Edited version of private ruling

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Ruling

Subject: Exempt Fringe benefits and Otherwise Deductible Rule

Issue 1

Question 1:

Is the reimbursement of the company accountant's membership fee an exempt benefit under section 58Y of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Detailed reasoning

Taxation Ruling TR 2000/7 considers the deductibility of subscriptions, joining fees, levies and contributions. It states that periodic subscriptions for membership of trade, business or professional associations are deductible where the principal activities of the association bear a direct relationship to the gaining or producing of assessable income.

The Professional Associations your employee subscribes to are:

-          Australian Society of Accountants

-          CPA of Australia

The employee is employed in the capacity as company accountant. Membership to the Australian Society of Accountants and the CPA of Australia assists your employee in updating financial and accounting knowledge to understand and interpret the financial statements in your role as company accountant.

The subscriptions to these professional associations have the necessary connection to the income earning activities as company accountant. Accordingly, the subscription fees to these associations are allowable deductions under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Section 58Y(1) Exempt benefits

Either of the following benefits provided by an employer to an employee of the employer in respect of the employee's employment is an exempt benefit:

(a) an expense payment benefit where the recipients expenditure is in respect of an eligible membership or subscription;

(b) a property benefit where the recipients property is an eligible membership or subscription.

58Y(2) Eligible membership or subscription

Each of the following is an eligible membership or subscription:

(a) a subscription to a trade or professional journal;

(b) an entitlement to use a corporate credit card;

(c) an entitlement to use an airport lounge membership.'

As the expense payment benefit is in respect of an eligible membership or subscription, in this case being the membership of accounting professional associations, it is considered that the benefits provided are exempt in terms of section 58Y(2) of the FBTAA.

Therefore the reimbursement of the employee's membership fee is an exempt benefit under section 58Y of the FBTAA.

Question 2:

Can the taxable value of the reimbursements for the:

A home office expenses

B employee car expenses

C self education expenses and

D home kitchen expenses

be reduced under section 24 of the FBTAA?

Detailed reasoning

Home Office Expenses

Taxation Ruling TR 93/30 provides the Commissioner's view on the deductibility of home office expenses. When part of a home has the character of a 'place of business' then the expenses associated with that part of the home take on a business character and are allowable deductions.

However, when a room of a home is used as a study or home office as a matter of convenience then the allowable deductions are only the additional expenses incurred as a result of the income-producing activities.

Paragraph 5 lists the following factors that may indicate if a part of a home has the character of a 'place of business'. These are:

§ the area is clearly identifiable as a place of business;

§ the area is not readily suitable or adaptable for use for private or domestic purposes in association with the home generally;

§ the area is used exclusively or almost exclusively for carrying on a business; or

§ the area is used regularly for visits of clients or customers.

The type of expenses that can be claimed can be divided into two categories, 'occupancy expenses' such as rent, interest, repairs and insurance and 'running expenses' such as lighting, heating, cleaning and depreciation. If the part of the home is used in connection with the taxpayer's income-producing activities, but does not constitute a 'place of business', only a proportion of the running expenses are allowable.

On a balanced consideration of the information that you provided, we consider that your home office does constitute a 'place of business'. It is clearly identifiable as a 'place of business' and cannot be readily suitable or adaptable for private use. Consequently, you can claim expenses in relation to your home office.

From the information provided, we accept that the employee performs work related activities at home and a deduction for the running expenses attributable to these activities would be allowable under section 8-1 of the ITAA 1997.

Under section 24 of the FBTAA, if the employee receiving the benefit would be entitled to a deduction under section 8-1 of the ITAA 1997, had the employee incurred the expenses, then the 'otherwise deductible' rule will apply.

Section 24 of the FBTAA allows the employer to reduce the taxable value of an expense payment fringe benefit which is provided to an employee, to the extent to which the employee would have been entitled to a 'once-only' income tax deduction for the expenditure concerned had it not been paid or reimbursed by the benefit provider. A 'once-only' deduction is one that is wholly or partly allowable in one year for the expenditure, and not in any other year.

In determining the business and private components of expenses incurred for FBT purposes, it is fundamentally the same as that applied under income tax law to determine whether expenses incurred are deductible under section 8-1 of the ITAA 1997. This will determine whether your employer is eligible for a reduction of the aggregate taxable value of the benefit provided.

If the employee's expenditure is not incurred in performing the actual duties and responsibilities of employment, the employee will not be eligible for a deduction for the costs incurred, and the 'otherwise deductible' rule will not apply. Consequently, any costs incurred by your employer in providing you with a fringe benefit will be subject to FBT in those circumstances.

