Edited version of private ruling

Authorisation Number: 1011773022204

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Ruling

Subject: FBT in-house benefits

Question 1

Does the reduction of the taxable value available under section 62 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) apply to all travel on certain public transport by employees or their associates?

Answer

No. It will not apply where the travel comes within the definition of 'entertainment' that is contained within subsection 32-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

Question 2

Does the reduction of the taxable value available under section 62 of the FBTAA apply to all travel by children of employees?

Answer

No. It will not apply where the travel comes within the definition of 'entertainment' that is contained within subsection 32-10(1) of the ITAA 1997.

Question 3

Does the reduction of the taxable value available under section 62 of the FBTAA apply to the expense incurred in:

(a) the initial purchase of a public transport card; and

(b) to any travel credit stored on the card?

Answer

(a) The reduction in the taxable value under section 62 will apply to a reimbursement of the expenses incurred in purchasing a public transport card.

(b) The reduction will not apply to credits stored on the card.

This ruling applies for the following periods:

Year ended 31 March 2012

Year ended 31 March 2013

Year ended 31 March 2014

The scheme commences on:

1 April 2011

Relevant facts and circumstances

You enable currently enable employees to enter into a salary sacrifice arrangement that involves the reimbursement of the cost of public transport tickets purchased by the employee, or an associate.

The reimbursements apply to certain transport services.

Under the current arrangement, to obtain a reimbursement employees are required to provide their tickets (or copies). A reimbursement will only be made on a ticket that has been used.

As part of this arrangement employees will be able to salary sacrifice for the reimbursement of home to work travel on scheduled metropolitan public transport services. Employees who do this will complete a declaration when they first submit a claim for reimbursement. Another declaration will be required to be completed each year.

A draft format for a declaration was provided.

A new public transport ticketing system was recently introduced. The system will use individually numbered rechargeable public transport cards to store travel credit.

Following the changes the current arrangement will need to be altered as employees will no longer have a ticket that can be provided to obtain a reimbursement.

Following the changes an employee, or associate will purchase a public transport card.

The balance can be topped-up by either direct debit, BPAY, online, by telephone or in person.

Employees or associates who have a card can register the card. Once a card has been registered, the registered holder is able to obtain a complete transaction history of their travel, including the date, time, route and the cost of each trip. In addition, if a registered card is lost or stolen the remaining travel balance can be transferred to a new card.

Employees will be required to provide a copy of the tax invoice for the initial purchase and for each recharge of their public transport card, as well as a copy of the transaction record for the relevant period when making a claim for reimbursement.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 20

Fringe Benefits Tax Assessment Act 1986 Section 45

Fringe Benefits Tax Assessment Act 1986 Section 47(1)

Fringe Benefits Tax Assessment Act 1986 Section 62

Fringe Benefits Tax Assessment Act 1986 Section 135S

Fringe Benefits Tax Assessment Act 1986 Section 135U(5)

Fringe Benefits Tax Assessment Act 1986 Section 136(1)

Fringe Benefits Tax Assessment Act 1986 Section 159(2)

Income Tax Assessment Act 1936 Section 318

Income Tax Assessment Act 1997 Section 32-10

Reasons for decision

1. Does the reduction of the taxable value available under section 62 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) apply to all travel on public transport by employees or their associates?

Section 62 of the FBTAA provides for the reduction of the aggregate taxable value of certain fringe benefits and states at subsection 62(1):

Where one or more eligible fringe benefits in relation to an employer in relation to a year of tax relate to a particular employee of the employer, the taxable value of that fringe benefit, or the sum of the taxable values of those fringe benefits, as the case may be, in relation to that year shall be reduced by

(a) if the taxable value or the sum of the taxable values does not exceed $1,000 an amount equal to the taxable value or the sum of the taxable values; or

(b) in any other case $1,000.

Eligible fringe benefit is defined in subsection 62(2) of the FBTAA as an 'in-house fringe benefit' or an 'airline transport fringe benefit'.

As the fringe benefit being provided is not an 'airline transport fringe benefit' it is necessary to determine whether the benefit provided is an 'in-house fringe benefit'.

Subsection 136(1) of the FBTAA defines 'in-house fringe benefit' as:

(a) an in-house expense payment fringe benefit;

(b) an in-house property fringe benefit; or

(c) an in-house residual fringe benefit.

