Edited version of private ruling

Authorisation Number: 1011792734698

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Ruling

Subject: Fringe benefits tax

Question

Is the income generated by the investments of the Fund which has been allocated to a member's account subject to fringe benefits tax in terms of subsection 66(1) of the Fringe Benefits Tax Assessment Act 1986 (the FBTAA 1986)?

Answer: No.

The income generated by the investments of the Fund which has been allocated to a member's account is not subject to fringe benefits tax in terms of subsection 66(1) of the FBTAA 1986.

This ruling applies for the following periods:

Year ended 31 March 2011

Year ended 31 March 2012

Year ended 31 March 2013

Year ended 31 March 2014

Relevant facts and circumstances

The Fund was established by trust deed (the Trust Deed).

The Fund meets the requirements of being an 'approved worker entitlement fund' under section 58PB of the Fringe Benefits Tax Assessment Act 1986 (the FBTAA 1986).

The Fund was established for the protection of employee entitlements. The Trust Deed permits the Employer to contribute certain 'Employee Entitlements' to the Fund on a regular basis to be held for its employees (as members of the Fund).

The main features of the Fund are as follows:

An 'Employee Entitlement' is defined in the Trust Deed to mean an entitlement specifically required by an 'Industrial Instrument' to be paid by an employer to the Fund with respect to a member, or, an entitlement payable to a member under an 'Industrial Instrument' which the employer has chosen to pay to the Fund.

An 'Industrial Instrument' is defined in the Trust Deed to be consistent with section 136 of the FBTAA 1986, which is 'a law of the Commonwealth or of a State or Territory or an award, order, determination or industrial instrument in force under any such law'.

An 'Entitlement' is defined in the Trust Deed to mean annual leave and annual leave loading; sick leave; long service leave; severance or redundancy; or any other amount from time to time payable by an Employer to a member under an Industrial Instrument, with respect to leave payments (including payments in lieu of leave) and payments made to an employee when an employee ceases to be employed.

Under the Trust Deed, the Trustee will establish an Account to which will be credited from time to time any income and receipts (but not contributions), including but not limited to any interest income of the Fund.

Under the Trust Deed the Trustee may pay amounts with respect to Employee Entitlements characterised as FBT exempt within the meaning of section 5BPA of the FBTAA 1986 out of the Account to a Member.

After paying Employee Entitlements, the Trustee must (subject to an ability to retain a portion to meet certain payments) allocate amounts remaining in the Account (including interest income generated by the Fund with respect to a Member's Employee Entitlement) by the last day of each calendar month to the Member's Account if both (i) a 'Contribution' has been made to the fund in respect of the relevant Member and (ii) the 'Contribution' would be an FBT exempt benefit under section 58PA.

In other words, income earned by the Fund can be used to pay Employee Entitlements or can be allocated to individual employees to their Member's Account in accordance with the set conditions.

The Trustee has the discretion to pay, apply or credit the income of the Fund to an Employee or to accumulate the income.

The leave entitlements will be credited to each individual employee's account. The employer will transfer an amount to cover leave entitlements to the Fund and this amount is added to each employee's individual account. When the employee takes leave or the employer pays out leave to that employee, the Fund will repay the employer and will reduce the balance in the employee's individual account.

The investment income which is earned by the Fund and which is allocated to the employees will be allocated between each employee on a pro-rata basis in accordance with each employee's individual balance.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1).

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.

Reasons for decision

Summary

The income generated by the investments of the Fund is not subject to fringe benefits tax.

Detailed reasoning

The term 'fringe benefit' is defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (the FBTAA 1986) to mean '...a benefit...in respect of the employment of the employee...'. For the present purposes, the words 'in respect of' are defined very broadly in subsection 136(1) to include 'by reason of, by virtue of, or for or in relation directly or indirectly to, that employment' and subsection 148(1) reinforces that wide scope. The words 'in respect of' ordinarily have a broad scope and the breadth of that scope is further reinforced by the comments made in the Explanatory Memorandum to the Fringe Benefits Tax Assessment Bill 1986:

The requirement that the benefit be provided 'in respect of' the employment of an employee is also given a wide meaning under the definition of that expression in sub-clause 136(1) to include any benefits provided by reason of, by virtue of, or for or in relation directly or indirectly to, that employment. For convenience, the term 'in respect of' is used in this memorandum as embracing all of those terms.

