Edited version of private ruling

Authorisation Number: 1011841331710

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Ruling

Subject: Fringe benefits tax: Exempt residual benefit

Question 1

Will transport provided under a salary sacrifice arrangement for employees in accordance with the arrangement constitute an exempt residual benefit under subsection 47(6) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) where the transport provided is on buses only?

Answer

Yes

Relevant facts

The arrangement proposed below encourages staff to make use of public transport and in turn ease congestion, reduce pollution and minimise the carbon footprint.

The arrangement will utilise an integrated public transport ticketing system aimed at unifying ticketing products and consistent fares and concessions across scheduled passenger services.

The employer is considering providing employees with transportation benefits between their place of residence and their place of employment.

This will be facilitated by way offering employee's the option to enter into an effective salary sacrifice arrangement to package the value of the home to work transportation benefit. This will be administered in accordance with the arrangement outlined below.

Integrated ticketing system

A transport card system is used across the public transport network.

It is equivalent in size to a credit card and contains microprocessors and memory that allows the card to be programmed for fare collection for the public transport network.

The card allows passengers to travel from destination to destination without discriminating as to the mode of transportation used to arrive at a particular destination.

The transport card can be purchased online, at a retailer or by completing a form and mailing it to the relevant authority.

The person who purchases (holds) the transport card is known as the 'cardholder'.

The person who uses the transport card is known as the 'authorised user'.

When applying online/via mail you can provide the name and address of the authorised user and the transport card will be sent to the cardholder.

If the transport card is purchased from a retailer, the employer will be required to register the card online.

If the transport card is purchased online or via post, the card will be automatically registered (for protection purposes).

A travel history report can be obtained via an online facility, which can be used to ensure the transport card is used solely for bus travel between home and work. This report provides a summary of locations travelled by the user of the card.

The report does not specifically state if the travel is via bus, train or ferry. It does provide a description of the stop and this description then enables you to determine the type of travel.

The available balance for the transport card can be topped up as required or via an automatic top-up facility, subject to dollar limitations.

As the employer will be making payments via the online system, only the cardholder may cancel the card.

Any outstanding amounts on the card will be refunded via a cheque (sent via post) or directly credited to a nominated bank account upon cancellation of the transport card.

The arrangement

Provision of travel to employees will be administered by the use of the transport card.

The cards will be purchased and registered by the employer (the cardholder) and provided to the employees (authorised users) for their use.

Payment for transport costs for employees will be facilitated under an effective salary sacrifice arrangement.

The provision of transport to these employees will be provided via a predetermined top up amount on the transport card.

Employees will need to sign a declaration acknowledging that the card is the property of the employer under the salary sacrifice arrangement.

The employer will implement a policy which restricts employee travel to buses only.

The employer policy will prohibit private travel (other than home to work travel) and will be validated by obtaining a 'No private use declaration' from the employees.

The employer, at its discretion, will request employees to provide reports to substantiate these declarations.

Where the card is used outside the agreed terms and conditions under the employer's policy, the employer will adjust the salary and wages of the employee accordingly.

Employees will determine an annual amount to salary sacrifice on a prospective basis. This amount will then be divided by the number of pay cycles and paid periodically on the card by the employer.

An annual review of travel reports will be performed of randomly selected employees and in the instance of an employee's termination.

An annual reconciliation will be prepared.

For employees who continue to salary sacrifice the transport benefit, any unused balance will be incorporated into subsequent salary sacrifice deductions.

For employees not continuing to salary sacrifice the transport benefit, any unused balance will be returned to the employee as salary and wages less the relevant PAYG withholdings.

In the event of an employee losing their transport card, a replacement card will be provided with the balance of the original card to be transferred to the replacement card.

A transport card provided to an employee under this arrangement will only be cashed out in the event of the cessation of employment of the employee, a change in the employee's circumstances such as the employee being unable to use the card as a result of moving residence or the employee's death.

Any unused balance will be returned to the employee as salary and wages less the relevant PAYG withholding.

The employer will create a salary sacrificing arrangement policy stating the rules and accountabilities applicable to packaging the transport benefit.

The policy will be enforced in accordance with other employment conditions.

If the policy is breached and an employee is found to have used the card for non-complying purposes, their salary sacrificed benefit for the relevant portion of travel will be adjusted via salary and wages deducting the additional Fringe Benefits Tax (FBT) thereon.

Any further breaches of the policy will result in termination of the benefit.

Reasons for decision

Issue 1

Question 1

Will transport provided under salary sacrifice arrangement to employees constitute an exempt residual benefit under subsection 47(6) of the Fringe Benefits Tax Assessment Act (FBTAA) where the transport provided is on buses only?

Summary

The requisite elements in subsection 47(6) of the FBTAA are satisfied. The transportation provided under the arrangement will be an exempt residual benefit.

