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Edited version of private ruling

Authorisation Number: 1011844824529

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Ruling

Subject: Fringe benefits tax: in-house residual expense payment benefit

Issue 1

Will the payment by the Institution of up-front course fees incurred by its employees and their children when they enrol in a higher education course at a public institution, be a benefit provided to the employee pursuant to the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?'

Question 1

Does the benefit provided constitute a fringe benefit as defined in subsection 136(1) of the FBTAA?

Yes

Question 2

Are the employees' children associates of the employee as defined in subsection 136(1) of the FBTAA?

Yes

Issue 2

Will the reimbursement under a salary sacrifice arrangement of the payment by the Institution, of an up-front course fees incurred by an employee of the Institution or the employee's children when they enrol in a course at the Institution, constitute an in-house residual expense payment fringe benefit for the purpose of subsection 22A(2) of the Fringe Benefits Tax Assessment Act 1986?'

Question 1

Is the payment of upfront course fees for a course by the employer on behalf of the employee, an expense payment benefit as defined in section 20 of the FBTAA?

Yes

Question 2

If the answer to question one is 'Yes,' will the reimbursement by the employer of the course fees incurred by its employees and their children when they enrol at an in-house course, be an in-house residual expense payment benefit as defined in subsection 136(1) of the FBTAA ?

Yes

Question 3

Will the taxable value of the in-house residual expense payment benefit be calculated pursuant to subsection 22A(2) of the FBTAA?

Yes

Question 4

Will the reimbursement of the employer by the employee under a salary sacrifice arrangement affect the in-house residual expense payment benefit and the manner in which it is calculated pursuant to subsection 22A(2) of the FBTAA?

Issue 3

Will the reimbursement under a salary sacrifice arrangement of the payment by the employer of an up-front course fees incurred by an employee of the Institution or the employee's children when they enrol in a course at an associate institution constitute an in-house residual expense payment fringe benefit for the purpose of subsection 22A(2) of the Fringe Benefits Tax Assessment Act 1986?

Question 1

Is the payment of upfront course fees for an institution course by the employer on behalf of the employee, an expense payment benefit as defined in section 20 of the FBTAA?

Yes

Question 2

If the answer to question one is 'Yes,' will the reimbursement by the employer of the course fees incurred by its employees and their children when they enrol in a course provided by an another associate institution be an in-house residual expense payment benefit as defined in subsection 136(1) of the FBTAA ?

Yes

Question 3

Will the taxable value of the in-house residual expense payment benefit be calculated pursuant to subsection 22A(2) of the FBTAA?

Yes

Question 4

Relevant facts

Some Institution staff and their children choose to study at other universities.

The Institution intends to pay up front course fee amounts incurred by its staff and their family members when studying at the Institution or at another institution.

The employee will be expected to produce a copy of the student's invoice for the course fees before a cut off date.

When the employer pays course fees up front on behalf of its employees, the amount paid for by the employer will be treated as an asset (accounts receivable/debtor) and as a liability for the staff member.

The employer intends for the debt to be repaid through a salary sacrifice arrangement with the staff member. The employee will be reimbursing the employer.

Certified agreements make provision for the employee to enter into a salary packaging agreement with the employer. Clauses enforce full payment to the Institution of any outstanding balance should the employee leave paid employment with the employer. Any payment of an outstanding balance on ceasing paid employment with the Institution must be made from after tax monies.

The Institution carries on a business of providing education courses. It provides identical or similar benefits to the general public or outsiders.

Courses run by associate institutions are identical or similar to those provided by the Institution.

The Institution considers that providing its employees and their associates the ability to salary sacrifice the upfront course fees for associate instituitions is an economic benefit provided by the employer. The benefit is therefore an in-house residual expense payment benefit and its taxable value will be calculated pursuant to subsection 22A(2) of the FBTAA.

The employer is a body corporate established by government some years ago.

· There are xx,000 clients enrolled at the Institution for courses. A significant number are international clients.

