Edited version of private ruling

Authorisation Number: 1011860922013

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Ruling

Subject: Residual Fringe Benefits

Issue 1

Question 1

Is the payment by an employer to the employee an allowance for the purposes of the Fringe Benefits Tax Assessment Act 1985 (FBTAA)?

Answer

No.

Question 2

Is the payment by the employer in respect of the employee's private medical insurance a residual fringe benefit for the purposes of the FBTAA?

Answer

Yes.

Question 3

Is the payment by the employee to the employer a recipient's contribution for the purposes of FBTAA?

Answer

Yes.

Question 4

Will section 67 of the FBTAA apply to the proposed arrangement?

Answer

No.

Question 5

Will the Commissioner apply Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to the proposed arrangement?

Answer

No.

This ruling applies for the following period

FBT Year Ending 31 March 2011

FBT Year Ending 31 March 2012

FBT Year Ending 31 March 2013

The scheme commenced on

1 April 2010

Relevant facts

The company has a corporate insurance policy under which private health insurance is provided to nominated inbound expatriate employees.

The company currently offers a number of its employees a total remuneration package that includes salary and wages, superannuation and private health insurance. Under this remuneration package the company bears all the FBT costs incurred in respect of the residual fringe benefits provided in respect of the private health insurance.

The company is proposing to restructure the remuneration packages of certain employees in order to reduce the FBT taxable value to nil. Specifically, they will offer employees who satisfy the following requirements the opportunity to enter into an arrangement to restructure their remuneration package:

· Employees not on the highest marginal rate of tax;

· The total cost borne by the company under the proposed arrangement is not greater than the costs incurred by the company under the existing arrangement.

Under the new remuneration package they will provide employees with an allowance to pay for private health insurance. For the purposes of this application, an allowance is defined to mean a grossed up amount that is provided to an employee from which an after tax payroll deduction for private health insurance will be processed.

Under the proposed structure, the company will continue to pay the employees their salary and wages and superannuation. Consequently, the employees who enter into the new remuneration package will benefit from the payment of additional superannuation contributions as the allowance that is paid will be included as ordinary time earnings for superannuation purposes.

Where employees have elected to enter into an arrangement with the company to restructure their remuneration package, the employee will be required to make an after tax employee contribution in order to reduce the taxable value of the residual fringe benefit to nil.

The allowance that is paid to the employee will be used to make an employee contribution back to the company. This will be made via an after tax payroll deduction.

In order to determine the amount of the allowance to be paid to each employee, the taxable value of each employee's residual fringe benefit will be grossed-up taking into account the employee's marginal tax rate and Medicare levy. For example, where the taxable value of an employee's residual fringe benefit is $2,500; the amount of the allowance to be paid is to be determined as follows:

Taxable Value $2,500

Marginal Tax Rate 30%

Medicare Levy 1.5%

Allowance = $2,500/(1-0.315)

= $2,500/0.685

= $3,649.64

Under the new package, the employees will make after tax contributions from the allowance received. The after tax contributions made by the employees will approximately equate to the taxable value of the residual fringe benefit provided. The allowance of $3,649.64 received will be subject to the normal PAYG withholding rules and after tax is withheld will be approximately equal to the taxable value of the residual fringe benefit. This amount will then be used to make an after tax contribution to reduce the taxable value of the residual fringe benefit to nil.

The amount of the allowance paid to the employees will be determined having regard to each employee's marginal tax rate and the Medicare Levy such that after tax contributions may be made by the employees sufficient to reduce any FBT on the residual health insurance benefits.

Each employee has a personal member number under the company number.

The premiums are invoiced to the company and are paid by the company. No amounts are invoiced to the employees or are paid by the employees.

The premiums are invoiced on a quarterly basis.

It is proposed that the employees will pay the allowance back in a lump sum in March each year, once the actual value of the benefit is known.