Is the benefit an 'in-house expense payment fringe benefit'?

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

(a) an in-house property expense payment fringe benefit; or

(b) an in-house residual expense payment fringe benefit.

What is an 'in-house property expense payment fringe benefit'?

Subsection 136(1) of the FBTAA defines an 'in-house property expense payment fringe benefit', in relation to an employer to mean:

an expense payment fringe benefit in relation to the employer where:

(a) the recipients expenditure was incurred in respect of the provision of tangible property by a person (in this definition called the property provider);

(b) the provision of the property is a property benefit;

(c) if the property provider is the employer or an associate of the employer - at or about the provision time, the property provider carried on a business that consisted of or included the provision of identical or similar property principally to outsiders;

(d) if the property provider is not the employer or an associate of the employer:

a. the property was acquired by the property provider from the employer or an associate of the employer (which employer or associate is in this definition called the seller); and

b. at or about the provision time, both the property provider and the seller carried on a business that consisted of or included the provision of identical or similar property principally to outsiders; and

(e) 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.

Therefore, the definition of 'in-house property expense payment fringe benefit' requires that:

(a) the fringe benefit is an 'expense payment fringe benefit';

(b) the employee's (or associate's) expenditure is incurred in respect of tangible property;

(c) the provision of property is a property benefit;

(d) either the property provider:

· is the employer or the employer's associate who carried on a business that consisted of, or included, the provision of identical or similar benefits principally to outsiders; or

· the provider purchased the benefit from the employer or the employer's associate and both the property provider and the employer or the employer's associate carried on a business that consisted of, or included, the provision of identical or similar benefits principally to outsiders;

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

What is an 'in-house residual expense payment fringe benefit'?

Subsection 136(1) of the FBTAA defines an 'in-house residual expense payment fringe benefit', in relation to an employer to mean:

an expense payment fringe benefit in relation to an 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:

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

(ii) 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 business that consisted of or included the provision of identical or similar benefits principally to outsiders: and

(d) 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.

Therefore, the definition of 'in-house residual expense payment fringe benefit' requires that:

(a) the fringe benefit is an 'expense payment fringe benefit';

(b) the employee's (or associate's) expenditure is incurred on the provision of a residual benefit (other than a benefit provided under a contract of investment insurance);

(c) either the residual benefit provider:

· is the employer or the employer's associate who carried on a business that consisted of, or included, the provision of identical or similar benefits principally to outsiders; or

· the provider purchased the benefit from the employer or the employer's associate and both the residual benefit provider and the employer or the employer's 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.

In combining the definitions of 'in-house property expense payment fringe benefit' and 'in-house residual expense payment fringe benefit' it can be concluded that the benefit will be an 'in-house expense payment fringe benefit' if the following conditions are satisfied:

(a) the fringe benefit is an 'expense payment fringe benefit';

(b) the employee's (or associate's) expenditure is incurred in respect of tangible property, or the provision of a residual benefit (other than a benefit provided under a contract of investment insurance);

(c) either the provider:

· is the employer or the employer's associate who carried on a business that consisted of, or included, the provision of identical or similar benefits principally to outsiders; or

· the provider purchased the benefit from the employer or the employer's associate and both the provider and the employer or the employer's 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.

These criteria are discussed below.

 (a)   Will the fringe benefit be an expense payment fringe benefit?

Section 20 of the FBTAA describes the circumstances under which an expense payment benefit will arise as follows:

Where a person (in this section referred to as the provider):

(a)     makes a payment in discharge, in whole or in part, of an obligation of another person (in this section referred to as the recipient) to pay an amount to a third person in respect of expenditure incurred by the recipient; or

(b)     reimburses another person (in this section also referred to as the recipient), in whole or in part, in respect of an amount of expenditure incurred by the recipient;

the making of the payment referred to in paragraph(a), or the reimbursement referred to in paragraph(b), shall be taken to constitute the provision of a benefit by the provider to the recipient.

Under the arrangement you will make a payment to an employee. This payment will not come within paragraph (a) as it is not a payment to discharge an obligation of the employee to pay an amount to a third person.