By virtue of the meaning given to 'employment' in its definition in proposed sub-section 136(1), only benefits that arise in relation to a position of employment or employment activity that gives rise to salary or wages that are assessable to income tax in Australia will be subject to fringe benefits tax. Clause 137 ensures, however, that benefits provided in lieu of assessable salary or wages are also subject to tax.

However, not all benefits provided by an employer are in respect of employment. In the answer to Question 17 in Attachment 1 to Miscellaneous Taxation Ruling MT 2021 it is explained:

The test is essentially whether the employer provided the benefit to the associate because of the employment relationship between the employer and the employee. This test would not be satisfied if it can be established that the benefit was provided to the associate solely by reason of an independent relationship (e.g., a family relationship) that he or she had with the employer.

Miscellaneous Taxation Ruling MT 2019 discusses benefits which are provided to a person in the capacity as a shareholder rather than being provided in the capacity as an employee and the ruling adds, at paragraph 6,:

By virtue of paragraph 148(1)(a) of the Fringe Benefits Tax Assessment Act, a benefit provided to a person by reason of both his or her employment activity and shareholding will be taken to be provided in respect of the person's employment. If, however, it can be established that a benefit is provided to a shareholder/employee solely by reason of that person's position as a shareholder of the company and not to any extent by reason of that person's employment by the company, the benefit will not be subject to FBT.

Similarly, the publication 'Fringe benefits tax - a guide for employers' provides the following comments at paragraph 1.1:

...According to the fringe benefits tax (FBT) legislation, a fringe benefit is a benefit provided in respect of employment. This effectively means a benefit is provided to somebody because they are an employee.

...As a guide to whether a benefit is provided in respect of employment, ask yourself whether you would have provided the benefit if the person had not been an employee.

In J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22 it was explained that the phrase 'in respect of employment' includes benefits where

...there is a sufficient or material, rather than a, causal connection or relationship between the benefit and the employment...

In Interpretative Decision ATO ID 2003/688 the employer allowed employees to invest funds at marginally higher interest rates. It was decided that the property benefit which was provided, being the total amount of interest paid by the employer to an employee investor, did not possess a 'sufficient or material' connection to employment. The payment of the total amount of interest was considered to be a consequence of the relationship of investor, despite the interest paid to employees being marginally higher than comparative rates available to members of the public. Hence, the interest was not a fringe benefit, as it was not provided in respect of employment. The interest received by the employee was ordinary income for the purposes of section 6-5 of the ITAA 1997.

It is considered that, although the scope of the words 'in respect of' can be far reaching, that broad scope does not include benefits which are provided in some capacity other than the employee capacity. The services performed by an employee generate the salary and wage income, whereas the fact that some or all of that amount is saved will generate the investment income. Salary and wage income is a reward for the services which are performed by the employee, whereas investment income is a reward for saving and investing the salary and wages. Ordinarily, investment income is not derived in the capacity as an employee. It is not derived 'in respect of the employment'.

In the present case, the quantum of investment income depends on how much of the leave payment is retained by the Fund, the quantum is affected by how long the amount is held by the Fund (and not paid to the employee) and the quantum depends on the economic performance of the various investments that were made by the Fund. The quantum is not dependent on the services performed by the employee. The investment income is paid because an amount has been invested by the Fund, it is compensation for the use of money and the amount of the compensation depends on the quantum of the funds invested, the investment acumen of the Fund and the risks involved in the various investments chosen by the Fund.

In the present case, there is no attempt to reward the employees for their service by paying investment income via the trust. Indeed, the trust deed ensures that the trustee acts independently of the employer. The trustee's relationship with the employees is the same as any independent trustee who holds funds for the employees and generates investment income from the funds which are held on trust. The investment income is earned in the capacity as a beneficiary of the trust regardless of the fact that the initial investment was derived in the capacity as an employee.

It is considered that the investment income is not paid directly or indirectly 'in respect of employment'. The investment income is not a 'fringe benefit' and is not subject to fringe benefits tax.