· There are a number of staff.

· The Institution is in partnership or joint ventures in association with other companies, institutions and government departments.

· The institution may enter into business arrangements and borrow money.

Associate institutions are associates for the purposes of the FBTAA and have similar characteristics to the Institution.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986
Section 20.
Paragraph 20(a)
Paragraph 20(b)
Subsection 22A(2)
Section 45
Section 52,
Subsection 136(1)
Subsection 159(2)
Subsection 159(3)
Income Tax Assessment Act 1997
Section 26-20
Subsection 995-1(1)
Income Tax Assessment Act 1936.
Section 318

Reasons for decision

Issue 1

Will the payment by the Institution of up-front course fees incurred by its employees and their children when they enrol in a course at a public Institution, be a benefit provided to the employee pursuant to the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?'

Question 1

Does the benefit provided constitute a fringe benefit?

A fringe benefit, as defined in subsection 136(1) of the FBTAA, arises where a benefit is 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 where such a benefit is not otherwise exempted.

When the Institution pays the upfront course fees incurred by its employees and their associates for education provided by the Institution or another institution, it is providing a benefit that is not otherwise exempted. The payment is made by the Institution in respect of the employee's employment and is a fringe benefit as defined in subsection 136(1) of the FBTAA 1986.

Question 2

Will the children be 'associates' of the employee for fringe benefits tax purposes?

You propose to pay upfront course fees of HECS/HELP fees incurred by your staff and their children under a salary sacrifice arrangement in two separate situations.

· The first is for your staff and their children who will enrol at the Institution

· The second is for your staff and their children who will enrol at another Institution.

Section 136(1) of the FBTAA 1986 states that 'associate' has the meaning given by section 318 of the Income Tax Assessment Act 1936.

For the purposes of this Part, the following are associates of an institution (in this subsection called the "primary institution") that is a natural person (otherwise than in the capacity of trustee):

(a) a relative of the primary institution;

(b) a partner of the primary institution or a partnership in which the primary institution is a partner;

(c) if a partner of the primary institution is a natural person otherwise than in the capacity of trustee - the spouse or a child of that partner;

An employee is a natural person. Their children are relatives and by definition of section 318(a) 'associates'. The employees and their children may incur course fees for higher education. The provision of a benefit of payment of the up front course fees incurred by the Institution's employees and/or their associates by the employer meets the definition of a 'fringe benefit' in section 136(1) of the FBTAA.

Issue 2

Will the reimbursement under a salary sacrifice arrangement of the payment by the employer, of up-front course fees of course fees incurred by an employee of the Institution or the employee's children when they enrol in a course at the Institution, constitute an in-house residual expense payment fringe benefit for the purpose of subsection 22A(2) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Question 1

Is the payment of upfront course fees for a course conducted by the employer on behalf of the employee, an expense payment benefit as defined in section 20 of the FBTAA?

Subsection 136(1) of the FBTAA provides that a fringe benefit which comes within the expense payment definition in section 20 of the FBTAA will be an expense payment fringe benefit. Section 20 sets out the circumstances of when this type of benefit occurs.

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.

'Provider' is defined in subsection 136(1) of the FBTAA to mean 'the person who provides the benefit'.

'Person' is defined in subsection 136(1) of the FBTAA to include:

(a) a body politic

(b) a body corporate

(d) any other unincorporated association or body of persons; and

(e) a person in the capacity of trustee.

The Institution is a body corporate and therefore a person for the purposes of the FBTAA.

'Recipient' is defined in subsection 136(1) as 'the person to whom the benefit is provided. The Institution's employee is the recipient when the Institution pays the student contribution amount on behalf of the employee and their children.

Section 20 of the FBTAA provides that an expense payment benefit will arise in two ways:

· where the provider (in this case the Institution) reimburses the recipient (in this case the employee) for expenses they incur, or

· where the provider (the Institution) pays a third party in satisfaction of expenses incurred by the recipient (the employee).