Relevant legislative provisions

Subsection 136(1) of the FBTAA 1986

Section 45 of the FBTAA 1986

Section 51 of the FBTAA 1986

Section 67 of the FBTAA 1986

Part IVA of the ITAA 1936

Section 177A of the ITAA 1936

Section 177D of the ITAA 1936

Section 177C of the ITAA 1936

Sub-section 177D(b) of the ITAA 1936

Subsection 177D(c) of the ITAA 1936

Reasons for decision

Issue 1

Question 1

Summary

No.

Detailed reasoning

Non-cash fringe benefits which are provided to an employee by an employer are generally subject to FBT which is a tax imposed on the employer. A benefit which is subject to FBT is neither assessable income nor exempt income of the employee or other recipient.

Guidelines on the difference between and allowance and a reimbursement for the purposes of determining whether a payment is a fringe benefit or assessable income are set out in Taxation Ruling (TR 92/15). In general, a payment is considered to be a 'reimbursement' when the recipient is compensated exactly for the expense already incurred, whereas a payment is considered to be an 'allowance' when an employee is paid a definite predetermined amount to cover an estimated expense, regardless of whether the employee incurs that expense.

At paragraph 6 of TR 92/15 it states the following:

"The word "allowance" is defined in the Macquarie dictionary as "a definite sum of money allotted or granted to meet expenses or requirements". An allowance will usually consist of the payment of a definite predetermined amount to cover an estimated expense, and will be paid regardless of whether the recipient incurs the expense".

Paragraph 10 of the same ruling describes a reimbursement as follows:

"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 vouches or substantiates 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 unexpected amounts to the provider".

The meaning of the word "reimburse" includes payments made in advance of expenditure as long as those payments possess the characteristics outlined above.

Paragraph 7 of TR 92/15 refers to a decision of the Taxation Board of Review in Case 153 where the Board said: 

"Our view is that between employer and employee there is a marked difference between a reimbursement and an allowance. A reimbursement transfers to the employer the burden of expenses actually incurred in the course of employment. An allowance is designed to compensate the employee because the employer does not wish to be under the obligation of meeting such expenses directly or indirectly".

In the RTA case the Commissioner submitted that each payment reimbursed the employees in whole or in part in respect of expenditure incurred by the employee. Hill J in rejecting the Commissioners submission noted at p 4512:

"Under the award, an employee could, it would seem, elect to travel by bicycle at no, or minimum, cost, but nevertheless be paid what it would have cost had he travelled by public transport less $1 per week or 20 cents per day. A payment to such a person could by no stretch of the imagination be said to involve a reimbursement".

In both the Mutual Acceptance case and the W A Flick case, the courts did not accept the companies' contention that the allowances were a partial reimbursement of actual expenditure and therefore are not included within the definition of wages. Dickson J. dissenting in the Mutual Acceptance case also did not consider the amount as a reimbursement but rather was a subvention towards expenditure.

In this case, the company is going to pay the employee an "allowance" each fortnight in their wages to pay for their health insurance. For the purposes of this application, an allowance is defined to mean a grossed up amount that is provided to an employee from which an after tax payroll deduction for private health insurance will be processed. The invoice is in the name of the company and the employer will pay the health insurance on behalf of the employee in quarterly instalments. It is proposed that the employees will pay the allowance back in a lump sum in March each year, once the actual value of the benefit received is known.

On the basis of the decided cases, Taxation Board of Review decisions and TR 92/15, it is considered the payments by the employer to the employees are reimbursements and not allowances or salary or wages as they were definite predetermined amounts to cover an estimated expense and were reward for services and additional remuneration payable in the capacity as an employee.

Question 2

Summary

Yes.

Detailed reasoning

The definition of a fringe benefit in subsection 136(1) of the FBTAA provides that a benefit will be a fringe benefit when that benefit is provided to an employee or an associate of the employee in respect of the employment of the employee by an employer (or its associate) or under an arrangement between the employer and a third party, unless the benefit is specifically excluded from being a fringe benefit.

The expression residual fringe benefit is defined in subsection 136(1) of the FBTAA to mean a fringe benefit that is a residual benefit.

By virtue of section 45 of the FBTAA, residual fringe benefits are fringe benefits that do not meet the requirements of one of the 12 specific types of fringe benefits outlined in Subdivision A of Divisions 2 to 11 of the FBTAA.