Detailed reasoning

Subsection 47(6) of the FBTAA provides an exemption for residual benefits consisting of the provision or use of a motor vehicle under certain limited circumstances. Subsection 47(6) of the FBTAA states:

Where:

(a) a residual benefit consisting of the provision or use of a motor vehicle is provided in a year of tax in respect of the employment of a current employee;

(aa) the motor vehicle is not:

(i) a taxi let on hire to the provider; or

(ii) a car, not being:

(A) a panel van or utility truck; or

(B) any other road vehicle designed to carry a load of less than 1 tonne (other than a vehicle designed for the principal purpose of carrying passengers); and

(a) there was no private use of the motor vehicle during the year of tax and at a time when the benefit was provided other than:

(i) work-related travel of the employee; and

(ii) other private use of the motor vehicle by the employee or an associate of the employee, being other use that was minor, infrequent and irregular;

the benefit is an exempt benefit in relation to the year of tax.

Subparagraph 47(6)(a) of the FBTAA

The requisite elements of subparagraph 47(6)(a) of the FBTAA are discussed below.

Residual benefit

In respect of a residual benefit, subsection 136(1) of the FBTAA states:

residual benefit means a benefit that is a residual benefit by virtue of section 45.

Section 45 of the FBTAA states:

A benefit is a residual benefit for the purposes of this Act if the benefit is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive).

Therefore, a residual benefit is a benefit that does not fall within one of the other more specific benefit types contained in the FBTAA.

In National Australia Bank Ltd v Federal Commissioner of Taxation 93 ATC 4914; (1993) 123 ALR 349 (the NAB Case), the Ryan J stated at pp ATC 4939-4940.

A good deal of attention in the course of argument was devoted to an analysis of the contractual arrangements which may be said to have been made between the taxi cab operator on the one hand, and the employee or the Bank on the other…

Little assistance is gleaned for the purpose of this analysis by endeavouring to impute to the taxi cab operator or driver a belief as to the person with whom the contract of carriage is made. On the evidence, it can be inferred only that the taxi cab operation is content to accept, as consideration for provision of the service, the right, arising from delivery of the Cabcharge voucher, to claim from Cabcharge the cost of providing the service. If the taxi cab operator thought about it at all, he or she would probably regard the contract of carriage as being made with the party having the contractual right to discharge the cost by means of the Cabcharge voucher; i.e. the Bank.

What I regard as the preferable view, that the contract is between the taxi cab operation and the Bank, accommodates the arrangement under which the shift supervisor arranges for the attendance of one or more taxi cabs and two or more employees travel in the same cab. The contract with the taxi cab operator then and there makes is to attend at the Bank's premises and convey one or more of its employees as directed, in consideration of the provision by the Bank of a warrant authorising the cost of the conveyance to be met by Cabcharge on the Bank's account. Even where the employee commissions the taxi cab from his or her home, the analysis which I favour remains available because the employee can be regarded as the agent of the Bank, having actual authority, evidenced by the possession of the Cabcharge voucher, to conclude a contract with the taxi cab operator on behalf of the Bank…

The view which I take of the contractual arrangement is that no obligation is imposed on the employee. Accordingly, the provision of the warrant for payment in the form of a Cabcharge voucher does not effect or result in a discharge or extinction of an obligation of the employee to pay any amount to the taxi cab operator.

…

As already indicated, I have accepted that the provision by the Bank to Mr Brewster of transport by taxi cab was a "benefit" as defined in the [FBTAA]. I have also explained why that benefit is not an "expense payment fringe benefit" by virtue of any provision of Subdivision A of Division 5 of the [FBTAA]. Since it has not been suggested to fall within Subdivision A of any of the Division 2 to 4 or 6 to 11, it follows that it is a residual benefit by virtue of s.45 of the [FBTAA].

As indicated in the NAB Case, in determining whether the transport provided is a residual benefit under the FBTAA, it is important to establish whether the contractual obligation for the particular transport arrangements is between the employer and the transport entity.

The employer will purchase and be registered as the owner of the transport cards that will be issued to employees who enter into the arrangement. As such, the primary contractual arrangement for the bus transportation will be between the employer and the transport provider. The Commissioner considers the proposed arrangement is similar to the arrangement outlined in the NAB Case. The Commissioner therefore concludes that a residual benefit will be provided under the arrangement.

Support for this conclusion is provided in Taxation Ruling TR 1999/10 Income tax and fringe benefits tax: Members of Parliament - allowances, reimbursements, donations and gifts, benefits, deductions and recoupments (TR 1999/10).

In discussing the use of a Life Gold Pass or a Severance Pass, paragraph 86 of TR 1999/10 states:

We do not consider that the issuing of passes under the Life Gold Pass and Severance Pass Schemes attracts any income tax implications. However, travel benefits received in relation to each use of a Gold Pass or Severance Pass by a Member will be taxed as a residual benefit, within the meaning of section 45 of Division 12 of the FBTAAA, to the provider of the pass.

Consisting of the provision or use of a motor vehicle

While the Commissioner has identified a residual benefit, the residual benefit needs to consist of the provision or use of a motor vehicle.

Section 136(1) of the FBTAA defines the term "motor vehicle" by referring to section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997). That section defines a motor vehicle as follows:

motor vehicle means any motor-powered road vehicle (including a 4 wheel drive vehicle).