The Institution proposes to pay the up front course fees for education it provides to its staff and their children. In this situation the Institution is not a third party as the provider because it is the employer of the recipient. The question remains whether payment of upfront course fees to in-house course fees by the Institution, is a reimbursement to the recipient for expenses they incur.

The term reimbursement is not defined under subsection 136(1) of the FBTAA, but the shorter term 'reimburse' is. The definition states:

includes any act having the effect or result, direct or indirect, of a reimbursement.

Further guidance for reimbursement is found in Taxation Ruling TR 92/15 Income tax and fringe benefit tax: the difference between an allowance and a reimbursement, where in paragraphs 9 and 10 it states:

9. The word reimburse is defined under subsection 136(1) of the FBT 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 repayment for expense or loss incurred, or a refund.

10. The ordinary meaning of 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.

From the above it can be said that a reimbursement is a payment to a recipient for an expense incurred. The word incurred has no statutory definition but guidance can be found in Taxation Ruling TR 97/7 Income tax: section 8-1 meaning of incurred timing of deductions. Paragraphs 5 and 6 of TR 97/7 state:

5. As a broad guide, you incur an outgoing at the time you owe a present money debt that you cannot escape. But this broad guide must be read subject to the propositions developed by the courts, which are set out immediately below.

6. The courts have been reluctant to attempt an exhaustive definition of a term such as incurred. The following propositions do not purport to do this, they help to out line the scope of the definition. The following general rules, settled by case law, assist in most cases in defining whether and when a loss or outgoing has been incurred:

(a) a taxpayer need not actually have paid any money to have incurred an outgoing provided the taxpayer is definitively committed in the year of income. Accordingly, a loss or outgoing may be incurred within section 8-1 even though it remains unpaid, subject to the principles set out below, it is not sufficient if the liability is merely contingent or no more than pending, threatened or expected, no matter how certain it is in the year of income that the loss or outgoing will be incurred in the future. It must be a presently existing liability to pay a pecuniary sum;

(b) a taxpayer may have a presently existing liability, even though the liability may be defeasible by others,

(c) a taxpayer may have a presently existing liability, even though the amount of liability cannot be precisely ascertained, provided it is capable of reasonable estimation (based on probabilities);

(d) whether there is a presently existing liability is a legal question in each case, having regard to the circumstances under which the liability is claimed to arise;

(e) in the case of a payment made in the absence of a presently existing liability (where the money ceases to be the taxpayers funds) the expense is incurred when the money is paid.

The term incurred implies an existing obligation or liability owed by the recipient. When the employer's staff or their associates enrol in a course of study, a liability of the course fee amount is created for the student by the Institution on the Institution's student course fee stream revenue account. The liability is incurred by the student in the academic year in which the student enrols and is able to be clearly ascertained. Although the student does not pay this expense, the provider, considers the expense its own when it pays the student contribution amount on revenue account. The Institution reimburses the employee for the expenses incurred by the employee and the employee's associates. The employee is the recipient of the expense payment by the Institution. Therefore, where the employer reimburses an employee for expenses incurred by the recipient, the expenses will be an expense payment benefit pursuant to paragraph 20(b) of the FBTAA.

Question 2.

If the answer to question one is 'Yes,' will the reimbursement by the Institution of the course fees incurred by its employees and their children when they enrol at a course at the Institution be an in-house residual expense payment benefit as defined in subsection 136(1) of the FBTAA ?

An expense payment benefit is an in-house expense payment fringe benefit where the expenditure the employer reimburses or pays for was incurred by the employee or their associates in purchasing goods and services that the employer (or an associate) sell to customers or clients in the ordinary course of its business. The Institution is a public Institution that sells its product of higher education courses to the public in the ordinary course of its business.

There are two types of in-house expense payment fringe benefits:

An in-house property expense payment fringe benefit and

An in-house residual expense payment fringe benefit.