Therefore, the benefit will only be an expense payment fringe benefit if it is a reimbursement of an amount of expenditure incurred by the employee or associate.

Guidance as to the circumstances in which a payment will be a reimbursement is provided in Taxation Ruling TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement.

In explaining what a reimbursement is paragraphs 3, 9 and 10 of TR 92/15 state:

3. A payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed. In general, the provider considers the expense to be its own and the recipient incurs the expenditure on behalf of the provider. A requirement that the recipient vouch expenses lends weight to a presumption that a payment is a reimbursement rather than an allowance. A requirement that the recipient refunds unexpended amounts to the employer adds further weight to that presumption.

9. The word "reimburse" is defined under subsection 136(1) of the FBTAA to include any act having the effect or result, direct or indirect, of a reimbursement. Since neither the FBTAA nor the ITAA provides a more descriptive definition beyond that, the ordinary meaning of the word applies. The Macquarie dictionary defines the word "reimburse" as a repayment for expense or loss incurred, or a refund.

10. The ordinary meaning of the word "reimburse" implies that the recipient is to be compensated exactly for an expense already incurred although not necessarily disbursed. The definition of "reimburse" under subsection 136(1) of the FBTAA is wide enough to include payments made before expenses are incurred. However, whether payment is made before or after expenses are incurred by the recipient, it qualifies as a reimbursement when the provider considers the expense to be its own and the recipient incurs the expense on behalf of the provider. As a result, a requirement that the recipient vouch or substantiate expenses lends weight to a presumption that a payment is a reimbursement rather than an allowance. A further indication of a reimbursement is where the recipient is required to refund unexpended amounts to the provider.

In applying these guidelines a payment will not be a reimbursement where it relates to credit put onto the card by the employee or associate. The card is in the name of the employee or associate. Therefore, when the employee or associate transfers credit onto the card he or she will either be transferring funds from one account to another, or will be depositing money into an account held in the name of the employee or associate. As such the employee will not incur an expense.

The expense is incurred when the employee actually travels on the public transport, or pays an amount to purchase a card.

Although the reimbursement of an employee's (or associates) costs incurred in travelling on public transport may be an expense payment benefit, it can also result in a tax-exempt body entertainment benefit. The ATO publication Fringe benefits tax: a guide for employers NAT 1054-08.2006, provides the following example in part 15.7:

Two employees of a tax-exempt body have dinner together while travelling on business overnight. They see a show at the casino in the city they are staying, and the fee to the show includes dinner. Their employer reimburses them for the cost of the show entry (which includes meals).

This expenditure is entertainment, and is therefore tax-exempt body entertainment. The expense payment fringe benefit valuation rules could not apply in this circumstance as this is a tax-exempt body entertainment fringe benefit.

This example demonstrates that in determining what kind of benefit is being provided it is necessary to consider the specific provision (tax-exempt body entertainment) before the general (expense payment) provision.

This is further supported by paragraph 9 in Taxation Ruling TR 97/17 Income tax and fringe benefits tax; entertainment by way of food or drink.

Paragraph 9 states:

Where a meal falls within a specific FBT provision (e.g., as a board fringe benefit or a tax-exempt body entertainment fringe benefit) then, in absence of an election made under Division 9A, the taxable value of the benefit is determined under that specific provision rather than the more general sections dealing with expense payment and property fringe benefits….

As you are exempt from income tax it is therefore necessary to determine whether the bus trips come within the meaning of entertainment.

What is entertainment?

Subsection 136(1) of the FBTAA states that 'entertainment has the meaning given by section 32-10 of the Income Tax Assessment Act 1997'.

Section 32-10 of the Income Tax Assessment Act 1997 (ITAA 1997) defines 'entertainment' as:

(a) entertainment by way of food, drink or recreation, or

(b) accommodation or travel to do with providing entertainment by way of food, drink or recreation.

What is recreation?

'Recreation' is defined under subsection 136(1) of the FBTAA as;

(a) amusement;

(b) sport or similar leisure-time pursuits; and

(c) recreation or amusement provided on, or by means of, a vehicle, ship, vessel or aircraft.

The Macquarie Dictionary provides the following definition of amusement:

1. the state of being amused; enjoyment.

