Edited version of private ruling

Authorisation Number: 1011745256278

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Ruling

Subject : In House Residual Expense Payments by Non Statutory Authority

Question 1; Does the reimbursement by the employer of the private expenses incurred by its employees (or associates) constitute in-house residual expense payment fringe benefits under the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer: Yes.

Question 2; If the answer to Question 1 is 'Yes', is the taxable value of such in-house residual expense payment fringe benefits calculated under subsection 22A(2) of the FBTAA?

Answer: Yes.

Question 3; If the answer to Question 2 is 'Yes', is the taxable value of such in-house residual expense payment benefits to be calculated under subsection 22A(2) of the FBTAA determined in accordance with either section 48 or section 49 of the FBTAA?

Answer: Yes., in accordance with section 48 of the FBTAA.

Question 4; Are the taxable values of any expense payment fringe benefits arising from the reimbursement by the employer of the private expenses incurred by its employees (or associates) reduced under section 62 of the FBTAA?

Answer: Yes.

This ruling applies for the following period;

1 April 2010 to 31 March 2011

The scheme commenced on

1 April 2010

Relevant facts and circumstances

The employer carries on a business that consisted of, or included, the provision of services.

An associate of the employer (Entity X) also carries on a similar business.

Employees of the employer may salary sacrifice up to a particular amount ($x) which does not exceed $1000.per employee per year.

The proposed arrangement will operate such that the employee will pay the invoice from one of a number of nominated entities (retailers) in respect of each billing period, submit the paid accounts to the employer for reimbursement and the employer will reimburse the employee up to $x per employee per annum.

The retailers are not associates of the employer.

The retailers purchase the services they sell to the public from the associate of the employer.

No other in-house fringe benefits are, or would be, provided to employees of the employer.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 20

Fringe Benefits Tax Assessment Act 1986 Subsection 22A(2)

Fringe Benefits Tax Assessment Act 1986 Section 45

Fringe Benefits Tax Assessment Act 1986 Subsection 46(2)

Fringe Benefits Tax Assessment Act 1986 Section 48

Fringe Benefits Tax Assessment Act 1986 Section 49

Fringe Benefits Tax Assessment Act 1986 Section 62

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 Section 149

Fringe Benefits Tax Assessment Act 1986 Section 156

Fringe Benefits Tax Assessment Act 1986 Section 159

Income Tax Assessment Act 1936 Section 318

Taxation Administration Act 1953 Section Sch1-357-85

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Question 1; Does the reimbursement by the employer of the private expenses incurred by its employees (or associates) constitute in-house residual expense payment fringe benefits under the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

An 'in-house residual expense payment fringe benefit', as defined in subsection 136(1) of the of the Fringe Benefits Tax Assessment Act 1986 (FBTAA), must meet all the following conditions:

(a) Be an expense payment fringe benefit;

(b) The employee's (or associate's) expenditure is incurred on the provision of a residual benefit;

(c) The residual benefit provider is either (as applicable):

i) The employer or associate who, at the relevant time, carried on a business that consisted of, or included, the provision of identical or similar benefits principally to outsiders; or

ii) Not the employer nor an associate of the employer but who, at the relevant time, had purchased the benefit from the employer or associate and both the residual benefit provider and the employer or associate carried on a business that consisted of, or included, the provision of identical or similar benefits principally to outsiders.

(d) The required documentary evidence is given to the employer at the required time.

(a) Expense payment benefit

An expense payment benefit under section 20 of the FBTAA is either where an employer (or associate) reimburses an employee (or associate) for expenses incurred by the employee (or associate) or where an employer (or associate) pays a third party in satisfaction of expenses incurred by an employee (or associate).

A fringe benefit as defined in subsection 136(1) of the FBTAA, is a benefit provided to an employee (or associate) by an employer (or associate) or a third party under an arrangement with the employer (or associate) in respect of the employee's employment and such benefit is not otherwise exempted.

The proposal by the employer to pay or reimburse the private expenses of its current employees (or their associates) only arises due to the employer and employee relationship between those current employees and the employer.

Therefore, the proposal by the employer to pay or reimburse the private expenses of its employees (or associates) constitutes s an expense payment fringe benefit.

This condition has been met.

(b) Employee's expenditure incurred in respect of a residual benefit

Section 45 of the FBTAA states that a residual benefit is one that is not a benefit by virtue of any provision of Subdivision A of Divisions 2 to 11 inclusive of the FBTAA. Therefore, a residual benefit is a benefit that does not fall within one of the other more specific benefit types contained in the FBTAA.

It is considered that the relevant employee's (or associate's) expenditure incurred will be in respect of a residual benefit as it does not otherwise fall within one of the other more specific benefit types contained in the FBTAA.

