Edited version of private ruling

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Ruling

Subject: In house fringe benefits

Question 1

Is the fringe benefit that arises from the reimbursement of the amounts charged for the supply of a product as part of an effective salary sacrifice arrangement an eligible benefit for the purposes of section 62 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) where you provide the product to the employee?

Answer

Yes.

Question 2

Is the fringe benefit that arises from the reimbursement of the amounts charged for the supply of a product as part of an effective salary sacrifice arrangement an eligible benefit for the purposes of section 62 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) where the product is provided by another provider?

Answer

No

This ruling applies for the following period

Year ended 31 March 2010

Year ending 31 March 2011

Year ending 31 March 2012

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You are one of the three organisations who provide a product.

You were established by an Act of Parliament.

The Act of Parliament:

· sets out your objectives;

· provides that you are not and do not represent the Crown;

· provides the Crown is not liable for any of your debts, liabilities or obligations;

· requires you to maintain financial records that accurately reflect and record your financial activities, provide the financial statements to Auditor General who audits the statements.

Your activities are regulated by another Act of Parliament. This second Act: provides:

· for the establishment of an economic regulatory framework for the industry;

· the establishment of a licensing regime;

· the regulation of prices, customer service standards and performance monitoring of the industry; and

· establishes a Regulator which administers the licensing system established under the Act.

You intend to offer your employees the opportunity to receive a reimbursement of the amounts paid to purchase the product as part of an effective salary sacrifice arrangement.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 20

Fringe Benefits Tax Assessment Act 1986 section 62

Fringe Benefits Tax Assessment Act 1986 subsection 62(1)

Fringe Benefits Tax Assessment Act 1986 subsection 62(2)

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 section 153

Fringe Benefits Tax Assessment Act 1986 subsection 158(1)

Fringe Benefits Tax Assessment Act 1986 subsection 159(2)

Fringe Benefits Tax Assessment Act 1986 paragraph 159(2)(a)

Fringe Benefits Tax Assessment Act 1986 paragraph 159(2)(e)

Income Tax Assessment Act 1936 section 318

Income Tax Assessment Act 1936 subsection 318(2)

Income Tax Assessment Act 1997 subsection 995-1(1)

Reason for decision

Question 1

Summary

Under the proposed arrangement you will reimburse an employee for the amount shown on an account.

The account may be from you. Alternatively, it could be from another entity.

The situation being considered in this first question is where you have provided the product to the employee.

The reimbursement will be an in-house expense payment fringe benefit where:

· the employer at or about the provision time carried on a business that consisted of or included the provision of identical or similar property principally to outsiders; and

· the employee provides documentary evidence of expenditure to the employer before the declaration date.

Both of these conditions will be satisfied if the employee provides you with the relevant documentation before the declaration date.

Detailed reasoning

Under the proposed arrangement you will reimburse an employee for the amount shown on an account.

The account may be from you. Alternatively, it could be an account from another entity.

The situation being considered in this first question is where you have provided the product to the employee.

Subsection 62(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) states that:

Where one or more eligible fringe benefits in relation to an employer in relation to a year of tax relate to a particular employee of the employer, the taxable value of that benefit, or the sum of the taxable values of those fringe benefits, as the case may be, in relation to that year shall be reduced by:

(a) if the taxable value or the sum of the taxable values does not exceed $1,000 - an amount equal to the taxable value or the sum of the taxable values; or

(b) in any other case - $1,000.

Subsection 62(2) of the FBTAA details the fringe benefits to which section 62 applies.

Subsection 62(2) of the FBTAA states:

In this section, "eligible fringe benefit" means:

(a) an in-house fringe benefit; or

(b) an airline transport fringe benefit.

An in-house fringe benefit is defined in subsection 136(1) of the FBTAA to mean:

(a) an in-house expense payment fringe benefit;

(b) an in-house property fringe benefit; or

(c) an in-house residual fringe benefit.

In general terms, section 20 of the FBTAA provides that an expense payment benefit will arise where an employer either:

· makes a payment to a third party to discharge an obligation of an employee, or

· reimburses the employee for expenses incurred by the employee.

As you intend to reimburse expenditure incurred by an employee the benefit will be an expense payment benefit.

Is the reimbursement an in-house expense payment benefit?

