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Ruling

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

Question 1

Does the reimbursement of the expenses incurred by your employees or their associates constitute an expense payment fringe benefit for the purposes of section 20 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

Question 2

If the answer to Question 1 is "Yes", is the taxable value of any resultant expense payment fringe benefit calculated under subsection 22A(2) of the FBTAA an in-house residual expense payment fringe benefit?

Answer

Yes

Question 3

If the answer to Question 2 is "Yes", is the taxable value under subsection 22A(2) of the FBTAA determined in accordance with section 48 of the FBTAA?

Answer

Yes

Question 4

If the answer to Question 2 is "Yes", will the taxable value of the in-house residual expense payment fringe benefits be included in the sum of the taxable values of the fringe benefits to which the reduction in section 62 of the FBTAA applies?

Answer

Yes

This ruling applies for the following periods:

Year ended 31 March 2012

Year ended 31 March 2013

Year ended 31 March 2014

Year ended 31 March 2015

Year ended 31 March 2016

The scheme commences on:

1 April 2011

Relevant facts and circumstances

You are a distribution company.

You are associated with a retail company.

You are also associated with companies that manufacture the product that you distribute.

There are other unrelated manufacturers and retailers who operate in the market.

You allow your employees to salary sacrifice an amount per year towards the reimbursement of the costs incurred in purchasing the product you distribute.

The employees may purchase the product from the associated retailer. However, they may purchase the product from a retailer that is not an associate.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 20

Fringe Benefits Tax Assessment Act 1986 Subsection 22A(2)

Fringe Benefits Tax Assessment Act 1986 Section 45

Fringe Benefits Tax Assessment Act 1986 Section 46

Fringe Benefits Tax Assessment Act 1986 Section 48

Fringe Benefits Tax Assessment Act 1986 Section 62

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 Section 149

Income Tax Assessment Act 1936 Section 318

Reasons for decision

1. Does the reimbursement of the expenses incurred by your employees or their associates constitute an expense payment fringe benefit for the purposes of section 20 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Section 20 of the FBTAA states:

Where a person (in this section referred to as the "provider"):

(a) makes a payment in discharge, in whole or in part, of an obligation of another person (in this section referred to as the "recipient") to pay an amount to a third person in respect of expenditure incurred by the recipient; or

(b) reimburses another person (in this section also referred to as the "recipient"), in whole or in part, in respect of an amount of expenditure incurred by the recipient;

the making of the payment referred to in paragraph (a), or the reimbursement referred to in paragraph (b), shall be taken to constitute the provision of a benefit by the provider to the recipient.

As you will reimburse your employees (or associate) for the cost of their expenses the benefit will be an expense payment fringe benefit under paragraph 20(b) of the FBTAA.

2. If the answer to Question 1 is "Yes", is the taxable value of any resultant expense payment fringe benefit calculated under subsection 22A(2) of the FBTAA as an "in-house residual expense payment fringe benefit?

Subdivision B of Division 5 of the FBTAA provides two alternative methods for calculating the taxable value of an expense payment fringe benefit. The appropriate method depends upon whether the fringe benefit is:

§ an in-house expense payment fringe benefit; or

§ an external expense payment fringe benefit.

What is an 'in-house expense payment fringe benefit'?

Subsection 136(1) of the FBTAA defines an in-house expense payment fringe benefit as:

(a) an in-house property expense payment fringe benefit; or

(b) an in-house residual expense payment fringe benefit.

Both of these terms are also defined in subsection 136(1) of the FBTAA. In broad terms:

§ an in-house property expense payment fringe benefit refers to an expense payment fringe benefit where the expenditure incurred by the employee was in respect of the purchase of goods of a kind sold by the employer in the ordinary course of business; and

§ an in-house residual expense payment fringe benefit refers to an expense payment fringe benefit where the expenditure incurred by the employee was in respect of the purchase of a service or other residual benefit of a kind supplied by the employer to members of the public in the ordinary course of business.

As the expenditure did not involve the purchase of goods the relevant definition to consider is that of an 'in-house residual expense payment fringe benefit'.

Is the payment or reimbursement an 'in-house residual expense payment fringe benefit'?