ATO Interpretative Decision ATO ID 2009/140 Fringe benefits tax: Exempt benefits: free travel on bus - private use (ATO ID 2009/14) discusses an arrangement similar to that which the employer proposes to implement. In ATO ID 2009/140 a bus was considered a motor vehicle for the purposes of subsection 47(6) of the FBTAA.

Subsection 136(1) of the FBTAA (relevantly) defines "provide" as follows:

provide:

(a) in relation to a benefit - includes allow, confer, give, grant or perform; and

(b) …

ATO Interpretative Decision ATO ID 2001/313 Fringe benefits tax: Exempt residual benefit (ATO ID 2001/313) provides guidance on the meaning of the term "use". It states that:

The word "use" has a broad meaning. It not restricted to situations where the employee has control of a vehicle.

ATO ID 2001/313 also considers the impact of the NAB Case and states:

…Ryan J noted that the specific inclusion of "a taxi let on hire to the provider" in paragraph 47(6)(aa) of the FBTAA indicates that the legislature considered "use of a motor vehicle" could include a passenger's travel in a taxi…these comments support the conclusion that bus transportation can also involve the "use of a motor vehicle".

The Commissioner therefore concludes that the residual benefit consists of the use of a motor vehicle, in this case being a bus.

In respect of the employment of a current employee

The Commissioner has determined that there is a residual benefit consisting of the use of a motor vehicle. However, this must be in respect of the employment of a current employee.

The meaning of the phrase 'in respect of the employment of a current employee' was considered in J and G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; 44ATR 22 (Knowles Case).

The Full Federal Court in discussing the meaning of the phrase "in respect of" stated the following at 2000 ATC 4156:

The words "in respect of" have no fixed meaning. They are capable of having a very wide meaning denoting a relationship or connection between two things or subject matters. However, the words must, as with any other statutory expression, be given a meaning that depends on the context in which the words are found.

The Full Federal Court in discussing the FBTAA stated at 2000 ATC 4158:

…it must be remembered that what must be established is whether there is a sufficient or material, rather than a, causal connection or relationship between the benefit and the employment.

The arrangement will only be offered to employees enabling them to salary sacrifice transportation costs from home to work and work to home. Policies will be put in place to prohibit private travel and to address circumstances where non-approved travel is undertaken. The transport cards will be cashed out in the event of cessation of employment, inability to use buses because of personal circumstances and upon the death of an employee.

The Commissioner concludes that the requisite elements of paragraph 47(6)(a) of the FBTAA are satisfied.

Paragraph 47(6)(b) of the FBTAA

Broadly speaking, for paragraph 47(6)(b) of the FBTAA to be satisfied in this case, the motor vehicle used must not be a taxi let on hire or a car.

Section 136(1) of the FBTAA defines the term "taxi". That section states:

taxi means a motor vehicle that is licensed to operate as a taxi.

Section 136(1) of the FBTAA defines "car" as having the same meaning as provided in section 995-1 of the ITAA 1997. That section states:

car means a *motor vehicle (except a motor cycle or similar vehicle) designed to carry a load of less than 1 tonne and fewer than 9 passengers.

The definition of the term "motor vehicle" has already been provided.

The requirements in paragraph 47(6)(b) of the FBTAA are met as a bus is neither a "taxi" nor a "car" as defined for the purposes of the FBTAA.

Paragraph 47(6)(c) of the FBTAA

Broadly speaking, paragraph 47(6)(b) of the FBTAA requires no private use of the motor vehicle other than work-related travel or minor, infrequent and irregular private use by an employee or an associate of the employee.

Section 136(1) of the FBTAA defines the term "private use". That section states:

private use, in relation to a motor vehicle, in relation to an employee or an associate of an employee, means any use of the motor vehicle by the employee or associate, as the case may be, that is not exclusively in the course of producing assessable income of the employee.

Section 136(1) of the FBTAA defines the term "work-related travel". That section states:

work-related travel, in relation to an employee, means:

(c) travel by the employee between:

(iii) the place of residence of the employee; and

(i) the place of employment of the employee or any other place from which or at which the employee performs duties of his or her employment; or

(b) travel by the employee that is incidental to travel in the course of performing the duties of his or her employment.

While travel between place of residence and place of employment is, generally speaking, considered private in nature, the travel permitted under the proposed arrangement will satisfy paragraph (a) of the definition of work-related travel as provided in the FBTAA and therefore falls within the exclusion provided for in subparagraph 47(6)(b)(i) of the FBTAA.

Under the arrangement to be put in place, the only permitted bus transportation is travel from home to work and work to home. Adherence to this policy will be enforced by declarations being required to be made by the employees to the employer. Further, an annual review will be conducted where randomly selected employees will have their travel reports examined. Policies will be put into place to address non-adherence.

The arrangement detailed in the ruling application does not allow for any minor, infrequent and irregular use of the bus by employees or associates for private purposes as defined.

The Commissioner concludes that this requirement is met as there is no private use other than work related travel permitted under the arrangement.

Conclusion

The Commissioner concludes that the requirements in subsection 47(6) of the FBTAA are satisfied. Therefore, the provision of transportation under the arrangement for employees will constitute exempt residual benefits.