An in-house expense payment fringe benefit is defined in subsection 136(1) of the FBTAA to mean:

(a) an in-house property expense payment fringe benefit; or

(b) an in-house residual expense payment fringe benefit.

Both of these terms are defined in subsection 136(1) of the FBTAA.

In general terms an in-house property expense payment benefit arises relates to a reimbursement of the cost of purchasing 'tangible property'.

'Tangible property' is defined in subsection 136(1) of the FBTAA to mean goods, and includes:

(a) animals, including fish; and

(b) gas and electricity.

As the product is 'tangible property' the relevant definition to consider is the definition of 'in-house property expense payment fringe benefit'.

Is the reimbursement an 'in-house property expense payment fringe benefit?

Where the employee's expenditure is incurred in the purchase of tangible property from the employer the definition of an in-house property expense payment fringe benefit provides that the reimbursement will be an in-house property expense payment fringe benefit where:

· the employer at or about the provision time carried on a business that consisted of or included the provision of identical or similar property principally to outsiders; and

· the employee provides documentary evidence of expenditure to the employer before the declaration date.

Do you carry on a business that consists of the provision of identical or similar property principally to outsiders?

The FBTAA does not define what constitutes carrying on a business for the purpose of the application of the in-house provisions.

It does however define 'business operations' in subsection 136(1) of the FBTAA as:

In relation to a government body or a non-profit company, includes any operations or activities carried out by that body or company.

In discussing the meaning of the term 'business operations' paragraph 9 of Taxation Ruling TR 2000/4 Fringe benefits tax: meaning of business premises (TR 2000/4), states:

The term 'business operations' in the definition of 'business premises' includes a wide range of activities. The activities include those undertaken by a person in the ordinary course of carrying on a business. They also include those activities that, although not undertaken in the ordinary course of carrying on a business, are nevertheless undertaken in the course of carrying on a business. Profit making activities that fall short of being a business are also included in 'business operations' if they have a business or commercial character.

The term 'business' is also defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as:

A business includes any profession, trade, employment, vocation or calling, except the occupation as an employee.

The Macquarie media dictionary describes to 'be in business' as:

To earn a living from a commercial activity; to be carrying out an activity, enterprise, etc., successfully.

These definitions indicate the requirement to be carrying on a business for the purpose of the FBTAA is capable of having a wide meaning.

Support for this conclusion was provided by the High Court decision in NT Power Generation Pty Ltd v Power and Water Authority [2004] HCA 48; 219 CLR 90; 210 ALR 312; 79 ALJR 1, where the phrase 'carrying on a business' was constructed broadly.

In its decision, the Court held at paragraph 52, that the Power and Water Authority was carrying on a very substantial business. In making this statement, the Court referred to the references to carrying on a business contained within the Power and Water Authority's internal documents, its annual report which discussed indicators like rate of return on assets, the debt to capital ratio and the sales revenue.

Further, at paragraph 66 in the Power and Water Authority case, the court stated:

While the word "business" in any particular context takes its meaning from that context, normally it is a "wide and general" word. Its meaning in the Act [Trade Practices Act 1974] is widened by s 4(1), since "business" includes "a business not carried on for profit".

In the earlier decision of NT Power Generation Pty Ltd v Power & Water Authority [2001] FCA 334, Mansfield J stated at paragraph 236:

Whether or not a business is being carried on is a question of fact, having regard, for example, to the nature of the activities carried out, and their continuous or repetitive character: Smith v Capewell (1979) 142 CLR 509; Fasold v Roberts (1997) 70 FCR 489.

Paragraph 13 of Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11), also provides a number of indicators which are relevant to determining whether a person is carrying on a business for income tax purposes. The indicators are as follows:

· whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators

· whether the taxpayer has more that just an intention to engage in business

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

· whether there is repetition and regularity of the activity

· whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business

· whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit

· the size, scale and permanency of the activity

· whether the activity is better described as a hobby, a form of recreation or a sporting activity.

In applying these indicators to you, it is relevant to note the following characteristics of your organisation:

· you are a separately established entity

· your primary objectives include the objective of being a successful business that maximises sustainable returns to your members

· your shareholders have an expectation that you will operate as a commercial entity and be results orientated

· your shareholders have set a benchmark for you to adopt a distribution target of net profit after tax

· you have a policy which determines your pricing structure and recovery of expenditure

· you have obtained the necessary licences

· the repetition and regularity of your activities in the provision of your services

· your activities are planned, organised and carried on in a businesslike manner such that it is directed at making a profit

· the amount of anticipated revenue to be generated from the activities

· the population served; and

· the value of your net assets.

