Edited version of private ruling

Authorisation Number: 1011635560396

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Ruling

Subject: computer software purchased under arrangement

Question

Will a fringe benefits tax liability arise from an employee's use of the software products under the home use program?

Answer

No.

This ruling applies for the following periods:

Year ended 31 March 2011

Year ended 31 March 2012

Year ended 31 March 2013

The scheme commences on:

1 April 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The employer has an agreement with a computer software provider for the provision of their products for use on computers at the employer's work place.

As part of the agreement, the provider offers the opportunity to have their products made available to the employer's employees.

The employees can obtain the use of these products for their personal computer. The functionality of the products available is the same as the retail versions but the employees' right to use the products is tied to the employer's agreement.

The employer is proposing to have the products made available to its employees and any employee who wishes to take up the offer will order directly from the provider via an internet site.

Employees pay the provider directly an amount charged by the provider for the use of the products but agree to remove the products from their computer if they cease employment with the employer.

Relevant legislative provisions

FBTAA section 51

FBTAA section 58P

FBTAA subsection 136(1)

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Will a fringe benefits tax liability arise from an employee's use of the software products under the home use program?

An employee who participates in the program is able to obtain the use of certain products on their personal computer.

The term 'benefit' is defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (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; . . .

The use of computer software comes within this definition.

In determining whether a fringe benefits tax liability will arise from the benefit it is necessary to determine whether the benefit is a fringe benefit.

Is the benefit a fringe benefit?

The definition of 'fringe benefit' in subsection 136(1) of the FBTAA provides that a benefit will be a fringe benefit where it is:

I. provided to an employee or an associate of an employee;

II. by the employer, an associate of the employer or a third party either under an arrangement that comes within paragraph (e) of the 'fringe benefit' definition or in circumstances that come within paragraph (ea) of the 'fringe benefit' definition;

III. is provided in respect of the employment of the employee; and

IV. does not come within paragraphs (f) to (s) of the 'fringe benefit' definition.

In considering each of these requirements:

Is the benefit provided to an employee or an associate of an employee?

As the software is only made available to current employees this requirement is satisfied.

Is the benefit provided by the employer, an associate of the employer or a third party in a situation that comes within either paragraph (e) or (ea) of the 'fringe benefit' definition?

The right to use licensed software products is provided to the employee by the software provider. As the provider is not the employer or an associate of the employer it is necessary to consider the application of paragraphs (e) and (ea) of the 'fringe benefit' definition.

Paragraph (e) applies where the benefit is provided by a person who is not the employer or an associate of the employer under an arrangement covered by paragraph (a) of the 'arrangement' definition.

Paragraph (a) of the 'arrangement' definition in subsection 136(1) states:

any agreement, arrangement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings.

This requirement will be satisfied as the employer will arrange with the provider for the program to be offered to the employees by activating the program and providing the employees with the relevant program code number which enables the employees to order the program.

Alternatively, if paragraph (e) is not satisfied, paragraph (ea) will be satisfied as the employer is participating in, facilitating or promoting a scheme or plan involving the provision of the benefit.

Is the benefit provided in respect of the employee's employment?

The benefit is provided in respect of employment as the employee's use of the licensed software is contingent on the employee's employment with the their employer. If the employee's employment ceases the employee is required to remove the software from their computer and/or destroy the disk that contained the software.

Does the benefit come within paragraphs (f) to (s) of the 'fringe benefit' definition?

For the purpose of this ruling the relevant paragraph is paragraph (g) which provides that a benefit that is an exempt benefit will not be a fringe benefit. This includes benefits that are exempt under section 58P of the FBTAA.

Will the benefit be an exempt minor benefit?

In considering the possible exempt benefits, section 58P of the FBTAA provides that a minor benefit will be an exempt benefit where the notional value is less than $300 and the specified conditions are satisfied.

Guidance on the possible application of section 58P is contained within Taxation Ruling TR 2007/12. In applying these guidelines we first need to look at a notional value of the benefit. The notional value of a benefit is defined in subsection 136(1) of the FBTAA to effectively be the taxable value of a benefit.

As explained in detail below, the taxable value of the benefit would have been nil, so the notional value for determining whether section 58P applies is also nil.

We also need to consider whether it would be unreasonable, having regard to the specified criteria in paragraph 58P(1)(f) of the FBTAA to treat the minor benefit as a fringe benefit. In so doing we need to look at the 'infrequency and irregularity' with which associated benefits have been or can reasonably be expected to be provided.

For the purposes of the minor benefits exemption the term 'associated benefits' is defined in subsection 58P(2) of the FBTAA to mean a benefit that is any of the following:

§ identical or similar to the minor benefit;

§ provided in connection with the provision of the minor benefit; or

§ identical or similar to a benefit provided in connection with the provision of the minor benefit.

In this case, although the individual employees get the use of a number of software products for an extended period (spanning a number of years of assessment) they only have to pay once for the license to use that software. Once access is granted an employee will not need to obtain further licences from the software provider. Therefore, there will not be any other associated benefits as the employee only receives the one benefit in respect of computer software.