The benefits in respect of the employees do not fall under any of the benefits outlined in Subdivision A of Division 2 to 11 of the FBTAA. Accordingly, they will constitute residual fringe benefits.

There are two main types of residual fringe benefits, in-house residual fringe benefits and external residual fringe benefits.

In-house residual fringe benefits 

A residual benefit is an in-house residual fringe benefit if the provider is the employer or an associate of the employer and the benefit is identical or similar to rights, services, facilities, etc. provided to the public in the ordinary course of business.

As the employer is not a provider of health insurance, the residual benefit will not be an in-house residual benefit.

External residual fringe benefits 

Any residual fringe benefit that is not an in-house residual fringe benefit is an external residual fringe benefit.

An external residual fringe benefit arises where:

· the residual fringe benefit is provided by the employer or associate but the benefit is not of a kind provided to the public in the ordinary course of business; or

· the employer or associate of the employer arranges for the residual benefit to be provided by a third party.

We consider that the provision of the health insurance would constitute an external residual fringe benefit pursuant to section 45 of the FBTAA.

Question 3

Summary

Yes.

Detailed reasoning

In most cases, an organisation can reduce their FBT liability by obtaining a payment from an employee towards the cost of providing a fringe benefit. The payment is commonly called an employee contribution.

A recipient's contribution is defined in subsection 136(1) of the FBTAA as

"(a) in relation to.....a residual fringe benefit….., being a fringe benefit provided in respect of employment of an employee of an employer, means the amount of any consideration paid to the provider or to the employer by the recipient or by the employee in respect of the provision of the….recipients benefit…..,as the case may be, reduced by the amount of any reimbursement paid to the recipient in respect of that consideration".

Generally the payment is a cash payment made to the organisation or the person who provides the benefit. Important points to note about employee contributions are:

· Employee contributions must be paid out of the employee's after tax income;

· An employee contribution towards a particular fringe benefit cannot be used to reduce the taxable value of another fringe benefit;

· In certain circumstances, journal entries in the organisation's accounts can be an employee contribution;

· An employee contribution paid directly to the organisation (including those received by journal entry) is included in your assessable income.

It is considered that the payment by the employee to the company would constitute a recipients contribution under subsection 136(1) of the FBTAA as the payment would be made in respect of their employment and in respect of the benefit provided.

Section 51 of the FBTAA provides the calculation for the taxable value of external period fringe benefits. This section provides that the taxable value is reduced by the amount of the recipient's contribution insofar as it relates to the recipients current benefit.

In conclusion the payment by the employee to the company would constitute a recipients contribution pursuant to subsection 136(1) of the FBTAA. This recipient's contribution will reduce the taxable value of the residual benefit under section 51 of the FBTAA.

Question 4

Summary

No.

Detailed reasoning

Section 67 of the FBTAA is a general anti-avoidance provision with a broad similarity to Part IVA of the ITAA. Section 67 of the FBTAA is intended to apply where, on an objective view of an arrangement and its surrounding circumstances, it would be concluded that the arrangement was entered into for the sole or dominant purpose of having an amount omitted from an employer's aggregate fringe benefits amount for any year of tax in respect of a benefit provided to a person.

Subsection 67(2) provides that a tax benefit is obtained by an employer in connection with an arrangement where:

· A benefit is provided to a person;

· An amount is not included in the aggregate fringe benefits amount of the employer in the FBT year in which the benefit was provided; and

· That amount would have been included, or could have been included, in that aggregate fringe benefits amount if the arrangement had not been entered.

Subsection 67(3) provides that a tax benefit is not obtained under this section if the amount which is not included in the aggregate fringe benefits amount of the employer occurs by reason of a payment or provision by a person of consideration in respect of the benefit provided.

Section 67 does not apply in your case because a tax benefit is not obtained by the employer in connection with the arrangement that will be in place. The employer is utilising existing provisions of the FBTAA to obtain a reduction in the taxable value of the benefit provided, by virtue of the employee making an after-tax contribution back to the employer. Therefore, section 67 of the FBTAA does not apply in this case.