2. that which amuses; pastime; entertainment

3. a mechanical entertainment, as a merry-go-round at a fair.

In applying these definitions it is possible for the travel to constitute the provision of entertainment where it is to do with the provision of entertainment to the employee or an associate. For example, where the employee catches a bus or train to a sporting event, or catches a bus or train to a restaurant. Similarly, the travel by an employee's child on a school excursion may constitute the provision of entertainment. For example, travel to a concert, movie, sporting event or end of year break up.

If the travel constitutes the provision of entertainment it may be a tax-exempt body entertainment fringe benefit. If it is a tax-exempt body entertainment benefit it will not be an in-house fringe benefit that comes within section 62.

Is the entertainment tax-exempt body entertainment?

Tax-exempt body entertainment benefits are defined in section 38 of the FBTAA, which states:

Where, at a particular time, a person (in this section referred to as the "provider") incurs non-deductible exempt entertainment expenditure that is wholly or partly in respect of the provision, in respect of the employment of an employee, of entertainment to a person (in this section referred to as the "recipient") being the employee or an associate of the employee, the incurring of the expenditure shall be taken to constitute a benefit provided by the provider to the recipient at that time in respect of that employment.

In deciding whether the benefit is a tax-exempt body entertainment benefit it is necessary to determine the following:

1) Who is the provider?

2) What is non-deductible exempt entertainment expenditure?

3) Does the provider incur non-deductible exempt entertainment expenditure/

Who is the provider?

In accordance with the section 38 definition the provider is the person who incurs non-deductible exempt entertainment expenditure. In the arrangement being considered this will be the employer who reimburses the expenses incurred by the employee.

What is non-deductible exempt entertainment expenditure?

Subsection 136(1) of the FBTAA provides the definition of non-deductible exempt entertainment expenditure as:

non-deductible entertainment expenditure to the extent to which it is not incurred in producing assessable income.

Non-deductible entertainment expenditure is also defined in subsection 136(1) as:

a loss or outgoing to the extent to which:

(a) section 32-5 of the Income Tax Assessment Act 1997 applies to it, or would apply if it were incurred in producing assessable income; and

(b) apart from that section, it would be deductible under section 8-1 of that Act, or would be if it were incurred in producing assessable income;

Section 32-5 of the ITAA 1997 states:

To the extent that you incur a loss or outgoing in respect of providing ^*entertainment, you cannot deduct it under section 8-1. However, there are exceptions, which are set out in Subdivision 32-B.

In considering the exceptions listed in subdivision 32-B of the ITAA 1997 it should be noted that the provider is the employer who pays the reimbursement.

As none of the exceptions listed in subdivision 32-B of the ITAA 1997 are likely to apply to the expenditure the reimbursement of the employee's (or associate's) travel on certain public transport will be non-deductible exempt entertainment expenditure where it comes within the entertainment definition.

Therefore, as the employers are not liable to pay income tax, the travel will be a tax-exempt body entertainment benefit where it comes within the definition of entertainment.

In all other situations, the reimbursement will be an expense payment benefit.

 (b)   Is the employees expenditure incurred in respect of tangible property or the provision of a residual benefit (other than a benefit provided under a contract of investment insurance)?

The employee's or associate's expenditure will be for either bus travel or the purchase of a card.

Is the expenditure incurred in respect of tangible property?

'Property' is defined in subsection 136(1) to mean:

(a) intangible property; and

(b) tangible property.

The travel will not come within either of these definitions, but the card may.

'Intangible property' is defined to mean:

(a) real property;

(b) a chose in action; and

(c) any other kind of property other than tangible property;

but does not include:

(d) a right arising under a contract of insurance; or

(e) a lease or licence in respect of real property or tangible property.

A card is not real property and by itself does not provide any rights. A person cannot travel on public transport unless their card has a credit balance. Therefore, a card will not be a chose in action.

'Tangible property' is defined to mean:

goods and includes:

(a) animals, including fish; and

(b) gas and electricity.

The card may be a good. If it is, it will be tangible property.

Does the travel expenditure relate to a residual benefit?

Residual benefit is defined in section 45 of the FBTAA to be a benefit that is not a benefit by virtue of any provision of Subdivision A of Divisions 2 to 11 inclusive of the FBTAA.