Finally, for section 58P to apply the benefit cannot be provided as a reward for service. Given this program will made available to all employees it could not be said that it is being provided as a reward for service as it is not linked to the services provided by the employee.

Therefore, in looking at the facts of this case and the application of section 58P of the FBTAA it would be unreasonable to treat the benefit as a fringe benefit.

Therefore, section 58P of the FBTAA will apply to exempt this benefit and as the benefit is an exempt benefit then it is not a fringe benefit as defined in subsection 136(1) of the FBTAA.

The notional value of the benefit

To calculate the taxable value of the fringe benefit it is necessary to first determine the type of benefit that has been provided. The FBTAA is divided into thirteen different categories. Each category has its own valuation rules.

A residual benefit is defined under section 45 of the FBTAA to be a benefit that does not fit within the specific categories contained in Division 2 to 11 of the FBTAA. For the purpose of this ruling the relevant categories are expense payment benefits (Division 5) and property benefits (Division 11).

The benefit being provided is the use of licensed software. This will not be an expense payment benefit as it does not involve a payment to discharge an obligation of the employee and it is not a reimbursement. Nor will it be a property benefit as ownership is not passed to the employee.

Therefore, the benefit will be a residual benefit.

The method used to calculate the taxable value of a residual benefit depends upon whether the benefit is an in-house benefit and whether it is provided for a period of more than one day.

In general terms, an in-house residual benefit requires the employer or an associate of the employer to be carrying on a business that consists of, or includes the provision of identical or similar benefits principally to outsiders. As neither the employer, nor an associate of the employer carry on a business that consists of, or includes the provision of identical or similar benefits principally to outsiders the benefit will be an external residual benefit.

The next step in determining the method to be used to calculate the taxable value of the benefit is to determine whether the benefit is a period benefit. In general terms a benefit will be a period benefit if it is provided for a period of more than one day. As the benefit being provided (the use of licensed software products) is provided for more than one day the benefit will be an external period residual benefit.

The methods that are used to calculate the taxable value of an external period residual benefit are contained within section 51 of the FBTAA. Section 51 of the FBTAA states:

Subject to this Part, the taxable value of an external period residual fringe benefit in relation to an employer in relation to a year of tax is:

(a) where the provider was the employer or an associate of the employer and the recipients overall benefit was purchased by the provider under an arm's length transaction - the amount paid or payable by the provider in respect of the recipients current benefit;

(b) where the provider was not the employer or an associate of the employer and the employer, or an associate of the employer, incurred expenditure to the provider under an arm's length transaction in respect of the provision of the recipients current benefit - the amount of that expenditure; or

(c) in any other case - the notional value of the recipients current benefit;

reduced by the amount of the recipients contribution insofar as it relates to the recipients current benefit.

As the provider is not the employer, or an associate of the employer paragraph 51(a) will not apply. Paragraph 51(b) also will not apply as neither the employer, nor an associate of the employer incur expenditure to the provider.

Therefore, as neither paragraph 51(a), nor paragraph 51(b) applies, paragraph 51(c) will be used to calculate the taxable value of the fringe benefit. The taxable value under paragraph 51(c) is 'the notional value of the recipients current benefit reduced by the amount of the recipients contribution insofar as it relates to the recipients current benefit'.

Subsection 136(1) of the FBTAA defines the term 'notional value' to mean:

. . . the amount that the person could reasonably be expected to have been required to pay to obtain the property or other benefit from the provider under an arm's length transaction.

Taxation Determination TD 93/231 provides guidance on how to determine the 'notional value' of a property fringe benefit. Paragraphs 2 to 4 of TD 93/231 state

2. To ascertain the 'notional value' of a property fringe benefit the employer must determine the amount the employee would have to pay for a comparable (on the basis of age, type and condition) benefit under an arm's length transaction.

3. This Office will accept a number of ways of obtaining the notional value including:

- the price of comparable goods advertised in local newspapers and/or relevant magazines or similar publications;

- the price paid for comparable goods at a public auction;

- the price of comparable goods at a second-hand store; or

- the market value of the goods determined by a qualified valuer.

4. The lowest value obtained using any of these methods will be acceptable.

Although this Taxation Determination relates to the 'notional value' of a property benefit it can also be used to calculate the 'notional value' of a residual benefit.

In this case, the benefit being provided to an employee is the use of licensed software products. Therefore, the national value is the amount that an employee would have to pay for the use of the software products under an arms length arrangement.

In considering whether the amount charged by the provider is the amount that the employee would pay in an arms length situation it is relevant to consider the following factors:

§ provider makes the program available to employees of all employers who have the relevant contract;

§ the amount charged by the provider is stated on the provider's website;

§ the software is only available for the period in which the employee is employed and the employer has the relevant contract; and

§ the amount paid by the employer for the services provided by the software provider is not affected by whether the software is made available for the use of employees.

These factors indicate the amount paid to the software provider to obtain the use of the licensed products is the amount that the person could reasonably be expected to pay to obtain the use of the software under an arm's length transaction.

Therefore, as the employee is paying the amount that he or she could reasonably be expected to pay in an arm's length situation, the taxable value of the external period residual benefit as calculated under section 51 of the FBTAA is nil.