Edited version of private ruling

Authorisation Number: 1011611314605

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Ruling

Subject: Fringe Benefits Tax: employee reimbursement

Question 1

Will the otherwise deductible rule reduce the taxable value of the fringe benefits that arise in scenario 1 to nil?

Answer

No.

Question 2

Will the otherwise deductible rule reduce the taxable value of the fringe benefits that arise in scenario 2 to nil?

Answer

Yes.

This ruling applies for the following period

Year ended 31 March 2011

The scheme commenced on

01 April 2010

Relevant facts

You are organising a regional meeting overseas for which attendance by your employees is compulsory.

Your employees will purchase their own air-fare tickets and then submit their expenses to you for reimbursement.

You have confirmed that employees will keep a travel diary.

You have provided two scenarios where an employee may take a holiday before or after the meeting. You will only reimburse the employee for travel deemed business related.

Scenario 1

The employee will travel to three overseas destinations of which one is where your meeting will be held. You will only reimburse the employee for the cost of the flights you consider to be business related.

Scenario 2

The employee will travel overseas to where the meeting will be held a few days before the meeting and leave the day after the meeting. You will reimburse the employee for the cost of the airfares.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 20

Fringe Benefits Tax Assessment Act 1986 section 24

Fringe Benefits Tax Assessment Act 1986 section 45

Fringe Benefits Tax Assessment Act 1986 section 52

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Will the otherwise deductible rule reduce the taxable value of the fringe benefits that arise in scenario 1 to nil?

Summary

In each of the scenarios you will reimburse the employee for certain costs relating to the attendance at the conference overseas. The reimbursement of the costs will be an expense payment fringe benefit.

Section 24 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) enables the taxable value of an expense payment fringe benefit to be reduced by the amount the employee would have been entitled to claim as an income tax deduction if he or she had paid for the tickets.

By applying the guidelines contained within Taxation Ruling TR 98/9: Income tax: deductibility of self education expenses (TR 98/9) we have concluded the employee in scenario 1 would have been able to claim an income tax deduction for 50% of the airfares reimbursed. The employee in scenario 2 would be able to claim an income tax deduction for 100% of the airfares reimbursed.

Detailed reasoning

What type of benefit has been provided?

In determining the taxable value of the fringe benefit that arises from the reimbursement of the travel expenses, it is necessary to firstly determine the type of benefit that is being provided.

Section 20 of the FBTAA 1986 states:

Where a person (in this section referred to as the "provider"):

a) makes a payment in discharge, in whole or in part, of an obligation of another person (in this section referred to as the "recipient") to pay an amount to a third person in respect of expenditure incurred by the recipient; or

b) reimburses another person (in this section also referred to as the "recipient"), in whole or in part, in respect of an amount of expenditure incurred by the recipient;

the making of the payment referred to in paragraph (a), or the reimbursement referred to in paragraph (b), shall be taken to constitute the provision of a benefit by the provider to the recipient.

As you will reimburse your employee's travel expenses, the benefit will be an expense payment fringe benefit. The taxable value of the fringe benefit may be reduced where the 'otherwise deductible' rule applies.

Paragraph 112 of Taxation Ruling TR 2001/2 Fringe Benefits Tax: the operation of the new fringe benefits tax gross-up formula to apply from 1 April 2000 states:

The taxable value of certain fringe benefits may be reduced to the extent that the employee would have been able to claim an income tax deduction had the employee themselves incurred the expense. The otherwise deductible rule applies to reduce the taxable value of either an airline transport fringe benefit, a board fringe benefit, an expense payment fringe benefit, a loan fringe benefit, a property fringe benefit or a residual fringe benefit. The taxable value is reduced by the hypothetical in come tax deduction to which the employee would have been entitled had the employee incurred the expense …

The recipient of the benefit in each of the scenarios is your employee. This means that you can reduce the taxable value of the benefit by the amount the employee would have been entitled to claim as an income tax deduction.

Guidelines for determining whether the employee would have been able to claim an income tax deduction for the costs incurred in travel, are provided by TR 98/9.

The general rule that applies in relation to expenses incurred in attending a work related conference or seminar is set out in paragraph 17, which states:

An expense is deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) when it has the essential character of an income producing expense. The essential character is to be determined by an objective analysis of all the surrounding circumstances. There are circumstances where apportionment under section 8-1 is required. For example, if a study tour or attendance at a work-related conference or seminar is undertaken for income-earning purposes and for private purposes, it is appropriate to apportion the expenses between the purposes. If the income-earning purpose is merely incidental to the main private purpose, only the expenses which relate directly to the former purpose are allowable. However, if the private purpose is merely incidental to the main income-earning purpose, apportionment is not appropriate.

Guidelines as to the approach to be adopted where only part of the travel is work related are provided by paragraphs 63 to 70 of TR 98/9.

Paragraph 64 provides the general rule that is to be applied where the private purpose is incidental to the work related purpose. It states:

If the purpose of a study tour or attendance at a work-related conference or seminar is the gaining or producing of income, the existence of an incidental private purpose does not affect the characterisation of the related expenses as wholly incurred in gaining assessable income.