An in-house property expense benefit refers to a benefit of tangible property such as material goods purchased by an employee or an associate.

An in-house residual expense payment benefit arises when an employee or their associate purchases intangible goods. The Institution's employees and their children will be purchasing education courses which are intangible goods.

An in-house residual expense payment fringe benefit is defined in subsection 136(1) of the FBTAA to mean:

"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;

(i) 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

(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 a business that consisted of or included the provision of identical or similar benefits principally to outsiders; and

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

In considering this definition it is necessary to answer the following questions:

1) Is the employee's expenditure incurred in respect of the provision of a residual benefit (other than a benefit provided under a contract of investment insurance)?

2) Who is the residual benefit provider?

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

4) Did the residual benefit provider carry on a business at the comparison time?

5) If the residual benefit provider carried on a business, did the business consist of, or include the provision of identical or similar benefits?

6) If the business consisted of, or included the provision of identical or similar benefits, were they provided principally to outsiders?

7) Will documentary evidence of the expenditure be provided to the employer before the declaration date?

1) Is the employee's expenditure incurred in respect of the provision of a residual benefit?

Section 45 defines a residual benefit as:

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 Division 2 to 11 (inclusive).

The underlying benefit to which the expenditure relates is the provision of education or training in the form of a particular course provided by the Institution. It is not a benefit provided under a contract of investment insurance. As the provision of education and training does not fall within any of the specific categories of benefits within Subdivision A of Divisions 2 to 11 (inclusive), it is a residual benefit.

2) Who is the residual benefit provider?

The provider is the person who provides the benefit. We established earlier that the Institution, as a body corporate, is a 'person' for the purposes of the FBTAA and is therefore the provider of the residual benefit of the higher education course.

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

The residual benefit provider will be the Institution, the employer of the employees who will be reimbursed under the arrangement.

4) Did the residual benefit provider carry on a business at the comparison time?

"Comparison time" is defined in subsection 136(1) of the FBTAA as the period of time over which the benefit is provided. The Institution intends to reimburse its employees at the time the student produces an invoice for the course fees but before the cut-off date.

The FBTAA does not define what constitutes carrying on a business for the purpose of the application of the in-house provisions. It does however define "business operations" in subsection 136(1) as:

In relation to a government body or a non-profit company, includes any operations or activities carried out by that body or company.

In discussing the meaning of the term business operations paragraph 9 of Taxation Ruling TR 2000/4 Fringe benefits tax: meaning of business premises states:

The term 'business operations' in the definition of 'business premises' includes a wide range of activities. The activities include those undertaken by a person in the ordinary course of carrying on a business. They also include those activities that, although not undertaken in the ordinary course of carrying on a business, are nevertheless undertaken in the course of carrying on a business. Profit making activities that fall short of being a business are also included in 'business operations' if they have a business or commercial character.

The term business is also defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as:

A business includes any profession, trade, employment, vocation or calling, except the occupation as an employee.

The Macquarie media dictionary describes to be in business as:

to earn a living from a commercial activity; to be carrying out an activity, enterprise, etc., successfully.

These definitions indicate the requirement to be carrying on a business for the purpose of the FBTAA is capable of having a wide meaning.

Support for this conclusion was provided by the High Court decision in NT Power Generation Pty Ltd v Power and Water Authority [2004] HCA 48; 219 CLR 90; 210 ALR 312; 79 ALJR 1 where the phrase carrying on a business was construed broadly.

In its decision the Court stated at paragraph 52 that the Power and Water Authority was carrying on a very substantial business. In making this statement the Court referred to the references to carrying on a business contained within the Power and Water Authority's internal documents, its annual report which discussed indicators like rate of return on assets, the debt to capital ratio and the sales revenue.

Further at paragraph 66 the court stated:

While the word business in any particular context takes its meaning from that context, normally it is a wide and general word. Its meaning in the Act [Trade Practices Act 1974] is widened by s 4(1), since business includes a business not carried on for profit.

