Edited version of private ruling

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Ruling

Subject: GST and reimbursement of employee's costs

Questions

1. Are you entitled to input tax credits for the GST incurred on expenses you pay on behalf of employees?

Answer: Yes.

You are entitled to input tax credits for the GST incurred on expenses you pay on behalf of employee's, provided the supply is a taxable supply.

2. Are you entitled to input tax credits for reimbursements of employee's expenses that they incur?

Answer: Yes.

You are entitled to input tax credits for reimbursements of employee's expenses, provided the supply is a taxable supply.

Relevant facts:

You are registered for goods and services tax (GST). You account for GST on a non-cash basis, monthly.

You often request a medical assessment of an injured employee to determine liability. You utilise the services of a number of different medico-legal firms. These firms all have many different specialists for whom they arrange appointments. You do not have written agreements with these firms or the individual specialist doctors.

When you make payments direct to service providers for treatment provided to your employees (whether current or past) you do not do this because of a contractual arrangement you have with the service providers. You do not refer injured employees to a doctor for treatment. Referrals are the responsibility of the injured employees treating general practitioner (GP). The injured employee will attend their GP for assessment. If the GP determines, a referral will be made to a specialist or physiotherapist etc. The GP or patient is able to choose any specialist or health practitioner they prefer. You do not provide your employee with a list of approved providers. The injured employee advises the treatment providers to forward invoices direct to you, quoting the relevant claim number. If the injured worker has approval for gym membership or similar expenses, it is their responsibility to arrange that service and have the account forwarded to you for payment.

You reimburse injured employees (both past and present) for expenses that they incur due to a work related injury. The reimbursement relates to various expenses such as medico legal reports, specialist fees, physiotherapy fees, travel costs, gym membership, to name just a few. You hold tax invoices (copy provided by employee) for services that you reimburse your employees.

You have explained that the reimbursement of your employees or payment made to others in respect of expenses incurred by employees are fringe benefits (expense payment benefit) under section 20 of the Fringe Benefits Tax Assessment Act 1986 (FBT Act).

Reasons for decision

Summary

The reimbursement of an employee's expenses is an expense payment benefit. As such, paragraph 111-5(ab) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) applies to allow you to be entitled to an input tax credit for supplies made to your employees that were taxable supplies.

You are also entitled to an input tax credit for the payment of expenses you make on behalf of your employees that are taxable supplies to your employees. This applies whether you are paying the expenses or reimbursing current or former employees.

Detailed Reasoning

Under section 11-20 of the GST Act, you are entitled to an input tax credit for any creditable acquisition that you make.

Section 195-1 of the GST Act defines creditable acquisition as having the meaning given by section 11-5 of the GST Act. The meaning is also affected by various other sections, including section 111-5 of the GST Act.

Section 11-5 of the GST Act provides that you make a creditable acquisition if:

(a) you acquire anything solely or partly for a creditable purpose

(b) the supply of the thing to you is a taxable supply

(c) you provide, or are liable to provide, consideration for the supply, and

(d) you are registered, or required to be registered for GST.

An essential requirement for section 11-5 of the GST Act is that you make an acquisition and that there is a supply of the thing that is a taxable supply to you. In circumstances where you make a reimbursement to an employee for costs that they incur, or you make a payment to another person in respect of an expenditure incurred by your employee you would not be making a creditable acquisition for the purposes of section 11-5 of the GST Act. As such you would not be making a creditable acquisition for which you would be entitled to an input tax credit.

However, Division 111 of the GST Act provides that subject to certain conditions an employer such as yourself makes an acquisition that can be a creditable acquisition where:

· an employee is reimbursed for an expense that constitutes an expense payment benefit, or

· a payment is made on behalf of an employee for an expense that constitutes an expense payment benefit.

Subsection 111-5(1) of the GST Act provides that a reimbursement is treated as consideration for an acquisition that you make from the employee where amongst other things the following applies:

· you reimburse an employee for an expense that he or she incurs that is related directly to his or her activities as your employee (paragraph 111-5(1)(a)), or

· you reimburse an employee (whether or not you are the employee's employer) for an expense that the employee or the employee's associate incurs, and the reimbursement constitutes an expense payment benefit (paragraph 111-5(1)(ab) of the GST Act).

Subsection 111-5(2) of the GST Act provides that the fact that the supply to you is not a taxable supply does not stop the acquisition being a creditable acquisition.

However, under subsection 111-5(3) of the GST Act the acquisition:

(a) is not a creditable acquisition to the extent (if any) that:

i. the employee, associate, agent, officer or partner is entitled to an input tax credit for acquiring the thing acquired in incurring the expense, or

ii. the acquisition would not, because of Division 69 of the GST Act, be a creditable acquisition if you made it

(b) is not a creditable acquisition unless the supply of the thing acquired, by the employee, associate, agent, officer or partner in incurring the expense, was a taxable supply, and

(c) is not a creditable acquisition if you would, because of Division 71 of the GST Act, not have been entitled to an input tax credit if you had made the acquisition that the employee, associate, agent, officer or partner made.

Goods and Services Tax Ruling GSTR 2001/3 explains in more detail the entitlement to input tax credits for acquisitions related to providing fringe benefits under the special rules in Division 111 of the GST Act.

The GST consequences of Division 69 of the GST Act and Division 71 of the GST Act are discussed at paragraphs 96 to 109 and 69 to 85 respectively of GSTR 2001/3. On the facts provided, Divisions 69 and 71 of the GST Act do not apply in your circumstances.

Furthermore your employees are not entitled to an input tax credit for acquiring the thing acquired in incurring the expenses in question and as such the acquisitions are not precluded from being a creditable acquisition on the basis of subparagraph 111-5(3)(a)(i) of the GST Act.