Because the employee is eligible for a deduction under section 8-1 of the ITAA 1997, the 'otherwise deductible' rule will apply to reduce the taxable value of the expense payment fringe benefit provided. Therefore, the employer would be able to reduce the taxable value of the fringe benefit in relation to the home office expenses under the 'otherwise deductible' rule, to nil.

The use of the 'otherwise deductible' rule must be supported by certain documentation. The documentation is needed to substantiate the extent to which the purchase price of the expense fringe benefit would have been 'otherwise deductible' to you.

You as the employer must obtain the documentation from you before lodging the relevant FBT return. Where the documentation is a declaration by you, it must be in an approved format

Employee car expenses

Section 24 of the FBTAA sets out how the 'otherwise deductible' rule works to reduce the taxable value of a fringe benefit.

Where an expense payment fringe benefit is provided in relation to a car owned or leased by an employee (car expense payment benefit), paragraphs 24(1)(ea) - (f) of the FBTAA provide special rules for determining how much, if any, of the employer's expenditure would have been otherwise deductible to the employee.

The rules are quite complicated but basically allow for three different methods of calculating the amount of the expenditure that hypothetically would have been income tax deductible to the employee.

The differences arise from the extent to which the employee uses the car for business or employment-related purposes and/or the type of evidence available to substantiate that use.

These rules state that where no log book has been maintained for the employee's car but it travels a minimum of 5,000 business kilometres during the year, there is a deemed thirty three and one third percent (33 and 1/3%) reduction provided the employee gives the employer the appropriate declaration by the due date for lodgment.

The reduction in value applies to 'car expense payment benefits' which is defined in subsection 136(1) of the FBTAA to mean an expense payment fringe benefit where the recipient's expenditure is a Division 28 of the ITAA 1997 'car expense'.

Therefore, paragraphs 24(1) (ea) and (f) of the FBTAA sets out the requirements which are linked to Division 28 of the ITAA 1997 which deals with the calculation of car expense deductions (that is, substantiation provisions).

A 'car expense' is defined in section 28 -13 of the ITAA 1997 as a loss or outgoing to do with a car (including borrowing costs and interest on money borrowed to buy a car, lease costs for a leased car and repair costs) as well as operating costs and depreciation.

Whilst this definition is very broad, only expenditure that is allowable under a deductibility provision of the ITAA may be taken into account.

Therefore, car expenditure of a capital nature isn't deductible, even if, on a strict reading, they would be included in the definition.

Consequently, by its very nature, the 'otherwise deductible' rule cannot apply to capital expenditure because its not income tax deductible.

A 'car' under these provisions has the same meaning as a 'car' for FBT purposes.

Paragraphs 24(1) (ea) and (f) of the FBTAA only apply if the expenditure is in relation to a car owned by or leased to the employee ('...held by the recipient...' as per subsection 162(3) of the FBTAA), that is, doesn't apply where the car is owned/leased by some other person such as an associate of the employee (for example, spouse) even if the car is used by the employee.

Whereas technically the legal owner of the property under a hire purchase agreement has historically been the financier, the Commissioner as a matter of administrative largesse allowed the hirer to claim the depreciation on the property - IT 196, IT 359, IT 2236 and IT 2419.

However, due to a recent legislative change (bought about as a result of a AAT case decision), the hirer is now treated as the owner of the property and is entitled to the depreciation claim (TLAB (5) 1999).

This is reflected in subsection 28-12(1) of the ITAA 1997 which states that if you own, lease or hire a car under a hire purchase agreement, you are treated as the owner of it for the purposes of these provisions.

Therefore, under a hire purchase agreement, the hirer is entitled to claim as an income tax deduction the depreciation on the property and the finance charges (for example interest, insurance, etcetera) that don't form part of the actual purchase price.

It should be stressed that the reduction in taxable value on a car expense payment benefit provided to an employee is only available where:

§ the expense payment benefit is "in respect of" a car owned by or leased to the employee; and

§ the employee, if he paid the expenditure or hadn't been reimbursed would have been entitled to a deduction for it, ie where the car was used for income-producing purposes (to qualify as a notional deduction under the "once-only deduction" rule; and

§ the employee lodges the appropriate declaration with the employer before the date of lodgment of the annual FBT return.

In most cases where an employer pays an employee a reimbursement for car expenditure based on the distance travelled that is, cents per kilometre), it wont be an expense payment benefit (that is, not subject to FBT as per section 22 of the FBTAA).