In the earlier decision of NT Power Generation Pty Ltd v Power & Water Authority [2001] FCA 334 Mansfield J stated at paragraph 236:

Whether or not a business is being carried on is a question of fact, having regard, for example, to the nature of the activities carried out, and their continuous or repetitive character: Smith v Capewell (1979) 142 CLR 509; Fasold v Roberts (1997) 70 FCR 489.

Paragraph 13 of Taxation ruling TR 97/11 Income tax: am I carrying on a business of primary production also provides a number of indicators which are relevant to determining whether a person is carrying on a business for income tax purposes. The indicators are as follows:

· whether the activity has a significant commercial purpose or character; this indicator comprises many 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 indicators to the Institution under this arrangement it is accepted that the following points are indicative of a business being carried on.

· there is repetition and regularity of the activities;

· there are other organisations that provide education and training in the course of carrying on a business;

· the activities are conducted on a considerable scale in terms of the number of employees, the number of clients, the size of the budget;

· there is a permanency of the activities.

· the activities are planned, organised and carried on in a businesslike manner

· the activities have a significant commercial purpose or character and are directed at making a profit.

· the delivery of tertiary education and training which generate revenue and increase market share, particularly in respect of enrolment of international clients.

· the Institution is in partnership or joint ventures in association with other companies, public universities and government departments.

· the Institution enters partnerships with commercial entities for the development of research items and markets internationally for research development.

By engaging in commercial activities and providing fee-for-service education, the Institution is acting in the same manner and in competition to other training providers that are carrying on a business. Further, in attracting overseas clients, the Institution competes in a world wide market. International clients are charged full fees mainly for commercial purposes. The Institution is very research focussed and works with commercial entities, other institutions and government departments in the development of research items. The Institution has been operating for some time which confirms the permanency of its activities.

Based on these facts, it is accepted that the Institution is carrying on a business at the time it provides the residual benefit.

5) If the residual benefit provider carried on a business, did the business consist of, or include the provision of identical or similar benefits?

Guidance for determining whether the benefits are identical or similar is provided by paragraphs 202 to 217 of Taxation Ruling TR 2007/12 Fringe benefits tax: Minor benefits. In discussing when benefits will be identical or similar paragraphs 202, 204, 215, 216 and 217 state:

202. 'Infrequency and irregularity' and 'identical or similar' are not defined in the FBTAA and therefore take their ordinary meaning.
…

204. The Macquarie Dictionary defines 'identical' as:

1. (sometimes followed by to or with) corresponding exactly in nature, appearance, manner, etc.: this leaf is identical to that.

2. the very same: I almost bought the identical dress you are wearing

and 'similar' as:

1. having a likeness or resemblance, especially in a general way.

215. The term 'identical benefit' is defined in section 136(1), in relation to residual fringe benefits, to mean:

another benefit that is the same in all respects, except for differences (if any) that are minimal or insignificant and do not affect the value of the other benefit.

216. Although this definition does not apply to section 58P, it assists in understanding the meaning of the term and is not inconsistent with the ordinary (dictionary) meaning of 'identical'.

217. In giving meaning to the words 'identical' and 'similar', it is clear that the dictionary meanings, in the context of section 58P and its intended operation, are both appropriate and applicable.

The commercial activities undertaken by the Institution include the provision of courses to Australian clients and overseas clients on a fee for service basis.

In applying the definitions of identical or similar, a residual fringe benefit provided to an employee will be identical or similar to a benefit provided as part of the business where the courses undertaken by the employees of the Institution are the same as those provided to other Australian or overseas clients who are not employees of the Institution.

The Institution provides its employees with education course. The course units are delivered to its employees and its clients in an identical manner and at the same time for the same price. It is accepted that the subjects or courses undertaken at the Institution by the employees and their children are identical or similar to those offered to all clients.

It is accepted that the courses undertaken at the Institution by its employees are identical or similar to those offered to all other clients.

