Edited version of private ruling

Authorisation Number: 1011491603787

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Fringe Benefits Tax - in-house residual fringe benefit

Issue

Question 1

Is the provision of internally funded scholarships by an educational institution to specified employees who undertake a specified course it provides a residual fringe benefit under subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

Question 2

If the answer to question 1 is yes, is the provision of the scholarship an in-house residual fringe benefit as defined in subsection 136(1) of the FBTAA?

Answer

No

Question 3

If the answers to questions 1 and 2 are yes, will the benefit be an in-house period residual fringe benefit and valued in accordance with section 49 of the FBTAA?

Answer

Not applicable

Relevant facts

The educational institution was established under an Act.

The educational facilities offered by the educational institution are of tertiary education.

The applicant stated that the educational institution is carrying on a business.

The applicant provided the following information against each of the criteria in paragraph 13 of Taxation Ruling TR97/11 Income tax: am I carrying on a business of primary production. Whilst this ruling is aimed at primary production, the general characteristics of a business are as the same. The indicators are as follows:

Whether the activity has a significant commercial purpose or character

· The educational institution achieves a positive revenue result from its operations. Those operations encompass not just education of Australian residents but also significant fee paying courses attended by both resident and foreign students.

· The educational institution is also involved in research activities and the active commercialisation of the intellectual property generated by those activities.

Whether the educational institution has more than just an intention to engage in business

· The educational institution has been in operation for years.

· The functions of the educational institution y include, within the limits of its resources

· The provision of educational facilities at educational institution standards for persons who being eligible to enrol seek the benefits of such facilities; and

· The establishment of such facilities as the educational institution thinks desirable for providing courses of study, whether within the educational institution or elsewhere, for evening students, giving instruction to and the examination of external students, and providing courses of study or instruction at such levels of attainment as the Council thinks appropriate to meet the special requirements of industry, commerce or any other section of the community; and

· generally, the dissemination of knowledge and the promotion of scholarship.

Whether the educational institution has a purpose of profit as well as a prospect of profit from the activity

· The educational institution has a formal business plan, strategic plan and in accordance with the financial statements has shown an operating result. It is therefore clear that the result shows not only an intention but an actual profit has been generated from the educational institution's activities.

· The educational institution provides for full fee paying courses to both domestic and international students.

Whether there is repetition and regularity of the activity

· The educational institution has been in continuous operation for years undertaking the activities of education and research.

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

· The educational institution generates revenues from a number of streams including education both in Australia and collaboratively overseas, research and commercialisation of intellectual property. A significant amount of that income is from activities which are also provided by other commercial organisations through full fee paying education and commercial research.

· The educational institution is also as a shareholder in many other entities. This is involved in the commercialisation of educational institution sourced intellectual property and conduct of commercial consultancies.

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

· The educational institution has a formal strategic plan which encompasses nine key strategic areas.

· The educational institution annual report had over millions of revenue generated and achieved net proceeds of a few millions.

· The educational institution maintains and produces comprehensive audited financial statements in accordance with applicable accounting standards.

The size, scale and permanency of the activity

· The educational institution had around x (number) staff, x (number) students, almost x (number) courses on offer and over x (number) Alumni. It has had over x (number) international students from more than x (number) countries enrolled in its courses.

Whether the activity is better described as a hobby, a form of recreation or a sporting activity

· The operations of the educational institution as tertiary institution and research centre are clearly not a hobby, recreation of sporting activity. It is established under an Act of State Parliament which provides it with a broad scope of activities that may and are undertaken. While some students may undertake study as a form of recreational pursuit, from the educational institution's viewpoint, it is a significant enterprise that is being carried out, achieves significant revenues and competes against other institutions both here and abroad to provide its services.

In applying these indicators to the circumstances of the educational institution, it is clear that the facts support that the educational institution is carrying on a business.