Based on these factors, it is accepted that you are carrying on a business.

As the services are provided to the residents in your region, it is accepted that you are providing services principally to outsiders.

Will the employee provide documentary evidence of expenditure to the employer before the declaration date?

The declaration date is defined in subsection 136(1) of the FBTAA as being the date of lodgement of the return of the fringe benefits taxable amount, or such later date as the Commissioner allows.

This condition will be satisfied if the employee provides the necessary documentation to you by the date of lodgement of the return.

Therefore, if the relevant documentation is provided, the reimbursement of an account that will be an in-house property expense payment benefit that comes within section 62.

Will the answer change if the services are provided by another entity?

Where the product is not provided by the employer the reimbursement will be an in-house expense payment benefit if the relevant documentation is provided, and either:

· the provider of the property is an associate of the employer and carries on a business that consists of or includes the provision of identical or similar benefits principally to outsiders; or

· the provider purchased the property from the employer or an associate of the employer and both the provider and the employer or associate that sold the benefit to the provider carried on a business that consisted of or included the provision of identical or similar benefits principally to outsiders.

As the product is not purchased from the employer or an associate of the employer, the reimbursement in this second question will only be an in-house expense payment fringe benefit if the entity that supplies the product is your 'associate'.

The definition of 'associate' in subsection 136(1) uses the meaning given by section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). The entity that supplies the product is not an associate under section 318 of the ITAA 1936.

The definition of 'associate' is extended by section 159 of the FBTAA. Under paragraph 159(1)(e) an authority of a State is deemed to be an associate of each other authority of the State. This paragraph will not apply to you as you are not an authority of the State.

As neither the associate definition in subsection 136(1), nor the extended definition in section 159 applies you are not an associate of the other entity. Therefore, the reimbursement of the cost of the product will not be an in-house expense payment fringe benefit.

Question 2

Detailed reasoning

Where the product is not provided by the employer the reimbursement will be an in-house expense payment benefit if the relevant documentation is provided, and either:

· the provider of the property is an associate of the employer and carries on a business that consists of or includes the provision of identical or similar benefits principally to outsiders; or

· the provider purchased the property from the employer or an associate of the employer and both the provider and the employer or associate that sold the benefit to the provider carried on a business that consisted of or included the provision of identical or similar benefits principally to outsiders.

As the product is not purchased from the employer or an associate of the employer, the reimbursement in this second question will only be an in-house expense payment fringe benefit if the entity that supplies the product is your 'associate'.

Is the provider your associate?

The definition of 'associate' in subsection 136(1) of the FBTAA uses the meaning given by section 318 of the Income Tax Assessment Act 1936 (ITAA 1936).

The relevant subsection is subsection 318(2) of the ITAA 1936, which states:

For the purposes of this Part, the following are associates of a company (in this subsection called the "primary entity"):

(a) a partner of the primary entity or a partnership in which the primary entity is a partner;

(b) if a partner of the primary entity is a natural person otherwise than in the capacity of trustee - the spouse or a child of that partner;

(c) a trustee of a trust where the primary entity, or another entity that is an associate of the primary entity because of another paragraph of this subsection, benefits under the trust;

(d) another entity (in this paragraph called the "controlling entity") where:

(i) the primary entity is sufficiently influenced by:

(A) the controlling entity; or

(B) the controlling entity and another entity or entities; or

(ii) a majority voting interest in the primary entity is held by:

(A) the controlling entity; or

(B) the controlling entity and the entities that, if the controlling entity were the primary entity, would be associates of the controlling entity because of subsection (1), because of subparagraph (i) of this paragraph, because of another paragraph of this subsection or because of subsection (3);

(e) another company (in this paragraph called the "controlled company") where:

(i) the controlled company is sufficiently influenced by:

(A) the primary entity; or

(B) another entity that is an associate of the primary entity because of another paragraph of this subsection; or

(C) a company that is an associate of the primary entity because of another application of this paragraph; or

(D) 2 or more entities covered by the preceding sub-subparagraphs; or

(ii) a majority voting interest in the controlled company is held by:

(A) the primary entity; or

(B) the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the other paragraphs of this subsection; or

(C) the primary entity and the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the other paragraphs of this subsection;

(f) any other entity that, if a third entity that is an associate of the primary entity because of paragraph (d) of this subsection were the primary entity, would be an associate of that third entity because of subsection (1), because of another paragraph of this subsection or because of subsection (3).