6) If the business consisted of, or included the provision of identical or similar benefits, were they provided principally to outsiders?

Outsider is defined in subsection 136(1) of the FBTAA to mean:

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.

In applying this definition, employees of the Institution will not be outsiders. Consequently, the provision of higher education courses will not be in-house residual fringe benefits if the course is principally provided to its employees or their associates.

Principally is not defined in the FBTAA. The Macquarie dictionary defines it as chiefly; mainly. To satisfy this requirement it is necessary that the Institution provides its courses mainly to outsiders.

The vast majority of higher education courses are provided to clients who are 'outsiders' per this definition. To put this in perspective, the Institution has xx,000 clients. Not all of the staff will be employees who are provided this benefit.

None of the courses will be mainly provided to the employees of the Institution. It should be noted that in this context, the definition of employee in subsection 136(1) of the FBTAA refers to a current employee, a future employee or a former employee.

We accept that the business carried on by the Institution included the provision of identical or similar benefits principally to outsiders and that this requirement is satisfied.

7) Will documentary evidence of the expenditure be provided to the employer before the declaration date?

Declaration date is defined in subsection136(1) of the FBTAA as being the date of lodgment of the return of the fringe benefits taxable amount, or such later date as the Commissioner allows.

Subsection 136(1) provides that the term documentary evidence means:

(a) if the expense was incurred on or after 1 July 1997 - 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;

Each client is invoiced for the course fees by the Institution. The employee will provide copies of the invoices to be reimbursed by the Institution before the cut-off date. The Institution will make the up-front payment and create the liability on account for the employee.

The reimbursement of the course fees by the Institution for it's education courses on behalf of its employees and their associates is an in-house residual expense payment benefit as defined in section 136(1) of the FBTAA.

Question 3

Will the taxable value of an in-house residual expense payment benefit be calculated pursuant to subsection 22A(2) of the FBTAA?

The taxable value of in-house residual expense payments is calculated in accordance with subsection 22A(2) of the FBTAA.

When calculating the taxable value of the benefit under subsection 22A(2), the 'otherwise deductible rule' in section 52 of the FBTAA may be employed to reduce the taxable value if the reimbursed expense would be a deduction to the employee for income tax purposes. Section 26-20 of the Income Tax Assessment Act 1997 (ITAA 1997) specifically excludes course fees as an income tax deduction. Therefore the otherwise deductible rule is not available in respect of calculating the taxable value of the payment of up-front course fees for in-house course fees by the Institution on behalf of its employees and their children.

Question 4

Will the reimbursement of the Institution by the employee under a salary sacrifice arrangement affect the in-house residual expense payment benefit and how it is calculated pursuant to subsection 22A(2) of the FBTAA?

The Institution proposes to be reimbursed for the payment of the upfront HECS/HELP student contribution by entering into a salary arrangement with its employees.

When the Institution pays course fees up front on behalf of its employees, the funds will be paid into the Institution's student course fee stream on revenue account. The amount paid by the Institution will then be treated as an asset (accounts receivable/debtor) and as a liability for the staff member. The Institution intends for the debt to be repaid through a salary sacrifice arrangement with the staff member.

A salary sacrifice arrangement (SSA) is a remuneration arrangement. Under a salary sacrifice arrangement an employee agrees to forego part of his or her total remuneration that he or she would otherwise expect to receive as salary or wages, in return for the employer or someone associated with the employer providing benefits of a similar value. The main assumption made by the parties is that the employee is then taxed under the income tax laws only on the reduced salary or wages and that the employer is liable to FBT, if any, on the benefits provided.

The types of benefits provided in a salary sacrifice arrangement by employers to employees includes superannuation contributions, the provision of motor vehicles and expense payment fringe benefits, such as school fees, childcare costs or loan repayments. An effective salary sacrifice arrangement involves the employee agreeing to receive part of his or her total amount of remuneration as benefits before the employee has earned the entitlement to receive that amount as salary or wages. The Institution proposes to provide the benefit of reimbursement of the course fees towards Institution course fees incurred by the employee and their associates.