In these circumstances, the relevant payment will be the income of the employee who will have to claim any offsetting deductions (as per the income tax substantiation requirements).

Car expenditure paid by an employer where the employer owns or leases the car is not an expense payment benefit (section 53 of the FBTAA). They are effectively represented in the value of any resultant car benefit.

Self Education Expenses

Taxation Ruling TR 98/9 sets out the circumstances when self education expenses are allowable as a deduction. Self education expenses are deductible under section 8-1 of the ITAA 1997 where they have a relevant connection to the taxpayer's current income earning activities.

That is, a deduction is allowable for self education expenses if a taxpayer's current income-earning activities are based on the exercise of a skill or some specific knowledge and the subject of the self education enables the taxpayer to maintain or improve that skill or knowledge (FC of T v. Finn (1961) 106 CLR 60, (1961) 12 ATD 348). Similarly if the study of a subject of self education leads to, or is likely to lead to an increase in a taxpayer's income from his or her current income earning activities in the future, a deduction is allowable

However, no deduction is allowable for self education expenses if the study is designed to enable a taxpayer to open up a new income-earning activity, whether in business or in the taxpayers current employment. Expenses incurred in obtaining employment are not deductible.

Such self education expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income (see FC of T v. Maddalena (1971) 45 ALJR 426; (1971) 2 ATR 541; 71 ATC 4161 (Maddalenas case); and paragraphs 15, 48 and 62 of TR 98/9).

What are the FBT implications associated with the payment of self-education expenses?

An 'expense payment fringe benefit' is defined in subsection 136(1) of the FBTAA as a fringe benefit that is an expense payment benefit. Section 20 of the FBTAA sets out the circumstances in which an expense payment benefit will be taken to be provided.

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.

The term benefit is defined in subsection 136(1) of the FBTAA to include any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit privilege, service or facility that is, or is to be, provided under:

(a)    an arrangement for or in relation to:

(i)    the performance of work (including work of a professional nature), whether with or without the provision of property;

(ii)    the provision of, or of the use of facilities for, entertainment, recreation or instruction; or

(iii)    the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction;

(b)    a contract of insurance; or

(c)    an arrangement for or in relation to the lending of money.

How it applies to your circumstances

In general terms, an expense fringe benefit may arise in either of two ways:

§ where your employer pays a third party, being your course provider, for the expenses incurred by you, or

§ where your employer reimburses you for the expenses incurred by you

The taxable value of such a fringe benefit (an external expense payment fringe payment) as set out in section 23 of the FBTAA is the amount of payment or reimbursement referred to in section 20 of the FBTAA, reduced by any recipient's contribution.

Under section 24 of the FBTAA, if the employee receiving the benefit would be entitled to a deduction under section 8-1 of the ITAA 1997, had the employee incurred the expenses, then the 'otherwise deductible' rule will apply.

Section 24 of the FBTAA allows the employer to reduce the taxable value of an expense payment fringe benefit which is provided to an employee, to the extent to which the employee would have been entitled to a 'once-only' income tax deduction for the expenditure concerned had it not been paid or reimbursed by the benefit provider.

A 'once-only' deduction is one that is wholly or partly allowable in one year for the expenditure, and not in any other year.

In determining the business and private components of expenses incurred for FBT purposes, it is fundamentally the same as that applied under income tax law to determine whether expenses incurred are deductible under section 8-1 of the ITAA 1997.

This will determine whether your employer is eligible for a reduction of the aggregate taxable value of the benefit provided.

If the employee's expenditure is not incurred in performing the actual duties and responsibilities of employment, the employee will not be eligible for a deduction for the costs incurred, and the 'otherwise deductible' rule will not apply.

Consequently, any costs incurred by your employer in providing you with a fringe benefit will be subject to FBT in those circumstances.

Because you are eligible for a deduction under section 8-1 of the ITAA 1997, the 'otherwise deductible' rule will apply to reduce the taxable value of the expense payment fringe benefit provided.

Therefore, your employer would be able to reduce the taxable value of the fringe benefit in relation the education course/s undertaken by you, under the 'otherwise deductible' rule, to nil.

The use of the 'otherwise deductible' rule must be supported by certain documentation. The documentation is needed to substantiate the extent to which the purchase price of the expense fringe benefit would have been 'otherwise deductible' to you.

Your employer must obtain the documentation from you before lodging the relevant FBT return. Where the documentation is a declaration by you, it must be in an approved format.