As the provision of transport does not fall within Divisions 2 to 11 of the FBTAA the expenditure incurred by the employees is in respect of a residual benefit.

Therefore, expenditure incurred in travelling on a bus will be a residual benefit.

(c)   Is the provider of the residual benefit the employer or an associate of the employer?

The provider will be an associate of the employer.

Does the provider carry on a business that consists of the provision of identical or similar benefits?

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) provides guidance for determining whether the nature, extent and manner of the activities being undertaken amount to the carrying on of a business.  

Paragraph 13 of TR 97/11 lists the following indicators that are relevant in determining whether the activities constitute the carrying on of a business:

· whether the activity has a significant commercial purpose or character; this indicator comprises may aspects of the other indicators;

· whether the taxpayer has more than just an intention to engage in business;

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

· whether there is repetition and regularity of the activity;

· whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

· whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

· the size, scale and permanency of the activity; and

· whether the activity is better described as a hobby, a form of recreation or a sporting activity.

In considering these factors it is accepted the provider carries on a business.

(c)(i) Are the benefits provided principally to outsiders?

The meaning of principally is also not defined in the FBTAA, however, at page 52 in the ATO publication Income tax guide for non-profit organisations (NAT 7967-3.2007) principally is stated to mean mainly or chiefly and that less than 50% is not principally. Therefore, under such guidance, principally may be regarded to mean more than 50% or, alternatively, more than half, of the time.

Outsider is defined in subsection 136(1) of the FBTAA as being:

in relation to the employment of an employee of an employer, means a person not being:

(a)     an employee of the employer;

(b)     an employee of an associate of the employer;

(c)     an employee of a person (in this definition referred to as the ``provider'') other than the employer or an associate of the employer who provides benefits to, or to associates of, employees of the employer or an associate of the employer under an arrangement between:

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

(ii)               the provider or another person; or

(d)     an associate of an employee to whom any of the preceding paragraphs apply.

Therefore, an outsider is someone who is not an employee of the relevant employer, not an employee of an associate of that employer, not an employee of someone who provides benefits to the employees of either that employer or that employers associate under an arrangement between them and also not to any associates of these latterly mentioned employees.

It is accepted that the public transport services are principally provided for outsiders.

(d)   Will documentary evidence of the employees expenditure be obtained from the employee?

Documentary evidence is defined in subsection 136(1) of the FBTAA as:

a document that would constitute written evidence of the expense obtained in a way described in Subdivision 900-E of the Income Tax Assessment Act 1997 if the expense were a work expense, and Division 900 of that Act applied to the person.

In your situation employees seeking a reimbursement of their transport costs will be required to provide a copy of the transaction record for the relevant period. This will set out the date, time, route/bus stop and the cost of each trip that is being reimbursed. This will provide sufficient evidence of the travel costs that are being reimbursed.

Similarly, where the employee is seeking a reimbursement of the cost of purchasing a public transport card, the employee will provide a copy of the relevant tax invoice. This will also provide sufficient evidence of the expenditure.

Therefore, provided the travel does not come within the definition of entertainment the expenses incurred by an employee or associate on travelling on public transport will be an in-house residual expense payment fringe benefit.

2. Does the reduction of the taxable value available under section 62 of the FBTAA also apply to travel by children of employees?

Section 318(1)(a) of the ITAA 1936 advises that an associate of a natural person is a relative of the natural person. Hence associates of employees are their children.

The principles discussed above will also apply in relation to the reimbursement of expenses incurred by the children of employees travelling on the public transport.

That is, in the absence of entertainment being provided, the reimbursement of transport expenses relating to transport provided to children employees will be an in-house residual expense payment fringe benefit.

Similarly, the cost of purchasing a card will be an in-house property expense payment benefit.

However, the in-house valuation rules will not apply where the travel comes within the definition of entertainment.

3. Does the reduction of the taxable value available under section 62 of the FBTAA apply to the expense incurred in:

· the initial purchase of a card; and

· to any travel credit stored on the card?

As discussed above, the reduction of taxable value that is available under section 62 will apply where the employee or associate incurs expenditure in purchasing a card.

As also discussed above, the expense payment benefit relates to the reimbursement of the actual travel undertaken. It does not relate to any credits that are stored on the card.