The Institution employees receive payment for their services under certified agreements. The certified agreements for its employees make provision for the employee to enter into a salary packaging agreement with the employer. Clauses in the agreements ensure that any employee ceasing employment will be obliged by way of a written formal agreement to repay the balance remaining of the liability. Any payment of an outstanding balance on ceasing paid employment will be made from after tax monies.

When the Institution pays course fees up front on behalf of its employees, the funds are paid into its student course fee stream on revenue account. The amount paid by the Institution will then be treated as an asset (accounts receivable/debtor) and as a liability for the employee. The employee's liability will be incrementally reduced by salary forgone as the employee becomes entitled to salary and wages.

Taxation Ruling TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements, discusses in paragraphs 80-83 the effectiveness of salary sacrifice arrangements where the doctrine of 'set-off' referred to in the Steeves Agnew case is present. As Dixon J recognised (82 CLR 420; 9 ATD 266):

'If cross-liabilities in sums certain of equal amounts immediately payable are mutually extinguished by an agreed set-off, that amounts to payment for most common law and statutory purposes'.

Paragraph 81 explains the doctrine of 'set-off.'

For the doctrine of 'set-off' to apply there has to be mutual liabilities of equal amounts presently payable between two parties. It is not enough, as held in FC of T v. P Iori & Sons Pty Ltd 87 ATC 4775; (1987) 19 ATR 201 and in Lend Lease Corporation Ltd v. FC of T 90 ATC 4401; (1990) 21 ATR 402, that there be a liability on one hand and a voluntary payment on the other. In addition, as the Full Court recognised in the Temple Wholesale Flower Supplies case, there must be agreement between the parties to adopt the set-off method of payment of debts. A unilateral action by one of the parties, such as a mere entry in books of account, does nothing to change the liabilities between the parties.

When the Institution creates the liability for its employee, the employee will not have created a liability of equal amount for its employer under the employment agreement with the Institution. The employee has not yet derived an entitlement to receive salary and wages from its employer to the value of that liability. The employee has agreed to receive a reduced salary to the extent necessary to reduce that liability as the employee earns an entitlement to receive salary and wages. The doctrine of set-off will not apply to the SSA with the employer as there are not mutual liabilities of equal amounts presently payable between the employer and the employee. This is consistent with the advice given in Taxation Ruling TR 2001/10 at paragraph 83:

83. Such a set-off would amount to a payment of salary or wages. The above situation is to be contrasted with the situation where the payment of the employee's liability is made under an effective SSA in respect of salary or wage which is yet to be derived, in which case the set-off would amount to an expense payment fringe benefit.

The reimbursement by the Institution of the upfront course fees incurred by its employees and their children when they enrol in an employer's education course is an in-house residual expense payment benefit for the purposes of subsection 22A(2) of the FBTAA. The reimbursement of the employer by the employee under the proposed salary sacrifice arrangement does not change the type of the fringe benefit provided or the manner in which the taxable value is assessed.

Your attention is drawn to the fringe benefits tax consequences of an employee leaving paid employment at the Institution who is required to pay the balance of any outstanding liability from post-tax monies. A payment of this nature may be a loan fringe benefit.

Issue 3

Will the payment or reimbursement of up-front course fees incurred by an employee of the Institution or the employee's child at another institution through a salary sacrifice agreement constitute an 'in-house residual expense payment fringe benefit' for the purpose of subsection 22A(2) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Question 1

Is the payment of upfront course fees for an education course provided by an another institution by the Institution on behalf of the employee and their children an expense payment benefit as defined in section 20 of the FBTAA?

The definition of an expense payment fringe benefit which is also contained within subsection 136(1) of the FBTAA provides that a fringe benefit which comes within the expense payment definition in section 20 of the FBTAA will be an expense payment fringe benefit. Section 20 sets out the circumstances of when this type of benefit occurs.