Home kitchen expenses

Section 24 of the FBTAA allows the employer to reduce the taxable value of an expense payment fringe benefit which is provided to an employee, to the extent to which the employee would have been entitled to a 'once-only' income tax deduction for the expenditure concerned had it not been paid or reimbursed by the benefit provider.

A 'once-only' deduction is one that is wholly or partly allowable in one year for the expenditure, and not in any other year.

In determining the business and private components of expenses incurred for FBT purposes, it is fundamentally the same as that applied under income tax law to determine whether expenses incurred are deductible under section 8-1 of the ITAA 1997.

This will determine whether your employer is eligible for a reduction of the aggregate taxable value of the benefit provided.

If the employee's expenditure is not incurred in performing the actual duties and responsibilities of employment, the employee will not be eligible for a deduction for the costs incurred, and the 'otherwise deductible' rule will not apply.

Consequently, any costs incurred by your employer in providing you with a fringe benefit will be subject to FBT in those circumstances.

Because the employee would be eligible for a deduction under section 8-1 of the ITAA 1997, the 'otherwise deductible' rule will apply to reduce the taxable value of the expense payment fringe benefit provided.

Therefore, your employer would be able to reduce the taxable value of the fringe benefit in relation to the home kitchen expenses incurred by you under the 'otherwise deductible' rule, to nil.

The use of the 'otherwise deductible' rule must be supported by certain documentation. The documentation is needed to substantiate the extent to which the purchase price of the expense fringe benefit would have been 'otherwise deductible' to you.

Your employer must obtain the documentation from you before lodging the relevant FBT return. Where the documentation is a declaration by you, it must be in an approved format.

Question 3:

Are the reimbursements for the membership fees, home office expenses, employee car expenses, self education expenses and home kitchen expenses, deductible to the company under section 8-1 of the ITAA 1997?

Deductibility of expenses

Under section 8-1 of the ITAA 1997 you can deduct expenses incurred in gaining or producing your assessable income, or expenses you necessarily incur in carrying on a business for the purpose of gaining or producing your assessable income.

You cannot deduct an expense under section 8-1 of the ITAA 1997 if it is of a capital, private or domestic nature.

You also cannot claim a deduction if the expense is incurred in producing exempt income or a provision of the tax law prevents you from claiming a deduction.

Connection with the income of the taxpayer

To be deductible under section 8-1 of the ITAA 1997, a loss or outgoing must have a sufficient connection with the derivation of the taxpayer's assessable income.

The expense must be incurred in gaining or producing the taxpayer's assessable income. The sufficiency of the connection is determined on the facts of the case (Taxation Ruling TR 95/33).

Apportionment of deductible expenses

Expenses may have to be apportioned into deductible and non-deductible parts. The inclusion of the words 'to the extent' in section 8-1 of the ITAA 1997 implies that the apportionment of expenses is contemplated.

The general requirement when apportioning expenditure is to assign a percentage to represent the deductible part of a composite expenditure. There is no universally accepted formula that can be applied. A deduction is possible as long as apportionment is reasonable in the circumstances and there is some proof of its determination.

Capital versus revenue expense

Capital expenses cannot be claimed under section 8-1 of the ITAA 1997.

An expense will usually be capital in nature where it is incurred with the intention to create an asset or advantage of a lasting and enduring nature (British Insulated & Helsby Cables Ltd v. Atherton (1926) AC 205; (1926) 10 TC 155).

Capital expenditure often produces an enduring benefit, that is, the structure of the advantage or asset.

Revenue expenditure is often repetitious or recurring in nature and often does not produce assets or advantages of an enduring nature.

Uniform Capital Allowances

Division 40 of the ITAA 1997 allows specific deductions for items that may be capital or capital in nature provided they are depreciating assets.

A depreciating asset is an asset with a limited affective life that is reasonably expected to decline in value over time.

Under Division 40 of the ITAA 1997 you may claim deductions for the decline in value of depreciating assets that you hold, to the extent to which you use the assets for a taxable purpose. The amount of your deduction is determined by the cost of the asset, its effective life and the percentage of taxable purpose the asset is used for.

The cost of a depreciating asset includes the cost when you began to hold the asset (first element) and the amounts that have contributed to bringing the asset to its present condition and location since you started to hold the asset.

In your case the reimbursements you have made to the employee for the expenses incurred including professional association membership fees, home office expenses, employee car expenses, self education expenses and home kitchen expenses are deductible to the company under section 8-1 of the ITAA 1997?