Paragraph 87 of GSTR 2001/3 explains that the expense payment benefit is not a creditable acquisition unless the supply of the thing acquired by the employee is a taxable supply (paragraph 111-5(3)(b) of the GST Act). For instance, where an employee is reimbursed for an expense incurred in acquiring a GST-free supply the reimbursement is not a creditable acquisition for the employer.

It follows, that the question that arises under subsection 111-5(3) of the GST Act in your circumstances is whether the supply of the thing acquired by your employees who have been injured was a taxable supply.

Taxable supply

Under section 9-5 of the GST Act, you make a taxable supply if:

(a) you make a supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that you carry on

(c) the supply is connected with Australia, and

(d) you are registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

The circumstances in which a supply is GST-free or input taxed are found in Divisions 38 and 40 of the GST Act respectively. On the facts provided by you there are no provisions of Division 40 of the GST Act applicable to the reimbursement of employees or others of expenses incurred such that the supplies would be input taxed.

GST-free supplies

Subdivision 38-B of the GST Act is concerned with medical and other health services as well as health goods that are GST-free.

In particular section 38-7 of the GST Act provides that a supply of a medical service is GST-free.

Section 38-10 of the GST Act provides that a supply of other health services, including physiotherapy, is GST-free.

Section 38-45 of the GST Act provides for certain medical aids and appliances to be GST-free.

Therefore, not all supplies that are acquired by the employee would be taxable supplies. You would need to ascertain whether such supplies acquired by the employee were GST-free supplies under Subdivision 38-B of the GST Act.

Where a supply made to your employee is neither GST-free or input taxed, that supply would be a taxable supply where it is made for consideration, the supply is made in the course or furtherance of the supplier's enterprise, the supply is connected with Australia and the supplier is registered or required to be registered for GST (see section 9-5 of the GST Act).

Accordingly, subsection 111-5(3) of the GST Act would not apply to prevent an acquisition from being a creditable acquisition unless the supply to the employee was not a taxable supply.

Conclusion

Based on the information you have provided, the reimbursement of an employee's expenses is an expense payment benefit that is a benefit of a kind referred to in section 20 of the FBT Act 1986. As such, paragraph 111-5(1)(ab) applies to treat the reimbursement you make to your employees as consideration for an acquisition that you make from your employees. As a creditable acquisition arises under Division 111 of the GST Act in your circumstances, you are entitled to claim an input tax credit of 1/11 of the reimbursement (section 111-10 of the GST Act).

This is the case provided the acquisition is not precluded from being a creditable acquisition under subsection 111-5(3) of the GST Act because for example the supply of the thing acquired is not a taxable supply (see paragraphs 86-95 of Goods and Services Tax Ruling GSTR 2001/3).

Tax invoices

Section 111-15 of the GST Act provides that for the purposes of subsection 29-10(3) of the GST Act, you are taken to hold a tax invoice for a creditable acquisition the consideration for which is a reimbursement to which section 111-5 of the GST Act applies, if you hold a tax invoice for the taxable supply referred to in subsection 111-5(3) of the GST Act. You have stated that you hold tax invoices for all reimbursements that you made to your employees that were taxable supplies to them and are therefore taken to hold a tax invoice for the purposes of subsection 29-10(3) of the GST Act.

Paying expenses of employees by paying service providers direct

Under section 111-25 of the GST Act if you make, or are liable to make:

(a) a payment on behalf of your employee for an expense that he or she incurs that is related directly to his or her activities as your employee, or

(b) a payment:

i. on behalf of an employee (whether or not you are the employee's employer) for an expense that the employee or the employee's associate incurs, or

ii. on behalf of an associate of an employee (whether or not you are the employee's employer) for an expense that the associate or employee incurs;

that constitutes an expense payment benefit;

This Division applies to you as if you reimbursed your employee, or you reimbursed the employee or associate, for the expense.

In your circumstances you make particular payments direct to service providers on behalf of your employee that constitute expense payment benefits. For example, you pay the gym membership direct to the supplier of the gym membership for your employees. This means that Division 111 of the GST applies to you as if you reimbursed your employee the gym membership. As noted above the reimbursement of an employee is treated as consideration for an acquisition that you make from your employee where that expense constitutes an expense payment benefit (paragraph 111-5(1)(ab) of the GST Act).

As such, you are entitled to an input tax credit for the payment of these expenses on behalf of your employee that are taxable supplies to your employee.

Note: you are required to hold a tax invoice before you are able to claim the input tax credit. You have stated that you do hold tax invoices for these expenses (paragraph 74 of Goods and Services Tax Ruling GSTR 2000/17).

Reimbursements of former employees

Section 111-30 of the GST Act provides that Division 111 of the GST Act applies in relation to:

(a) reimbursements, of a kind referred to in paragraphs 111-5(1)(ab) or (ac) of the GST Act, of former employees and future employees, and of the associates of former employees and future employees, and

(b) payments of a kind referred to in paragraph 111-25(b) of the GST Act, that you make or are liable to make on behalf of former employees and future employees and of the associates of former employees and future employees.

In the same way that Division 111 of the GST Act applies to such reimbursements of and such payments that you make or are liable to make to employees and their associates.

Therefore, where you are reimbursing a former employee or where you are paying expenses on behalf of former employees, you are able to claim input tax credits where the supplies to the former employees were taxable supplies.

Note: where you acquire an expense direct, that is you make the acquisition (for example if you contract with a medico legal firm to provide an assessment to your employees), you are entitled to the input tax credit in respect of those acquisitions where you satisfy the requirements for a creditable acquisition under section 11-5 of the GST Act. You would be required to hold tax invoices for the acquisition of these expenses.