Question 5

Summary

No.

Detailed Reasoning

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance provision that can apply in certain circumstances if a tax benefit is obtained in connection with a scheme, and it can be concluded that the scheme, or any part of it, was entered into for the dominant purpose of enabling a tax benefit to be obtained.   Part IVA is a provision of last resort.   

The application of Part IVA depends on the facts of the particular case.  

In order for Part IVA to apply, the following questions must be addressed:

1. Is there a scheme as defined by section 177A of the ITAA 1936?

2. Is there a tax benefit which was obtained in connection with the scheme as defined by section 177C of the ITAA 1936?

3. Is the scheme a scheme to which Part IVA applies, as determined by section 177D of the ITAA 1936, where it would be concluded that your main or dominant purpose of entering into the scheme was to obtain the tax benefit. 

Scheme

For Part IVA to apply, the identified scheme must fall within the following wide definition of 'scheme'.

A scheme is defined in subsection 177A (1) to mean:

· An agreement, arrangement, understanding, promise or undertaking whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

· Any scheme, plan, proposal, action, course of action or course of conduct

In the present case, there is a 'scheme' as defined in section 177A of the ITAA 1936, being the following arrangement. Employees will be paid an allowance from which after tax contributions will be made by the employee to the employer to reduce the taxable value of the residual fringe benefit provided. Therefore the broad definition of the term scheme is satisfied.

Tax benefit

The identification of a tax benefit necessarily requires consideration of the income tax consequences, but for the operation of Part IVA, of an 'alternative hypothesis' or a 'counterfactual. This is what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out. This alternative arrangement also forms the background against which the objective ascertainment of the dominant purpose of a person occurs in accordance with section 177D of the ITAA.

Specifically, a tax benefit must be obtained by the relevant taxpayer in connection with the scheme and having regard to the factors listed in paragraph 177D(b), of the ITAA 1936 it can be concluded that the taxpayer entered into the scheme to obtain a tax benefit. Paragraph 177D(c) of the ITAA 1936 sets out the circumstances in which a tax benefit is obtained by a taxpayer in connection with a scheme.

Impact the arrangement will have on the employer

Based on example 1 in the facts, the recipients payment of $2,500 received will be included in assessable income by the employer (i.e. an amount of $2,272.73, after taking into account GST remitted on the employee contribution) which would not have been included if the arrangement was not entered into. An additional $1,561.84 will be claimed as a deduction under the arrangement entered into which would not have been claimed as a deduction under the old remuneration package offered. However, the overall result is that a greater amount of income tax will be paid by the employer.

We agree that a tax benefit has not been obtained by the employer in connection with the arrangement.

Objective purpose test

Section 177D of the ITAA 1936 provides that Part IVA applies to a scheme in connection with which you have obtained a tax benefit if, after having regard to eight specified factors, it would be concluded that a person who entered into or carried out the scheme, or any part of it, did so for the purpose of enabling you to obtain the tax benefit.

Section 177D of the ITAA 1936 refers to 'the purpose' of the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme. The person need not be you.

The objective test in paragraph 177D(b) of the ITAA 1936 is the core of Part IVA and has been described by the High Court as the 'pivot' or 'fulcrum' on which Part IVA turns. It is frequently referred to as the 'statutory predication test'.

The consideration of purpose or dominant purpose under paragraph 177D(b) of the ITAA 1936 requires an objective conclusion to be drawn. The conclusion required by section 177D of the ITAA 1936 is not about a person's actual, i.e., subjective, dominant purpose or motive. It is possible for Part IVA to apply notwithstanding that the dominant objective purpose of obtaining the tax benefit was consistent with the pursuit of commercial gain.

A conclusion about a relevant person's purpose for section 177D of the ITAA 1936 is the conclusion of a reasonable person based on all the facts and evidence that are relevant to considering the eight factors for the scheme. However, not all of the factors will be equally relevant in every case. Provided the eight factors are each taken into account, it is possible to arrive at the conclusion as to purpose by making a global assessment of purpose.

