Edited version of private ruling

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Ruling

Subject: FBT Expense payment benefit

Question 1

Is a payment made by an employer for expenses incurred by an employee, an expense payment benefit according to section 20 of the Fringe Benefit Tax Assessment Act 1986(FBTAA)?

Answer

Yes

Question 2

Is the employer entitled to claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the payment made to the employee?

Answer

Yes

This ruling applies for the following periods:

Year ending 31 March 2012

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commences on:

1 March 2010

Relevant facts

An employee & director of a company incurred expenses (unrelated to employment with the company) for which they would have normally claimed a deduction under section 8-1 of the ITAA 1997.

After a review it was discovered that some of this expenditure was not claimed.

In the application it has been stated that the period of review allowing the employee to seek an amendment of their assessments has passed.

Rather than lodging an out of time request (and associated objections), the employee and the employer have entered into an agreement in which the employer will reimburse these expenses instead.

A relevant agreement was provided which detailed the amounts of expenditure incurred by the employee. The agreement also stated the reimbursement of the employee is in relation to employment and that the employer will be exempt from fringe benefits tax under the otherwise deductible rule.

The employer has stated they intend to make the payment in the current year.

Relevant legislative provisions

Section 8-1 ITAA 1997

Section 20 FBTAA

Section 24 FBTAA

Reasons for decision

Question 1

Summary

The payment made by the employer for prior year expenses incurred by the employee is an expense payment fringe benefit according to section 20 of the FBTAA.

Detailed reasoning

A description of what constitutes an expense payment benefit is provided in section 20 of the FBTAA. It states:

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.

The employer has agreed to reimburse the employee for expenses incurred over a period of years. The wording of section 20 of the FBTAA would suggest that an expense payment benefit only arises after an expense has been incurred as is the case here.

Where the employee provides evidence that an expense has been incurred and the payment is in respect of that specific expense then the payment will be a reimbursement to which section 20 of the FBTAA would apply..

The payment can be in whole or part, so a decision to only reimburse the employee for the expenses they incurred and did not include in their income tax return as a deduction, would not effect whether or not the payment is an expense payment benefit.

The employee has incurred expenditure and the employer intends to reimburse their expenditure. Therefore an expense payment benefit will arise on the date the payment is made to the employee.

The taxable value of the expense payment benefit being provided to the employee by the employer is discussed in paragraph 9.2 the Fringe benefits tax: a guide for employers (FBT guide), it states:

The taxable value of an expense payment fringe benefit is the amount you reimburse or pay

The taxable value of this benefit will be the same amount as the reimbursement. However this taxable value can be reduced through the application of section 24 of the FBTAA, this is explained further in ATO ID 2004/294. It states:

The taxable value of an expense payment fringe benefit may be reduced under section 24 of the FBTAA to the extent that the 'otherwise deductible' rule (ODR) applies.

The ODR applies when the recipient of the benefit is the employee. Furthermore, the ODR applies where the employee receiving the benefit would have been entitled to a 'once only' income tax deduction for the expenditure had it not been paid or reimbursed by the employer. A 'once only' deduction is one that is wholly or partly allowable in only one year (therefore excluding claims such as those relating to the 'decline in value' of depreciating assets that are spread over a number of years).

Although the employee has stated that the 'otherwise deductible' rule will apply certain conditions under section 24 of the FBTAA need to be satisfied. In respect of these conditions paragraph 9.5 of the FBT guide states in part:

Where you use the otherwise deductible rule, you must have certain documentation to substantiate the extent to which the expense payment would have been 'otherwise deductible' to the employee. You must obtain the documentation from the employee before lodging the relevant FBT return. Where the documentation is a declaration by the employee, it must be in a form approved by the Commissioner. . .

You must obtain an employee declaration except where:

· the employee's expense (other than an expense incurred in respect of a car they own or lease) is incurred exclusively in the course of performing employment-related duties (for example, protective clothing, tools of trade)

· there is a requirement to keep a travel diary

· the requirement to keep a travel diary is waived because the employee is a member of an international aircrew, or

· the provision of the fringe benefit is covered by a recurring fringe benefit declaration.

In this case as the expenditure is not related exclusively to the individual's employment with the employer, the employee must provide the employer with a declaration in the form approved by the Commissioner. If it is not provided then section 24 of the FBTAA will not apply.

The percentage declared by the employee in the declaration is the percentage the employer will be able to reduce the taxable value of the expense payment benefit.

In completing the declaration, the employee needs to look at the amount they would have been entitled to claim as a once-only deduction when the expense was incurred.

Once the otherwise deductible rule has been applied, any remaining amount will be the taxable value of the expense payment benefit and needs to be taken into account when determining whether the employee has a reportable fringe benefit amount.

Question 2

Summary

The employer can claim a deduction for the payment made to the employee under section 8-1 of the ITAA 1997.

Detailed reasoning

Subsection 8-1(1) of the ITAA 1997 allows taxpayers to claim general deductions. It states:

You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a ^*business for the purpose of gaining or producing your assessable income.

As explained in paragraph 1.10 of the FBT guide, the cost incurred by an employer in providing a fringe benefit is an allowable income tax deduction.

As the benefit being provided is an expense payment benefit, the payment made to the employee is an allowable deduction under section 8-1 of the ITAA 1997.