Currently the educational institution offers a course which consists of 18 units or 6 months full time equivalent study. The course is offered by the educational institution to the public and to the educational institution employees with the admission criteria being that applicants to the course must normally hold an approved bachelor degree or equivalent qualification from an approved tertiary institution.

Each year the educational institution offers a number of internally funded scholarships to eligible educational institution employees only. The employees who are eligible are selected by academic merit on endorsement by their faculty executive dean and must meet the general admission criteria as above as well as being an employee of the educational institution.

These eligible employees do not have to pay for the course. There are no additional charges. educational institution employees who are not awarded a scholarship have to pay the Student Contribution Amount (SCA). No benefit is provided to the other employees.

The SCA for local students is calculated for each topic which is classified in a student contribution band. The educational institution charges the student contribution allowed by the Australian Government for each band.

The course units are delivered to the educational institution specified employees and educational institution students in an identical manner and at the same time. Assessments and awards are also provided at the same time.

For the current year enrolment, the total number of students for the course is X (number). Y (number) are educational institution employee students. Z (number) out of the x staff students are provided with the scholarship by the educational institution. V (number) are Australian non-educational institution employee students.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 45

Fringe Benefits Tax Assessment Act 1986 section 49

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision

Issue

Question 1

Is the provision of internally funded scholarships by the educational institution to specified employees who undertake a specified course it provides a residual fringe benefit under subsection 136(1) of the FBTAA?

Summary

As the provision of education and training does not fall within any of the specific categories of benefits within Subdivision A of Divisions 2 to 11 (inclusive) of the FBTAA, it is a residual benefit.

Detailed reasoning

The educational institution offers a number of internally funded scholarships to eligible educational institution employees for the course.

These eligible employees do not have to make any student contribution for the course. There are no additional charges. That is, these eligible employees receive a fee free course. This is a benefit provided to these employees.

Is this benefit a fringe benefit as defined in subsection 136(1) of the FBTAA?

The definition of fringe benefit in subsection 136(1) of the FBTAA states:

A fringe benefit is a benefit provided to an employee or an associate of the employee, by the employer or an associate of the employer, in respect of the employment of the employee.

As the benefit of the provision of the fee free course is provided to eligible employees of the educational institution, by the educational institution, because they are employed by the educational institution, the benefit is a fringe benefit in accordance with subsection 136(1) of the FBTAA.

Is the fringe benefit a residual fringe benefit?

Subsection 136(1) of the FBTAA states

'Residual fringe benefit' means a fringe benefit that is a residual benefit.

'Residual benefit' means a benefit that is a residual benefit by virtue of section 45.

Section 45 of the FBTAA defines a residual benefit as:

A benefit is a residual benefit for the purposes of this Act if the benefit is not a benefit by virtue of a provision of Subdivision A of Division 2 to 11 (inclusive) of the FBTAA.

As the provision of education and training does not fall within any of the specific categories of benefits within Subdivision A of Divisions 2 to 11 (inclusive) of the FBRAA, it is a residual benefit.

Question 2

If the answer to question 1 is yes, is the provision of the scholarship an in-house residual fringe benefit as defined in subsection 136(1) of the FBTAA?

Summary

The provision of the scholarship for the course to specific employees is not an in-house residual benefit as defined because the requirement in subparagraph (a)(ii) of the definition of in-house residual fringe benefit in subsection 136(1) of the FBTAA is not met.

Detailed reasoning

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

"In-house residual fringe benefit", in relation to an employer, means a residual fringe benefit in relation to the employer

(a) where both of the following conditions are satisfied:

(i) the provider is the employer or an associate of the employer;

(ii) at or about the comparison time, the provider carried on a business that consisted of or included the provision of identical or similar benefits principally to outsiders; or

(b) .. .

Based on the answer to question 1 of this ruling the benefit provided is a residual fringe benefit.

Is the provider of the benefit the employer or an associate of the employer?

Provider is defined in subsection 136(1) of the FBTAA to mean 'the person who provides the benefit'. Therefore, for Flinders educational institution to be the provider, it must be a person.