Consideration of the eight factors involves comparison of the scheme with the alternative arrangements (counterfactuals). In other words, the conclusion about the dominant purpose of a person entering into or carrying out the scheme, or any part of it, necessarily requires consideration of what may otherwise have occurred.

These eight factors are as follows:

(i) the manner in which the scheme was entered into or carried out

There is no artificiality in the arrangement. The transactions that are proposed are legitimate in there workings and no tax advantage is obvious. This points against the application of Part IVA.

The company holds a corporate health insurance policy that provides health insurance coverage for nominated expatriate employees. The premium for this policy is paid by the company in the first instance.

The nominated expatriate employees will be paid an annual allowance which will be used to reimburse the employer for the cost of the health insurance.

The employer will withhold PAYG from the allowance and remit same to the ATO.

The allowance will fall within the meaning of Ordinary Time Earnings for company purposes and as such the company will make additional superannuation contributions based on 9% of the allowance that is paid.

The reimbursement to the employer for the cost of the health insurance will be made by way of an after tax payroll deduction.

The reimbursement by the employees will be treated as an employee contribution for FBT purposes and will be included as part of the companies taxable income.

(ii) the form and substance of the scheme

The form is that you will pay your employees' an allowance for their health insurance premiums. The company will pay the health insurance premiums on behalf of the employee who in turn will reimburse the employer this amount out of their salary. There is no contrivance or artificiality present, the arrangement does exactly what it appears to do, and nothing else. Hence, the substance is consistent with the form. This would point against the application of Part IVA.

(iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out

The arrangement will be ongoing on a yearly basis. The premiums will be paid on a quarterly basis. The employee will make contributions back to the employer in a lump sum every March in line with the end of the FBT year. The timing of the arrangement is within normal requirements of this type of benefit and therefore this point would not indicate the application of Part IVA.

The arrangement will form part of the remuneration package for expatriate employees and will commence on arrival in Australia and will terminate with their departure from Australia.

(iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by this scheme

The tax result is that the company will no longer have a FBT liability with regards to the health insurance residual benefit. In addition the company will incur a taxation liability on the income received from the employees. This result does not point to the application of Part IVA.

The employees covered by this act will receive a taxable allowance which is subject to PAYG withholding.

The result for the company is the following:

· A deductible allowance is paid to employees;

· A PAYG withholding is deducted from the allowance and paid to the ATO;

· Additional deductible superannuation contributions are paid for employees;

· The deduction for FBT payable on the health insurance benefits is reduced to nil;

· The reimbursements received from employees are included as taxable income.

(v) any change in the financial position of the relevant taxpayer that has resulted, or will result, or may reasonably be expected to result, from the scheme

As outlined above the company will incur a decrease in it's FBT liability but an increase in their IT liability. As these financial changes are consistent with what would be expected from such an arrangement, this factor is therefore neutral as to the application of Part IVA.

The net effect for the company is to reduce the deductible expenses by an amount equal to X% of the cost of the health insurance. Hence, the company will pay more income tax as a result of this arrangement.

(vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result, or may reasonably be expected to result, from the scheme.

There are no additional persons connected to the taxpayer who will be affected by the arrangement. This factor will therefore have not effect on the application of Part IVA.

The employee's overall financial position is improved by virtue of the additional superannuation contributions that are paid in respect of the allowance.

(vii) any other consequence for the relevant taxpayer or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out

There is no indication of any other consequence as a result of entering into the proposed scheme. 

The employees will no longer have an amount relating to the health insurance included in any reportable fringe benefit amount on their annual payment summary. Instead they will have a taxable allowance included.

(viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi)

There are no additional persons connected to the taxpayer who will be affected by this arrangement. 

This is purely an employer/employee relationship only.

Conclusion

All these factors either point against the application of Part IVA or are neutral. Part IVA will therefore not apply to this arrangement.

ATO view documents

TR 92/15

Other references (non ATO view, such as court cases)

Mutual Acceptance case

W A Flick case

RTA case

Case 153

Does Part IVA, or any other anti-avoidance provision, apply to this ruling?

No

Keywords

Part IVA

Residual Fringe Benefits

Fringe Benefits