Subsection 136(1) of the FBTAA defines an in-house residual expense payment fringe benefit, in relation to an employer to mean:

an expense payment fringe benefit in relation to an 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;

(c) if the residual benefit provider is not the employer or an associate of the employer:

(i) the residual benefit provider purchased the benefit from the employer or 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 business that consisted of or included the provision of identical or similar benefits principally to outsiders: and

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

Therefore an 'in-house residual expense payment fringe benefit' requires that:

(a) The fringe benefit is an 'expense payment fringe benefit';

(b) The employee's (or associate's) expenditure is incurred on the provision of a residual benefit (other than a benefit provided under a contract of investment insurance);

(c) Either the residual benefit provider:

· is the employer or the employer's associate who carried on a business that consisted of, or included, the provision of identical or similar benefits principally to outsiders; or

· the provider purchased the benefit from the employer or the employer's associate and both the residual benefit provider and the employer or the employer's associate carried on a business that consisted of, or included, the provision of identical or similar benefits principally to outsiders.

(d) The required documentary evidence is given to the employer at the required time.

These criteria are discussed below.

(a) Will the fringe benefit be an expense payment fringe benefit?

As discussed previously the reimbursement will be an expense payment fringe benefit.

(b) Will the employee's expenditure be incurred on the provision of a residual benefit?

For the benefit to be an in-house residual expense payment fringe benefit the expenditure must relate to a residual benefit which is defined in section 45 of the FBTAA to be a benefit that is not a benefit by virtue of any provision of Subdivision A of Divisions 2 to 11 inclusive of the FBTAA.

As set out above, the expenditure incurred by the employees (or associate) will be in respect of a residual benefit.

(c) Is the provider of the residual benefit the employer or an associate of the employer, or did the residual benefit provider purchase the benefit from the employer or an associate of the employer?

For this requirement to be satisfied either:

(i) the residual benefit provider must be the employer, or an associate of the employer; or

(ii) the residual benefit provider must purchase the residual benefit from the employer or an associate of the employer.

Is the provider of the residual benefit the employer, or an associate of the employer?

The "residual benefit provider" is the person who provides the benefit to the employee.

This will either be an associated company, or an unrelated company that is not an associate.

Therefore, in considering whether the reimbursement is an in-house residual expense payment fringe benefit it is necessary to consider paragraph (b) of the in-house residual expense payment fringe benefit definition if the employee has purchased the product from the associated retailer and paragraph (c) for the other retailers.

Are the requirements of subparagraph (b) of the definition of 'in-house residual expense payment fringe benefit satisfied in relation to the product provided to an employee by the associated retailer?

The reimbursement of the cost of the product purchased by an employee from the associated retailer will be an in-house residual expense payment fringe benefit if the associated retailer at the comparison time carried on a business that consisted of or included the provision of identical or similar benefits principally to outsiders.

Does the associate retailer carry on a business?

Guidance for considering whether EEQ is carrying on a business is provided by Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?

Paragraph 13 of TR 97/11 lists the following indicators that are relevant in determining whether the activities constitute the carrying on of a business:

§ whether the activity has a significant commercial purpose or character; this indicator comprises may 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 view of the information provided it is accepted that the associated retailer satisfies these requirements.

Is the product provided principally to outsiders?

The meaning of 'principally' is also not defined in the FBTAA. However, at page 52 in the ATO publication Income tax guide for non-profit organisations (NAT 7967-3.2007) 'principally' is stated to mean 'mainly or chiefly' and that 'less than 50% is not principally'. Therefore, under such guidance, 'principally' may be regarded to mean 'more than 50%' or, alternatively, 'more than half, of the time'.

'Outsider' is defined in subsection 136(1) of the FBTAA as being:

in relation to the employment of an employee of an employer, means 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.

Therefore, an 'outsider' is someone who is not an employee of the relevant employer, not an employee of an associate of that employer, not an employee of someone who provides benefits to the employees of either that employer or that employer's associate under an arrangement between them and also not to any associates of these latterly mentioned employees.

On the basis of the information provided it is accepted that these requirements are met.

