Edited version of private ruling

Authorisation Number: 1011622025195

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Ruling

Subject: business expenses

Questions

Will the cost of medical counselling-treatment for an employee be exempt under the work-related counselling exemption in section 58M of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer:

No.

Will the cost of medical counselling-treatment for an employee, specifically required in order to practice as a doctor, be fully deductible?

Answer:

Yes.

This ruling applies for the following fringe benefits tax periods:

1 April 2008 to 31 March 2009

1 April 2010 to 31 March 2011

1 April 2011 to 31 March 2012

1 April 2012 to 31 March 2013

1 April 2013 to 31 March 2014

The fringe benefits tax scheme commenced on: 14 November 2008

This ruling applies for the following income tax periods:

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The income tax scheme commenced on: 1 July 2008

Relevant facts

The company is a medical practice company.

The doctor is the sole director and employee of the company.

The doctor's continued registration as a medical practitioner is subject to specific conditions put in place by the Medical Board.

These conditions include mandatory ongoing counselling and stringent testing in order for him to continue practicing due to his medical condition.

The company has paid the doctor's medical expenses and the company seeks clarification as to whether the medical counselling expenses (residual fringe benefits) will be exempt under section 58M(1) of the FBTAA.

Reasons for decision

Fringe benefits tax

A fringe benefit is a benefit provided where an employee and employer relationship exists. The fringe benefit provided is 'in respect of employment'.

The doctor is the sole director of the company.

He is an employee under the extended definition of 'salary and wages' in accordance with section 137 of the FBTAA read together with the definitions of 'employment' and 'in respect of employment' in subsection 136(1) of the FBTAA.

For the purposes of FBTAA, a person (such as a director) who does not receive salary or wages but is provided with benefits will be an employee.

Subparagraph 58M(1)(c)(iv) of the FBTAA provides where a residual benefit is provided in respect of employment of an employee, the benefit will be an exempt benefit if it consists of the provision of work-related counselling of the employee.

In this case, the director is the employee and the company has paid the medical expenses incurred by the director in his personal capacity.

These expenses had to be incurred because the Medical Board directed that the doctor be supervised, attend treatments for his ailment, take other tests as required, to take medication as prescribed, to attend review interviews, and other medical matters.

The supervision arrangements, attending and treatment from a specialist, medication expenses and other testing and costs were required to bring the employee's health back into line with the medical fraternity with respect to providing his specialised skills to the public.

This company satisfies all conditions set down by the FBTAA legislation. These conditions are:

· Is a benefit provided to your employee?

· Is the benefit provided a residual benefit?

· Does the benefit consist of the provision of counselling?

· Does the benefit consist of work-related counselling?

However, the company is a practice company formed for the purposes of accessing greater superannuation contributions for this employee.

In accordance with Taxation Determination TD 95/34 we will accept a practice company providing fringe benefits as part of an employee's remuneration package, provided there is no material taxation advantaged gained, other than access to greater superannuation.

Paragraph 3 of TD 95/34 states that these practice companies should not provide exempt fringe benefits other than unavoidable exempt fringe benefits, such as the provision of worker's compensation.

The supply of exempt benefits would breach the reason for a professional person setting up a company where the professional would be providing his skills and knowledge as a sole trader and not through a company.

Furthermore, the provision of exempt benefits would create a material tax advantage that would be gained. No material taxation advantage is considered to arise as a result of a difference between the amount of tax payable and the amount that would be payable if the benefit was provided in the form of salary or wages.

Therefore, all medical and counselling expenses paid on behalf of the director by the practice company will incur fringe benefits tax, in the years where an employer and employee relationship exists and are not exempt under subparagraph 58M(1)(c)(iv) of the FBTAA.

Income tax

Under paragraph 8-1(1)(b) of the Income Tax Assessment Act 1997, a taxpayer carrying on a business is entitled to deduct outgoings or losses which are necessarily incurred in carrying on the business to produce assessable income.

The word "necessarily" does not mean that the outgoing must be unavoidable or logically necessary. In FCT v Snowden & Willson (1958) 99 CLR 431, it was held that 'necessarily' means that the outgoing must be 'clearly appropriate or adapted for' the ends of the business. For practical purposes it is for the person carrying on the business to be the judge of what outgoings are necessarily incurred. 

In Magna Alloys & Research Pty Ltd v FCT 80 ATC 4542; (1980) 11 ATR 276 it was decided that where the outgoing is voluntary, the controlling factor is that objectively must, in the circumstances, be reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the business.

In many cases the legitimate ends of a business will encompass what is in the personal interests of the directors and employees. The decision in Magna Alloys, supra, shows the fact that the dominant motive in incurring an expense is to provide a benefit to directors does not, of itself, prevent the outgoing from being necessarily incurred in carrying on the taxpayer's business.

In this case, the company is paying for a director/employee to attend mandatory ongoing counselling and stringent testing in order for him to continue practicing due to his medical condition. Although the employee is a director of the company and will receive a personal benefit from this expenditure, the company stands to benefit from the employee being able to continue practicing in the medical profession. As a result, it can be concluded that the outgoing is necessarily incurred in the carrying on of the company's business and, therefore, would be deductible under paragraph 8-1(1)(b) of the ITAA 1997.