition of notional value in subsection 136(1) of the FBTAA is said to be the amount that could have reasonably been expected to be paid by the employee to acquire the benefit under an arm's length transaction.

Although we have often been told the ATOIDs and private rulings cannot be relied on by other taxpayers, this ATOID and these ruling go against the commonly held treatment of SARs and accordingly, if the Tax Office is maintaining the view that SARs are a fringe benefit we request urgent attention to the following questions:-

1. How does a taxpayer value such a right for FBT purposes?

A SAR plan usually entitles an employee to receive a cash payment equal to the increase in the value of stick over a period of time. For example on 1 July 2003 an employee may be granted rights under a SAR with a current market value (say) $10,000. The conditions of the SAR is that on 30 June 2006 the employee will be entitled to a cash bonus based on the appreciation in the value of the 'shares' over that period of time. Accordingly, if the value of those shares is $20,000 at 30 June 2006 the employee will receive a cash payment of $10,000. If the shares were worth $10,100 on the 30 June 2006 the employee would be entitled to a cash payment of $100.

As can be seen the value of the SAR rights is not the $10,000 value of the 'underlying shares' as this is only the starting point in deciding what the cash payment at the end may be.

It would appear that the treatment of payments received in respect of SAR plans has always been that when the cash payment is made (in this case 30 June 2006) the amount is subject to PAYG and included as a bonus on the employees payment summary.

2. Does the Tax Office accept that the granting of SARs will also be subject to FBT where the employer has discretion to make the payment (or not to make the payment) in certain circumstances, even though the employee may have met the hurdles imposed under the plan?

The view in the taxpaying community is that the correct tax treatment is that the payment is subject to PAYG on payment to the employee.

Tax Office response
The Tax Office noted that the 'private rulings' referred to in the submission are not in fact private rulings but are the 'edited versions' published on a Register. The Register is a public historical record of all edited written binding advice issued by the Tax Office for reasons of integrity, transparency and accountability. The Register is not updated to reflect changes in the law, withdrawal of the original advice or any other changes. For these reasons, the Commissioner is not bound by an edited version in relation to any taxpayer. Law Administration Practice Statement PS 2001/7 provides further background on the publication of written binding advice.

The Tax Office indicated that the issue was being raised some two years after ATO ID 2002/645 was published and given the statement in the submission that the ATOID goes against the commonly held treatment of SARs this was of some concern. The ATOID provides the Tax Office view on the arrangement covered in the ATOID as that arrangement relates to a SARs situation. As noted in the submission, Tax Officers are required to follow that view.

ATOID 2002/645, in considering the arrangement set out therein, does include a note to the effect that a 'SAR may be an intangible property benefit'. It does not state that a SAR is a property fringe benefit. Where, in fact, a SAR is a property fringe benefit, a valuation methodology would need to be adopted that validly provides a value for the right created under the SAR.

Noting the comments made by members at the meeting concerning the breadth of SARs (and variations thereof) in the marketplace and the implications that may arise from the application of the view expressed in ATOID 2002/645, the Tax Office indicated that there are currently a number of private binding ruling requests that raise questions as to the correctness of the ATOID. It was probable therefore that a review of the position in ATOID would become necessary.

It was not appropriate, without having the full facts of the arrangement, to provide a response to the second question in the submission.

18 Car fringe benefit operation of s.9(2)(e)(i) FBTAA - recipient's payment rule (CPA Australia)

Facts
Assume that an employer provides a car fringe benefit by making a vehicle available to an employee for private use. In the course of providing this benefit, the employer incurs various expenses associated with the vehicle.

Under the arrangement between the employee and employer, an employee is able to make after tax contributions to the employer, by way of a deduction from the employee's after tax salary on each pay day.

Issue
Would the Tax Office please confirm that recipient's payment rules in section 9(2)(e)(i) will apply under the arrangement described above, notwithstanding that no cash has physically been 'paid' by the employee (rather, the employer has withheld after tax salary).

Analysis
Under the 'recipient's payment' rule, the taxable value of a car fringe benefit can be reduced by any amounts paid to the employer/provider for the right to use the car.

Specifically, in order to satisfy the recipient's payment rule under section 9(2)(e)(i), the following two conditions must be satisfied:

¦ an expense must be 'incurred' to the provider or employer, and

¦ the amount must be 'paid' by the recipient to the employer or provider.

Every pay day, the employee is entitled to a specified amount of money, after subtracting PAYG and superannuation components from his or her total remuneration amounts for the period. The employee then directs his or her employer to withhold a specified amount from his or her after tax salary.

In this respect, it is contended that given that the employee has directed his or her employer to withhold certain amounts from his or her after tax salary, this is sufficient to constitute both an 'expense incurred' and a 'payment' by the employee. Consequently, such amounts would qualify as a recipient's payment and hence be subtracted from the taxable value of the car fringe benefit.

It would seem unnecessary to require the employee to actually take control of the whole after tax amount of salary and then physically hand over a cash amount to the employer in order to satisfy the recipient's payment rules. Instead, in our view, it is sufficient that by being entitled to the full after tax amount and then voluntary directing the employer to withhold that amount, the employee will be considered to have made a payment for the purposes of section 9(2)(e)(i).

Tax Office response
The scenario put forward by CPA Australia would be a common situation. The Tax Office stated that, on the facts provided, the after tax contributions by the employee to the employer, by way of a deduction by the employer from the employee's after tax salary on each pay day, will be an amount 'paid' by the employee to the employer for the purposes of section 9(2)(e)(i).

In Case 1/97, 97 ATC 101, the AAT held that a taxpayer was unsuccessful in arguing that amounts remitted on his behalf by electronic transfer from his salary for credit union loan repayments, medical insurance premiums and credit card repayments were fringe benefits and thus exempt from income tax. The AAT found that, at a point in time immediately before the payments were electronically transferred, they had in fact been constructively derived by the taxpayer and that they were dealt with on his behalf or as he directed.

19 GST exclusive expense payment fringe benefits (CPA Aust)

As part of an employer's reimbursement policy employees are reimbursed the GST exclusive amount of an expense.

For example an employee incurs $110 (GST inclusive) in respect of a private expense. Under the reimbursement policy the employee is only reimbursed the GST exclusive amount of $100.

Does the Tax Office consider the benefit is a type 1 or type 2 benefit?

It would appear that as no amount of GST has been reimbursed the employer would have no entitlement to an input tax credit and therefore the benefit would be a type 2 benefit.

Tax Office response
The Tax Office advised that the expense payment fringe benefit in this scenario would be a type 1 benefit.

This view is in accordance with GSTR 2001/3, paragraphs 86-89 and TR2001/2. Whether the employer chooses to reimburse the employee the GST exclusive amount or not, will not change the fact that there is an entitlement to an input tax credit because of the operation of Division 111 of the GSTA.

Where there has been a taxable supply to an employee and the employer reimburses in whole or in part the expense incurred/payment made by the employee making the acquisition, there will arise an entitlement to an input tax credit under Division 111 of the GSTA. Accordingly, there is a GST creditable benefit for the purposes of section 149A of the FBTAA.

20 Other business

The Tax Office informed members that The Federal Chamber of Automotive Industries would be represented at future meetings of the sub-committee.

21 Close of meeting

The next meeting will be held on 19 August 2004 at the ICAA, Level 15, 37 York Street, Sydney