This condition has been met.

(c) The employer or the employer's associate is the residual benefit provider and the residual benefit provider carried on a business of providing similar or identical benefits principally to outsiders

The expression 'associate' is defined in subsection 136(1) of the FBTAA to have the same meaning as that expression has in relation to a person in section 318 of the Income Tax Assessment Act 1936.

The retailers, who provide the services to the relevant employees, are neither employers of the employees nor associates of the employee's employers. The retailers provide the same services as those provided to the employees to members of the public.

The residual benefit providers are not the employer or an associate of the employer. As such, paragraph (c)(i) of the definition of 'in-house residual expense payment fringe benefit' is not satisfied. We therefore need to consider whether (c)(ii) is met. That is, whether the residual benefit providers, at the relevant time, had purchased the benefit from the employer or associate and both the residual benefit provider and the employer or associate carried on a business that consisted of, or included, the provision of identical or similar benefits principally to outsiders.

The employer carries on a business that consisted of, or included, the provision of services.

Entity X, an associate of the employer also carries on a similar business.

It is accepted that:

Each of the residual benefit providers (the retailers), do carry on a business of providing similar or identical benefits principally to outsiders;

the retailers, at the relevant time, had purchased the benefits from Entity X, an associate of the employer; and

Both the employer and Entity X carry on a business that consists of or includes the provision of identical or similar benefits principally to outsiders.

As the requirement of paragraph(c)(ii) of the definition of 'in-house residual expense payment fringe benefit' in subsection 136(1) are met, the alternative "non-associate" tests in the definition are satisfied.

(d) Required documentary evidence to be given to employer at the required time

This condition is met as the required documentary evidence will be given to the employer at the required time under the proposed 'mechanics of the arrangement' entered into between the employer and its current employees under the terms of the proposed arrangement.

Conclusion on in-house residual expense payment fringe benefits

The reimbursements by the employer of the private expenses incurred by its current employees (or associates) constitute in-house residual expense payment fringe benefits as all the necessary conditions have been met.

Question 2; If the answer to Question 1 is 'Yes', is the taxable value of such in-house residual expense payment fringe benefits calculated under subsection 22A(2) of the FBTAA?

Section 22A of the FBTAA determines the taxable value of in-house residual expense payment fringe benefits.

Subsection 22A(2) of the FBTAA provides for a reduction in taxable value for 'in-house residual expense payment fringe benefits'. Subsection 22A(2) of the FBTAA states:

Subject to this Part, the taxable value in relation to a year of tax of an in-house residual expense payment fringe benefit (in this subsection called the ``actual fringe benefit'') provided during the year of tax is the amount that, if:

(a) the provision of the residual benefit to which the actual fringe benefit relates were an in-house residual fringe benefit (in this subsection called the ``notional fringe benefit''); and

(b) the recipients contribution in relation to the notional fringe benefit were equal to the recipients expenditure reduced by whichever of the following amounts is applicable:

(c) the amount of the payment referred to in paragraph 20(a) reduced by the amount of the recipients contribution in relation to the actual fringe benefit;

(d) the amount of the reimbursement referred to in paragraph 20(b);

(e) would have been calculated under whichever of sections 48 and 49 is applicable as the taxable value, but for section 52 and Division 14, of the notional fringe benefit in relation to the year of tax.

Subsection 136(1) of the FBTAA defines an in-house residual expense payment fringe benefit as:

'In-house residual expense payment fringe benefit', in relation to an employer, means an expense payment fringe benefit in relation to the employer where:

(a) the recipients expenditure was incurred in respect of the provision of a residual benefit (other than a benefit provided under a contract of investment insurance) by a person (in this definition called the ``residual benefit provider'');

(b) if the residual benefit provider is the employer or an associate of the employer - at or about the time that, if the residual benefit had been a residual fringe benefit, would have been the comparison time, the residual benefit provider carried on a business that consisted of or included the provision of identical or similar benefits principally to outsiders;

(c) if the residual benefit provider is not the employer or an associate of the employer:

(d) the residual benefit provider purchased the benefit from the employer or an associate of the employer (which employer or associate is in this definition called the ``seller''); and

(e) at or about the time that, if the residual benefit had been a residual fringe benefit, would have been the comparison time, both the residual benefit provider and the seller carried on a business that consisted of or included the provision of identical or similar benefits principally to outsiders; and

(f) documentary evidence of the recipients expenditure is obtained by the recipient and that documentary evidence, or a copy, is given to the employer before the declaration date.

To be an in-house residual expense payment fringe benefit, a benefit must meet the following criteria:

· It is an expense payment fringe benefit

· The recipients expenditure is incurred in respect of the provision of a residual benefit by the residual benefit provider

· The residual benefit provider or the residual benefit provider and the seller (as applicable) carried on a business of providing identical or similar benefits to outsiders at the relevant time, and

· Documentary evidence of the recipient's expenditure is given to the employer before the declaration date.