Where the private purpose is more than incidental to the business purpose the general rules to be used are set out in paragraphs 65 and 66. These paragraphs state:

65. Both Ronpibon Tin NL (78 CLR at 59; 8ATD at 437) and Fletcher & Ors ( 173 CLR at 16; 91 ATC at 4957; 22 ATR at 621) recognise there are at least two kinds of expenditure that require apportionment under section 8-1. The first is expenditure in respect of a matter where distinct and severable parts are devoted to gaining income and other parts are devoted to some other end. If a study tour or work-related conference or seminar was mainly devoted to a private purpose, such as having a holiday, and the gaining or producing of income was merely incidental to the private purpose, only those expenses directly attributable to the income-earning purpose would be allowable.

66. The second kind of apportionable expenditure is a single outlay that serves both an income-earning purpose and some other purpose indifferently. While the High Court recognised that there can be no precise arithmetical division in such cases. For example, if a study tour or work-related conference or seminar is undertaken equally for income-earning purposes and private purposes, it would be appropriate to apportion the expenses equally between the purposes.

Paragraphs 67 to 70 provide three examples that illustrate the application of these general rules. They state:

67. Example: Glenn, a qualified architect, attends an eight-day work-related conference in Hawaii on trends in modern architecture. One day of the conference involves a sightseeing tour of the island and a game of golf is held on the final afternoon of the conference. As the main purpose of attending the conference is the gaining or producing of income, the total cost of the conference (air fares, accommodation and meals) is allowable.

68. The existence of private pursuits, such as the island tour and the game of golf, is purely incidental to the main purpose and does not effect the characterisation of the conference expenses as wholly incurred in gaining assessable income.

69. Example: Jenny, a doctor, was holidaying in Cairns when she became aware of a work-related seminar on the current treatment of cancer patients. The cost of the half-day seminar was $200. Jenny is able to claim a deduction for the cost of the seminar because it is directly attributable to an income-earning purpose. However, no part of her airfare to Cairns or her holiday accommodation is an allowable deduction.

70. Example: Francesco, a paediatrician, has 2 equal purposes when he decides to attend a five-day international conference on paediatrics in Singapore to be followed by a seven-day holiday in Thailand. The conference package is $2,500 ($1,000 return air fare, $500 for the cost of the conference and $1,000 for accommodation and meals at the conference venue). Francesco paid another $2,000 for accommodation, meals and car hire for the 7 day holiday in Thailand. Francesco is allowed a deduction of $1,500 for the conference cost and the accommodation and the meals expenses at the conference. Only half of the return air fare ($500) is allowed as the expense was incurred for two equal purposes, one income-earning and the other private. The other expenditure of $2,000 relating to the holiday in Thailand is private in nature and not allowable as a deduction.

Further guidance is provided by paragraphs 311 and 312 of Taxation Ruling TR 1999/10 Income tax and fringe benefits tax: Members of Parliament - allowances, reimbursements, donations and gifts, benefits, deductions and recoupments. These paragraphs state:

311. Travel expenses that are unconnected with a Member's work-related activities are not allowable deductions. They are not incurred in the course of gaining or producing assessable income and, in any case, are of a private or domestic nature.

312. Example: A Member flies from her New South Wales country electorate to Sydney to attend Parliamentary sittings for five days. On the conclusion of those sittings, she is joined by her family for a holiday in Sydney that extends for two days. Although she incurs accommodation and other expenses in Sydney for seven days, no part of the expenses incurred in respect of the two day holiday period is allowable as a deduction. However, she would be entitled to claim the full cost of her return fare because the main purpose of the travel was work-related.

In each scenario, your employee is required to travel to undertake work-related duties. An employee can only be reimbursed with your approval. These factors indicate that the travel expenses have a business purpose.

However, the employee in each scenario took additional private days. The effect of these private days on the characterisation of the expenses depends upon whether the private purpose is merely incidental to the business purpose.

Factors which may assist in determining whether the private purpose is incidental to business purpose include the time spent away and whether there is travel to other destinations. These factors need to be considered before deciding whether the essential nature of the expense can be characterised as an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Where none of these factors indicate that the private purpose was more than incidental to the business purpose, we will accept that the main purpose for the overseas travel is work-related. In such a situation, the employee would have been entitled to an income tax deduction had they incurred and paid the air fares themselves.

However where the facts indicate that the private purpose was more than incidental to the business purpose, the expenditure will need to be apportioned. In such a situation, the application of the otherwise deductible rule will only apply to the extent that the expenditure would have been income tax deductible.

In applying these paragraphs to the expenditure incurred by the employee, the following can be concluded in the two scenarios you have provided.

Scenario 1 - an employee travels to three destinations

The employee will travel to three overseas destinations of which one is where your meeting will be held. You will only reimburse the employee for the cost of the flights you consider to be business related.

As this travel serves both income producing and private purposes both paragraphs 17 and 66 of TR 98/9 apply. That is the travel should be apportioned.

Therefore the otherwise deductible rule will reduce the taxable value of the fringe benefits that arise from the travel by 50% where the employee has retained a travel diary.

Scenario 2 - an employee travels to a single destination.

The employee will travel overseas to where the meeting will be held a few days before the meeting and leave the day after the meeting. You will reimburse the employee for the cost of the airfares.

Paragraph 312 of TR 1999/10 provides an example of where private purposes are incidental to the business purposes.

From the information provided we consider that the private purpose of the travel in this scenario is incidental to the business purpose. Therefore, where a travel diary is maintained the otherwise deductible rule will reduce the taxable value of the fringe benefits that arise from the travel to nil.