Edited version of private ruling

Authorisation Number: 1011656869181

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Ruling

Subject: FBT - in-house benefit

Question

Will a fringe benefits tax liability arise from the special discount granted to an employee?

Answer

No

Relevant facts and circumstances

You are an employer which provides staff discounts to your employees. No financial evidence is required for employees to access this discount. In the event the employment of the employee ceases, the employment discount is withdrawn.

You also provide discounts for members of the public due to financial reasons. Any member of the public is eligible to apply for such a discount. Consideration is given whereby members of the public must show financial evidence that their financial situation warrants a special discount and the decision is made at the discretion of your head employee. Eligibility to the special discount is reviewed annually in light of financial considerations.

An employee may also qualify for the special discount and if the employee terminates their employment with you the special discount will continue as the special discount is not dependent on ongoing employment with you.

Will a fringe benefits tax liability arise from the special discount granted to an employee?

Detailed reasoning

An FBT liability will arise where a fringe benefit has been provided to an employee or an associate of an employee.

Has a fringe benefit been provided?

The definition of fringe benefit within sub-section 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) defines a fringe benefit to mean a benefit:

(a) provided at any time during the year of tax;

(b) provided in respect of the year of tax

being a benefit provided to the employee or to an associate of the employee by:

(c) the employer; or

(d) an associate of the employer; or

(e) a person (in this paragraph referred to as the arranger) other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of arrangement between:

(i) the employer or an associate of the employer; and

(ii) the arranger or another person; or

(ea) a person other than the employer or an associate of the employer, if the employer or an associate of the employer:

(i) participates in or facilitates the provision or receipt of the benefit;

(ii) participates in, facilitates or promotes a scheme or plan involving the provision of the benefit;

and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so;

in respect of the employment of the employee, but does not include:

……..

The definition goes on to provide that benefits listed in paragraphs (f) to (s) will not be fringe benefits.

Therefore a fringe benefit will arise where a benefit

(a) is provided to an employee, or an associate of an employee

(b) by the employer, or an associate of an employer, or a third party under an arrangement involving either the employer or an associate of the employer

(c) in respect of the employment of the employee

(d) is not one of the benefits listed in paragraphs (f) to (s) of the fringe benefit definition.

(a) Has a benefit been provided to an employee or an associate of an employer?

The term "associate" is defined in subsection 136(1) of the FBTAA to have the same meaning as section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). Section 318(1)(a) of the ITAA 1936 states that an associate of a natural person is a relative of that person.

The benefit is the provision of a product at a reduced cost to an employee's child, an associate of the employee. Therefore a benefit has been provided to an associate of an employee.

(b) Who provided the benefit?

The employer is the provider of the benefit.

(c) Was the benefit been provided in respect of the employment of the employee?

The phrase 'in respect of' in relation to the employment of an employee is defined in subsection 136(1) of the FBTAA to include 'by reason of, by virtue of, for or in relation directly or indirectly to, that employment'.

The meaning of this phrase was considered by the Federal Court in J & G Knowles v. Federal Commissioner of Taxation [2002] 96 FCR 402; 2000 ATC 4151; 44 ATR 22 (Knowles) and Starrim Pty Ltd v. Federal Commissioner of Taxation [2000] FCA 952; 2000 ATC 4460; 44 ATR 487 (Starrim).

In Knowles the Full Federal Court considered the judgements in Smith v. FCT (1987) 164 CLR 513; 19 ATR 274; 87 ATC 4883 and Federal Commissioner of Taxation v. Rowe (1995) 60 FCR 99; 31 ATR 392; 95 ATC 4691 before concluding that it is not sufficient for the purposes of the FBTAA to conclude that there is a causal connection between the benefit and the employment.

At paragraph 26 the Court said:

Whatever question is to be asked, it must be remembered that what must be established is whether there is a sufficient or material, rather than a, causal connection or relationship between the benefit and the employment

At paragraphs 28 and 29, the Court said:

While the width of the definition of "fringe benefit" was designed to capture benefits that, in truth, were other than remuneration, the stated purpose suggests that asking whether the benefit is a product or incident of the employment will be helpful. If it is not then the benefit is likely to be extraneous to the employment and will not bear FBT, notwithstanding that the employment might have been a causal factor in the provision of the benefit. In particular, the fact that a benefit is provided to a director because it was authorised by that director will not, of itself, be sufficient to characterise the benefit as one which is "in respect of" the employment. Without more, it is not a product of incident of that office.

To put the matter another way, although the process of characterising the benefit provided in a particular case can involve questions of fact and degree, it is not sufficient for the purposes of the FBTAA merely to enquire whether there is some causal connection between the benefit and the employment: see FCT v Rowe (1995) 60 FCR 99 at 114 and 123; 31 ATR 392 at 404 and 412; 95 ATC 4691 at 4703 and 4710. Although Brennan, Deane and Gaudron JJ observed in Technical Products (at 47), that the requisite connection will not exist unless there is "some discernible and rational link" between the 2 subject matters which the statute requires to be linked, as was pointed out by Dawson J (at 51), the connection must be "material".

In applying this decision to your situation eligibility for the discount is based solely on financial circumstances of a person and not on their employment. An employee must meet the same criteria as any member of the general public.

In the event that an employee qualifies for the discount and that employee terminates his or her employment the discount will continue to be provided as it is not dependent on employment.

Therefore although the discount was provided to an employee is not sufficient to conclude that it was provided in respect of the employment of the employee, rather the discount was provided because of the employee's financial circumstances.

Conclusion

As the benefit was not provided in respect of the employment of the employee the benefit is not a fringe benefit, therefore no FBT liability will arise where the discount is provided to an employee.