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.

'Provider' is defined in subsection 136(1) of the FBTAA to mean 'the person who provides the benefit'.

'Person' is defined in subsection 136(1) of the FBTAA to include:

(a) a body politic

(b) a body corporate

(d) any other unincorporated association or body of persons; and

(e) a person in the capacity of trustee.

The Institution is a body corporate and therefore a person for the purposes of the FBTAA.

When the Institution staff or their children enrol in a course at another institution they incur an obligation to pay a third party for the student contribution towards course fees. An upfront payment of the employee (recipient)'s obligation by the Institution (provider) to another institution (third person) will be an expense payment fringe benefit by virtue of paragraph 20(a) of the FBTAA.

Question 2

If the answer to question one is 'Yes,' will the reimbursement by the Institution of the course fees incurred by it employees and their children when they enrol at a course at another institution be an in-house residual expense payment benefit as defined in subsection 136(1) of the FBTAA ?

A benefit is an in-house residual expense payment fringe benefit if it is an expense payment fringe benefit which satisfies certain conditions. There are two types of in-house expense payment fringe benefits:

An in-house property expense payment fringe benefit and

An in-house residual expense payment fringe benefit.

An in-house property expense benefit refers to a benefit of tangible property such as material goods purchased by an employee or an associate.

An in-house residual expense payment benefit arises when an employee or their associate purchases intangible goods. The Institution employees and their children will be purchasing higher education courses which are intangible goods.

An in-house residual expense payment fringe benefit is defined in subsection 136(1) of the FBTAA to mean:

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

(i) 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

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

In considering this definition it is necessary to answer the following questions in relation to the situation where the employees and their associates incur course fees for education courses at another institution:

1. Will the employee's expenditure be incurred in respect of the provision of a residual benefit (other than a benefit provided under a contract of investment insurance)?

2. Who is the residual benefit provider?

3. Is the residual benefit provider the employer or an associate of the employer?

4. Does the residual benefit provider carry on a business at the comparison time?

5. If the residual benefit provider carries on a business, do the businesses consist of, or include the provision of identical or similar benefits?

6. If the businesses consisted of, or included the provision of identical or similar benefits, were they provided principally to outsiders?

7. Will documentary evidence of the expenditure be provided to the employer before the declaration date?

1. Will the employee's expenditure be incurred in respect of the provision of a residual benefit?

The employee or child is invoiced for course fees on enrolment. The employee has incurred an expense. The expense incurred is 'recipients expenditure' under subsection 136(1) and paragraph 20(a) of the FBTAA. The recipient's expenditure is in respect of course fees. Section 45 defines a residual benefit as:

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 Division 2 to 11 (inclusive).

The underlying benefit to which the expenditure relates is the provision of education or training in the form of a particular course provided by another institution. It is not a benefit provided under a contract of investment insurance. Nor is it an economic benefit of the ability to salary sacrifice the actual course fees as you have contended. As the provision of education and training does not fall within any of the specific categories of benefits within Subdivision A of Divisions 2 to 11 (inclusive), it is a residual benefit. The employee and their children will incur an obligation to pay course fees.

2. Who is the residual benefit provider?

The benefit being provided is the education course at another institution. Therefore the provider of the residual benefit is another institution.

3. Is the residual benefit provider the employer or an associate of the employer?

Section 136(1) of the FBTAA 1986 states that 'associate' has the meaning given by section 318 of the Income Tax Assessment Act 1936 and notes that section 159 of the FBTAA affects the definition. The Institution's associates meet the definition of an associate of the employer.

The residual benefit provider is an institution other than the employer. They are all associates of the Institution for the purposes of the FBTAA.

5. Does the residual benefit provider carry on a business at the comparison time?

"Comparison time" is defined in subsection 136(1) of the FBTAA as the period of time over which the benefit is provided. The Institution intends to reimburse its employees at the time an invoice is produced for the course fees charged by another institution.