As it has been determined previously that the reimbursement by the employer of the private expenses incurred by its current employees (or associates) constitute in-house residual expense payment fringe benefits, the taxable value of such fringe benefits will fall to be calculated under subsection 22A(2) of the FBTAA.

Question 3; If the answer to Question 2 is 'Yes', is the taxable value of such in-house residual expense payment benefits to be calculated under subsection 22A(2) of the FBTAA determined in accordance with either section 48 or section 49 of the FBTAA?

Under subsection 22A(2) of the FBTAA, the taxable value of an in-house residual expense payment fringe benefit is equal to the taxable value of the notional residual fringe benefit calculated under whichever of sections 48 or 49 of the FBTAA is applicable (and also without taking into account the 'otherwise deductible rule' in section 52 or any of the other reductions of taxable value in Division 14 of the FBTAA).

Section 49 of the FBTAA deals with the taxable value of an in-house period residual fringe benefit.

An 'in-house period residual fringe benefit' is defined, in subsection 136(1) of the FBTAA, to mean an in-house residual fringe benefit that is provided during a period.

Section 149 of the FBTAA sets out when a benefit may be regarded as one 'that is provided during a period'. The relevant two main requirements, under section 149 of the FBTAA, are that the benefit:

· is provided, or subsists, during a period or more than 1 day; and

· is not deemed by a provision of the FBTAA to be provided at a particular time or on a particular day.

However, subsection 46(2) of the FBTAA states that in circumstances where an employee incurs a liability for a payment to be made for a benefit (not being either a lease or a licence in respect of property) on a regular billing basis and that the provision of identical benefits to the public is also part of the provider's business, the provision of the relevant benefit during each billing period constitutes a separate benefit which is deemed to have been provided at the time the payment in respect of each billing period becomes due and payable.

The relevant benefits in this case are supplies of services by the retailers which are billed to consumers on a regular basis. It is also accepted that it is part of the normal business of each of the retailers to provide identical benefits principally to outsiders (that is, the public).

Paragraph 46(2)(d) of the FBTAA will, therefore, deem such benefits to be provided at the time when the payment in respect of that period is due and payable (that is, deemed to be provided on a particular day) and they then, consequently, fall within the specific exclusion of what is regarded as a 'period benefit' under section 149 of the FBTAA.

As the relevant benefits are not period benefits, then they also cannot be 'in-house period residual fringe benefits' as defined nor, consequently, fall to be valued under section 49 of the FBTAA.

Therefore, the relevant benefits will be valued under section 48 of the FBTAA as 'in-house non-period residual fringe benefits' as all the necessary requirements are met.

However, it may be noted that whether the taxable value of such benefits are, in fact, calculated under section 48 of the FBTAA or under section 49 of the FBTAA will be, in a case such as this, effectively immaterial to the final result.

Question 4; Are the taxable values of any expense payment fringe benefits arising from the reimbursement by the employer of the private expenses incurred by its employees (or associates) reduced under section 62 of the FBTAA?

Section 62 of the FBTAA provides for a reduction in the taxable values of 'eligible fringe benefits'. The reduction is the lesser of the aggregate taxable value of all relevant benefits or $1000. The reduction applies separately to the relevant benefits provided to each employee nor is there provision for carrying any amount over to a following year.

In accordance with Taxation Ruling MT 2044 Fringe benefits tax: reduction of aggregate taxable value of fringe benefits - application to associates, such a reduction applies in respect of the total benefits provided to each employee and his or her associates in a particular year.

In this case, the employer will reimburse the employee up to $X per employee per annum. No other in-house fringe benefits are, or would be, provided in a particular year to any of the relevant current employees of the employer.

Under paragraph 62(2)(a) of the FBTAA, an 'in-house fringe benefit' is an 'eligible fringe benefit'. An 'in-house fringe benefit' is defined in subsection 136(1) of the FBTAA as including an in-house expense payment fringe benefit. In turn, an 'in-house expense payment fringe benefit' is defined, in subsection 136(1) of the FBTAA as including an 'in-house residual expense payment fringe benefit'.

Therefore, as it has already been determined that the benefits in this case are 'in-house residual expense payment fringe benefits' they will qualify as being 'eligible fringe benefits' for the purposes of section 62 of the FBTAA. As the total taxable values of eligible fringe benefits provided to an employee will not exceed $1000 in a particular year, the taxable values of any expense payment fringe benefits arising from the reimbursement by the employer of the private expenses incurred by its employees (or associates) may be reduced to nil.