Person is defined in subsection 136(1) of the FBTAA to include:

· a body politic

· a body corporate

· a partnership

· any other unincorporated association or body of persons; and

· a person in the capacity of trustee.

The educational institution was established under section 3 of the Act which states that the educational institution is a body corporate.

As the educational institution is a body corporate it comes within the definition of person in subsection 136(1) of the FBTAA.

Therefore, the provider of the benefit is the employer (the educational institution).

Does the educational institution carry on the required business at the comparison time?

The comparison time is defined in subsection 136(1) of the FBTAA. The relevant part of the definition is sub subparagraph (a)(ii)(A), at the time the overall benefit commenced. The benefit is a period residual fringe benefit because it is provided during a period, the duration of the course. Therefore, the comparison time is when the GCE(HE) course commenced.

Is the educational institution carrying on a business?

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 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 these definitions 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 construed broadly.

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 also provides a number of indicators which are relevant to determining whether a person is carrying on a business in general 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 than 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; and

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

In considering these indicators to the educational institution, it is accepted that the following points are indicative of a business being carried on.

· the activities have a significant commercial purpose or character and are directed at making a profit;

· the educational institution achieves a positive revenue result from its operations;

· the educational institution has been in operation for years;

· there is repetition and regularity of the activities;

· the activities are planned, organised and carried on in a businesslike manner;

· the activities are conducted on a considerable scale in terms of the number of employees, the number of students, the size of the budget;

· there is a permanency of the activities;

· the delivery of tertiary education and training generates revenue and increases market share, particularly in respect of enrolment of international students; and

· the educational institution has the power to participate in joint ventures and arrangements for the sharing of profits.

Based on these facts, it is accepted that the educational institution is carrying on a business.

Does the provision of the course constitute the provision of similar benefits provided principally to outsiders?

Its main business activity is the provision of tertiary education including the course to members of the public, as well as research. The course undertaken by the specified employees of educational institution is the same as provided to other Australian or overseas students who are not employees of the educational institution.

The course units are delivered to the educational institution specified employees and educational institution students in an identical manner and at the same time. Assessments and awards are also provided at the same time.

It is accepted that the course undertaken at the educational institution by its specified employees are identical or similar to those offered to other Australian students.

Outsider is defined in subsection 136(1) of the FBTAA to mean:

a person not being:

(a) an employee of the employer;

(b) an employee of an associate of the employer;

(c) an employee of a person (in this definition referred to as the "provider") other than the employer or an associate of the employer who provides benefits to, or to associates of, employees of the employer or an associate of the employer under an arrangement between:

(i) the employer or an associate of the employer; and

(ii) the provider or another person; or

(d) an associate of an employee to whom any of the preceding paragraphs apply.

In applying this definition, employees of the educational institution will not be outsiders but most other students except some students whom are associates of the employees or an employee of an associate of the employer are outsiders.

Principally is not defined in the FBTAA. The Macquarie dictionary defines it as chiefly; mainly. To satisfy this requirement it is necessary that the educational institution provides this course mainly to outsiders.

Per this definition, the majority of students in this course have to be outsiders. For the current enrolment, there are X (number) students and Y (number) of them are the educational institution employee students. Out of which Z (number) of them are provided this benefit. Only 2 are non-educational institution employee students.

In this situation, we cannot accept that the provision of this benefit is principally to outsiders. This requirement is not met.

Accordingly, we conclude that the provision of internally funded scholarships by the educational institution to specified employees who undertake this course is not an in-house residual benefit as defined in section 136(1) of the FBTAA.

Any residual fringe benefit that is not an in-house residual fringe benefit is an external residual fringe benefit.

Question 3

If the answers to questions 1 and 2 are yes, will the benefit be an in-house period residual fringe benefit and valued in accordance with section 49 of the FBTAA?

Summary

As the answer to question 2 is no, question 3 is not applicable.