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Ruling

Subject: Application of Fringe Benefits Tax to purchased leave

Question

Will a fringe benefit arise from the arrangement that enables employees to purchase additional leave of up to four weeks per year?

Answer

No.

This ruling applies for the following period

1 April 2010 - 31 March 2011

The scheme commenced on

1 April 2010.

Relevant facts and circumstances

You intend to enter an agreement which allows your employees to purchase additional leave.

Under the draft agreement an employee is able to purchase between one and four weeks of additional annual leave.

An adjusted employment cycle will enable a full time employee to take four weeks leave in addition to the normal entitlement of four weeks of annual leave in a year and receive 48 weeks' salary, which would be payable over fifty-two weeks

Applications for Purchased Additional Annual Leave may be made for a specific calendar or financial year

Annual leave and long service leave will continue to accrue as normal during the twelve month period. Any such leave taken during the twelve month period shall be paid at the adjusted salary rate

Annual leave, long service leave and sick leave accrued prior to the entering into of a Purchased Additional Annual Leave arrangement will be paid, when taken, at its accrued rate

Annual Leave balances will be reduced and exhausted prior to the reduction of a Purchased Additional Leave balance

Deductions from salary will commence in the first pay period after approval. Any permanent salary increase (e.g. increment, promotion, allowances etc) will result in an adjustment in accordance with the increased amount as soon as possible after the increase takes effect

Superannuation contributions during the twelve month period will be based on the employee's adjusted salary rate unless the employee chooses to contribute additional amounts to both the employer and employee contribution rates to maintain entitlements at their former level.

Purchased leave does not accrue. If for any reason the employee has been unable to take any portion of approved purchased leave they will be paid out on the first pay period following the expiration of the twelve month timeframe

You intend to deduct tax from a participating employee's salary at the rate applicable to the lower salary

Should an employee resign or have their employment terminated for whatever reason during or prior to taking their approved period of Purchased Additional Annual Leave and such termination of employment results in a financial debt to you, you will raise a debt against that former employee. Such debt will be recoverable through your normal finance procedures.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision

Will a fringe benefit arise from the arrangement that enables employees to purchase additional leave of up to four weeks per year?

The term 'fringe benefit' is defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to mean:

in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit:

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

(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; …

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

(f) a payment of salary or wages or a payment that would be salary or wages if salary or wages included exempt income for the purposes of the Income Tax Assessment Act 1936 …

A fringe benefit therefore does not include a payment of salary or wages.

Under the arrangement an employee will be entitled to receive an additional one to four weeks of leave. This leave is in effect leave without pay as an employee who takes an additional four weeks leave will only be entitled to receive the equivalent of 48 weeks salary. The reduction in salary will be spread over the full year.

Therefore, the arrangement provides an employee with the entitlement to receive an additional one to four weeks of leave and a set amount of salary or wages.

The question of whether a fringe benefit can arise from an entitlement to receive remuneration is discussed in Taxation Ruling TR 2010/6 Income tax, Pay As You Go Withholding and fringe benefits tax: tax consequences on the issue, holding and redemption of bonus units as part of an employee benefits trust arrangement.

Paragraphs 8, 9 and 11 of TR 2010/6 state:

8. An employee does not derive ordinary or statutory income from the provision of personal services until the income either has been received by them or is taken by subsections 6-5(4) or 6-10(3) to have been received by them.

9. An employee will not derive an amount of salary or wages or bonus income if that employee acquires only a right to receive the salary or wages or bonus income. As a mere right to receive salary or wages or bonus income, the receipt of bonus units is not a derivation of that income for the purposes of section 6-5.

10. ...

11. A right to receive salary or wages or bonus income is not a fringe benefit as defined in subsection 136(1) of the FBTAA. Paragraph (f) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA excludes from fringe benefits tax 'a payment of salary or wages'. A step in a series of steps having the effect of delivering a payment of salary or wages or bonus income to an employee does not in itself constitute a separate benefit provided to the employee with separate taxation consequences. The purpose and the effect of the bonus unit aspect is to deliver salary or wages or bonus income to an employee.

Further discussion occurs at paragraphs 76 to 78 which state:

76. Where an employee is granted a right or rights to remuneration (pre-existing remuneration rights) that are an intrinsic part of a contract for services that ultimately results in the receipt by the employee of remuneration that is subject to tax under the relevant tax laws as 'salary or wages', those pre-existing remuneration rights come within the definition of a 'benefit' for the purposes of the FBTAA.

77. However, paragraph (f) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA excludes the payment of 'salary or wages', itself a defined term, from that definition of fringe benefit. …

Broadly speaking, the scheme of the fringe benefits tax is to tax remuneration of employees derived from employment in the hands of the employer if that remuneration is not salary or wages as so defined, but to leave remuneration in the form of salary or wages to be assessed to income tax in the hands of the employee.

…

78. …

If entitlements to receive salary or wages constituted fringe benefits, Parliament's purpose in excluding salary or wages from fringe benefits tax would be stultified and systemic double taxation might result. Consequently, it is evident from the context and object of the FBTAA that the creation of an obligation to pay (and the corresponding entitlement to be paid) a sum of money that, when discharged, amounts to the payment of salary or wages to an individual as employee, is also incapable of being a fringe benefit.

In applying these principles a fringe benefit will not arise from the arrangement as it only provides an entitlement to receive a prescribed amount of salary or wages in return for the employee undertaking his or her employment duties for a prescribed number of weeks during the year.