None of these provisions apply in relation to the entity that provided the product.

The definition of associates in section 318 of the ITAA 1936 is expanded by subsection 159(2) of the FBTAA which states:

For the purposes of this Act, but without limiting the generality of the expression "associate":

(a) a company that is related to another company shall be deemed top be an associate of that company;

(b) the Commonwealth shall be deemed to be an associate of each authority of the Commonwealth;

(c) an authority of the Commonwealth shall be deemed an associate of each other authority of the commonwealth;

(d) a State shall be deemed to be an associate of each authority of the State;

(e) an authority of a State shall be deemed to be an associate of each other authority of the State;

(f) a Territory shall be deemed to be an associate of each authority of the Territory; and

(g) an authority of a Territory shall be deemed to be an associate of each other authority of the Territory.

In considering paragraph 159(2)(a), subsection 158(1) provides that a company shall be taken to be related to another company if:

· one of the companies is a subsidiary of the other company; or

· each of the companies is a subsidiary of the same company.

As the entity is not your subsidiary and you are not a subsidiary of the entity neither of these dot points is satisfied.

The other paragraph in subsection 159(2) of the FBTAA to be considered is paragraph 159(2)(e), which provides that an authority of the State shall be deemed to be an associate of each authority of the State.

Are you an authority of the State?

The words 'authority of the State' naturally means a body which is given by the State the power to direct or control the affairs of others on behalf of the State.

In Committee of Direction of Fruit Marketing v Australian Postal Commission (1980) 4 ALD 227; (1980) 54 ALJR 534; (1980) 30 ALR 599; (1980) 144 CLR 577 (Fruit Marketing) Gibbs J provided the following definition of 'authority of a State' at 580:

 The expression "authority of a State" refers to a body which exercises power derived from or delegated by the State, but the fact that a body is established under State law and possesses power conferred upon it by State law will not necessarily mean that the body is an authority of a State. For example, a private company, such as a gas company, which provides a public service for profit, may be set up under the company laws of a State, and may be given special statutory powers to enable it to carry on its undertaking, but it does not thereby become an authority of a State. The words "authority of a State" naturally means a body which is given by the State the power to direct or control the affairs of others on behalf of the State, that is, for the purposes of and in the interests of the community or some section of it. In some cases it may be decisive that the body concerned is given exceptional powers of a kind not ordinarily possessed by an individual or a company, and that those powers are intended to be exercised for a purpose that would ordinarily be regarded as a purpose of government. On the other hand, in some cases it may be decisive that the body is conducted in the interest and for the profit of its members. In all cases, however, it is necessary to have regard to all the relevant circumstances in order to determine the character of the body in question.

The meaning of the word 'authority' has also been considered in the context of the expression 'public authority' in a number of cases including Renmark Hotel Inc v FC of T (1949) 8 ATD 424; (1949) 79 CLR 10 (Renmark Hotel) andotel H FC of T v Bank of WA Ltd; FC of T v State Bank of NSW Ltd 96 ATC 4009; (1995) 32 ATR 380 (Bank of WA).

These cases were summarised in Bank of WA by Hill J at ATC 4009:

… a community based public hotel, (Renmark Hotel Inc v FC of T (1949) 8 ATD 424; (1949) 79 CLR 10); a corporation established to operate a private railway, (FC of T v Silverton Tramway Co Ltd (1953) 10 ATD 295; (1953) 88 CLR 559); a members racing club (albeit that it had the power by statute to license horse racing) (The Western Australian Turf Club v FC of T 78 ATC 4133; (1977-1978) 139 CLR 288) and a body incorporated by Statute for the publication of law reports (
Incorporated Council of Law Reporting of Queensland v FC of T (1924) 34 CLR 580) have all been held not to be authorities (or public authorities).

