Edited version of private ruling

Authorisation Number: 1011649702717

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Ruling

Subject: Fringe benefits tax, otherwise deductible rule

Question 1

If you pay in full for flights overseas for your employee, does this become a fringe benefit as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1936 (FBTAA)?

Answer

Yes.

Question 2

Will fringe benefits tax be payable on the fringe benefit?

Answer

No.

This ruling applies for the following periods:

Year ended 31 March 2011

The scheme commences on:

This year

Relevant facts and circumstances

Your employee will be travelling overseas and undertaking duties of employment whilst there.

Your employee has decided to take this opportunity and extend the travel with a holiday.

You are paying for the return flights between here and overseas.

This is the first year your employee will be required to travel overseas.

You intend to focus further activity on a strategy you recently commenced by sending your employee overseas to undertake duties of employment.

The itinerary for the trip as is follows:

§ depart here on 10^th of the month and arrive there 11^th.

§ undertake duties of employment from 13^th to 24^th of the month.

§ depart there on 30^th of the month and arrive stopover 31^st of the month.

§ depart stopover on 7^th of the next month and arrive here 8^th.

Your employee will be on leave from 25^th of month to 7^th of following month.

There is no extra cost involved with the extended stopover.

You have indicated that it will become normal practice for this employee to undertake one such trip per year.

The timing is due to there being less activity here and thus it is a good use of the slow period.

You have also indicated that your employee will be maintaining a travel diary for the trip and that will be provided to you.

Reasons for decision

Question 1

Summary

The flights between here and overseas, that you intend to purchase for your employee, will be the provision of a fringe benefit.

Detailed reasoning

A fringe benefit is defined in subsection 136(1) of the FBTAA.

A benefit, as defined in subsection 136(1) includes 'any right…privilege, service or facility…'. You intend to purchase flights for your employee between here and overseas and the provision of these flights is considered a benefit.

You are providing it to your employee because your employee will be undertaking duties of employment whilst overseas. Therefore you are providing the benefit to your employee in respect of employment.

Consequently, the benefit is a fringe benefit as defined in subsection 136(1) of the FBTAA.

Question 2

Summary

No fringe benefits tax be payable on the fringe benefit as the taxable value of the residual fringe benefit may be reduced to nil by the otherwise deductible rule in accordance with section 52 of the FBTAA.

Detailed reasoning

Taxable value and otherwise deductible rule

When you purchase the flights for your employee, you will be providing a residual fringe benefit to your employee.

The fringe benefit will be an external non-period residual fringe benefit which means that its taxable value will be the amount you pay for the flights. This is in accordance with section 50 of the FBTAA.

The taxable value of the residual fringe benefit may be reduced in accordance with the otherwise deductible rule under section 52 of the FBTAA. Broadly, this means that the taxable value may be reduced to the extent that your employee would have been entitled to an income tax deduction if you had not paid for the flights.

Deductibility of expenses

The extent to which overseas travel expense would be an allowable income tax deduction if incurred by an employee is determined under the general deduction provisions in section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Prior to the income tax year ended 30 June 1998 the general deduction provisions was subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

Taxation Ruling TR 95/33 considers the decision in the Full High Court of Australia in Fletcher & Ors v. FC of T 91 ATC 4950; (1991) 22 ATR 613 and in particular considers the availability of an income tax deduction under subsection 51(1) of the ITAA 1936.

The general deduction provisions allow a deduction for all losses and outgoings to the extent which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.

As stated in TR 95/33, expenditure will generally be deductible if its essential character is that of expenditure that has a sufficient connection with the operations or activities which more directly gain or produce the taxpayer's assessable income. The essential character of an expense is a question of fact to be determined by reference to all the circumstances. Apportionment of an expense is required if it has both an income producing purpose and another purpose.

Travelling expenses incurred by an employee in carrying out their duties of employment are incurred in gaining or producing assessable income and, therefore are allowable income tax deductions under section 8-1 of the ITAA 1997.

The airfare for the return trip overseas will be considered work related expenditure. However, because your employee is including a private purpose in the trip, consideration has been given to whether an apportionment of the airfare between business and private will be warranted.

Taxation Ruling TR 98/9 sets out the circumstances in which self education expenses are allowable deductions. Paragraphs 63-70 of TR 98/9 discuss the application of the general provisions to overseas travel expenses.

TR 98/9 states that if the purpose of a study tour or attendance at a work related conference or seminar is the gaining or producing of assessable income, the existence of an incidental private purpose does not affect the characterisation of the expenses as wholly incurred in gaining assessable income.

TR 98/9 provides examples indicating that where overseas travel is undertaken voluntarily and is planned to be for business and private purposes equally, expenses of a single outlay that serve both purposes should be apportioned.

There can of course be different reasons for a person undertaking overseas travel and there are a variety of circumstances in which it may be undertaken. As mentioned above and reiterated in TR 98/9 the essential character of the expense is to be determined by an objective analysis of all the surrounding circumstances.

You are sending your employee overseas to carry out employment duties. You have recently implemented a new strategy and although your employee has not travelled overseas undertake employment duties before, you intend for this to occur once a year from now on.

You have also indicated that you believe it to be a good use of a time where activity is very slow.

In these circumstances and also considering the amount of time spent on business and private purposes during the trip, it is accepted that the predominant purpose of the trip will be work related. Even though your employee may extend the journey in order to have a holiday, the facts do not suggest that this influenced the decision to make the trip and is not sufficient to alter the essential character of the expenditure on the airfare.

Accordingly, your employee would be entitled to an income tax deduction under section 8-1 of the ITAA 1997 for the full cost of the return airfare if you do not pay for the flights.

Substantiation

To use the otherwise deductible rule under section 52 of the FBTAA a 'travel diary' must be obtained from your employee before the due date of lodging the fringe benefits tax return.

A 'travel diary' is defined in subsection 136(1) of the FBTAA as a diary or similar document which shows the nature of each work activity, where and when it took place, the duration of the activity and the date the entry was made.

This condition will be satisfied because you intend to give a diary to your employee to complete, which your employee will then provide to you.

Conclusion

Since your employee would be entitled to an income tax deduction for the cost of the flights if you do not pay for them, the taxable value of the residual fringe benefit will be reduced to nil by using the otherwise deductible rule. Therefore no fringe benefits tax will be payable on the fringe benefit.