Conversely, the NSW Commissioner of Railways was an authority of the State within the meaning of ss. 125 and 132 of the Patents Act 1952: General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125, as was a body corporate established by Statute having the responsibility under that legislation for marketing of fruit with the power to impose levies on growers and on fruit marketed in the Fruit Marketing case. Of the remaining Australian cases it suffices to say that doubt was expressed whether the Anti- Cancer Council of Victoria (Re Anti-Cancer Council of Victoria; Ex parte the State Public Services Federation (1992) 175 CLR 442) or the Registrar of the Accident Compensation Tribunal of Victoria (Registrar of the Accident Compensation Tribunal (Vic) v FC of T 93 ATC 4835; (1993) 178 CLR 145) were.

Hill J then provided the following propositions which were derived from the cases:

· A private body, corporate or unincorporated, established for profit is not an authority.

· For a body to be an authority of a State or of the Commonwealth, the body in question must be an agency or instrument of government set up to exercise control or execute a function in the public interest. It must be an instrument of government existing to achieve a government purpose.

· The body in question must perform a traditional or inalienable function of government and have governmental authority for doing so.

· For a body to be an authority, it is not necessary that it has coercive powers and the possession of coercive powers does not of itself characterise a body as an authority.

· As a minimum, a body is required to possess exceptional powers. However, the possession of exceptional powers is not of itself sufficient to characterise a body as an authority. For example, a private utility that may have the legal right to enter premises would not be an authority solely because of that power.

· Incorporation by legislation is not a requirement for a body to be classed as an authority.

In considering whether these propositions apply to you, it is relevant to consider the following questions:

· Were you established for profit?

· Are you an agency or instrument of the State government?

· Do you perform a traditional or inalienable function of government and have governmental authority for so doing?

· Do you possess exceptional powers?

Were you established for profit?

In Federal Commissioner of Taxation v. Silverton Tramway Co Ltd (1953) 88 CLR 559; 27 ALJ 580; 10 ATD 295 Dixon CJ at CLR 566 said:

The word "authority" would not readily be applied in ordinary speech to a company carrying on an undertaking for private profit, even if the undertaking were a public utility and the company had secured a grant of statutory powers to enable it to do so.

Similarly, Rich J in Renmark Hotel at CLR 18 said:

No-one would describe as a public authority an electric lighting company which had obtained statutory powers but possessed a share capital issued to shareholders and which carried on for profit, but we might call it a public utility.

Your principal objectives require that you are to be a successful business by operating in accordance with good commercial practice to maximise returns to members. There is also an expectation that you will adopt a dividend distribution target of at least 50 per cent of the net profit after tax.

These facts indicate you were established for profit.

Are you an agency or instrument of the State government?

As set out above, Gibbs J in Fruit Marketing said at CLR 580:

The words "authority of a State" naturally means a body which is given by the State the power to direct or control the affairs of others on behalf of the State, that is, for the purposes of and in the interests of the community or some section of it.

The Act that established you indicates that you are not acting on behalf of the State as it sets out that you are not and do represent the Crown.

Further, the Act provides that you are to be controlled by an independent Board comprising:

· a Chairperson;

· three common directors; and

· 2 regional directors.

Each of these people are appointed by the Owner's Representatives.

Do you perform a traditional or inalienable function of government and have governmental authority for so doing?

Your objectives and functions are detailed in the Act under which you were established and the associated documentation that you provided.

Although some of these functions have traditionally been conducted by government, you have been separately established from the State government.

The governmental functions are governed by a second Act which sets out the functions and powers of the Minister and the Regulator. The Regulator's functions include the administration of the licensing system that governs your activities.

In undertaking the supply of the product you are acting in the same manner as any other entity that had been licensed by the Regulator.

Do you possess exceptional powers?

The powers provided to you under the enacting legislation are focused on the day to day administration of your corporation and are of the kind ordinarily possessed by an entity of your type. They are not considered to be exceptional or out of the ordinary.

As set out above, the exceptional powers are provided by the second Act to the Regulator.

In applying the propositions put forward in the Bank of WA case you are not considered to be an authority of the State as:

· you were established for profit;

· you are not an agency or instrument of the State government;

· the functions that you are performing are no different to any other corporation licensed to provide water and sewerage services; and

· you do not possess exceptional powers.

As you are not an authority of the State and the requirements of the 'associate' definition are not satisfied you are not an associate of the other Regional Corporations. Therefore, the reimbursement of the cost of water and sewerage services provided by one of the other Regional Corporations will not be an in-house expense payment fringe benefit.