Therefore, paragraph (b) of the definition of in-house residual expense payment fringe benefit will be satisfied in relation to the reimbursement of expenses incurred by an employee in purchasing the product from the associated retailer.

Are the requirements of subparagraph (c) of the definition of 'in-house residual expense payment fringe benefit satisfied in relation to the product provided to an employee by the other retailers?

As the other retailers are not the employer, or an associate of the employer the relevant requirements to consider are those contained in paragraph (c) of subsection136 (1) of the FBTAA which defines "in-house residual expense payment fringe benefit".

Paragraph (c) contains two subparagraphs that must be satisfied. Reference is made to paragraphs 34 to 39 of Class Ruling CR 2011/71 Fringe benefits tax: NSW State Owned Electricity Corporations that reimburse their employee's domestic electricity expenses which state:

34. Subparagraph (c)(i) states:

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' )

35. Neither the terms 'purchased' nor 'from' are defined in the FBTAA and so they must take on their ordinary meaning. The Macquarie Dictionary , multimedia version 5.0.0, provides the following definitions:

purchase

verb (t ) ( purchased, purchasing )

1 . to acquire by the payment of money or its equivalent; buy.

from

preposition

1 . a particle specifying a starting point, and hence used to express removal or separation in space, time, order, etc., ... , source or origin, ...

36. The 'in-house residual expense payment fringe benefit' definition was inserted into the FBTAA by Taxation Laws Amendment (Fringe Benefits and Substantiation) Act - Act No. 139 of 1987. This Act gave effect to various changes of a concessional nature that had been announced by the Federal Government following the enactment of the FBTAA. This included an amendment to the FBTAA 'to extend the concessional valuation rules applying to in-house fringe benefits to include purchases of an employer's products through independently owned retail outlets'.

37. Prior to the amendments, the in-house rules did not apply to expense payment fringe benefits, or to property and residual fringe benefits provided by a third party under an arrangement with the employer or an associate.

38. In explaining the fringe benefits to which the in-house rules would apply after the amendments were enacted, the Explanatory Memorandum (EM Extract) stated:

The Bill will also extend the range of fringe benefits that qualify for the in-house concessional valuation rules. At present, property and residual fringe benefits only qualify as in-house fringe benefits where the goods or services, etc., are provided to the employee (or an associate) by the employer or an associate of the employer. Under the proposed amendments, property and residual fringe benefits provided by a third party by arrangement with the employer (or associate) will also qualify where the goods, etc., were purchased by the third party arranger from the employer (or associate) in the ordinary course of business.

A further category of fringe benefits will also now qualify for the in-house concessions. The new category will, broadly, comprise expense payment fringe benefits where the employee receives a reimbursement of expenditure incurred in respect of the purchase of goods, etc., of a kind supplied to the public in the ordinary course of the employer's business. For example, where an employee of a petroleum company purchases the company's brand of petrol from an independently owned retail outlet at the usual retail price and the employee subsequently receives a reimbursement of a percentage of that retail price from the employer, that reimbursement will qualify as an in-house expense payment fringe benefit.

...

The effect of the amendments will be that irrespective of whether a staff discount is provided directly as a property or residual fringe benefit or indirectly as an expense payment fringe benefit, the taxable value will be the same.

39. As set out in the EM Extract, in broad terms, the intention of the amendments was to ensure that irrespective of the form of the arrangement adopted to provide a staff discount, the in-house concessions will apply where an employee receives a staff discount for the purchase of the employer's (or associate's) products. In so doing, the amendments made it possible for the in-house concessions to be utilised by an employer whose products are sold by an independent retailer.

For the same reasons as set out in this extract, it is accepted that the other retailers purchase the product that is provided to the employees from an associate of the employer. Therefore, it is accepted that subparagraph (c)(i) will be satisfied.

Subparagraph (c)(ii) states:

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 business that consisted of or included the provision of identical or similar benefits principally to outsiders

This subparagraph requires a consideration of whether 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.

The 'residual benefit provider' will be the retailer that provided the electricity to the employee.

'Seller' is defined in subparagraph (c)(i) as being the employer or associate from which the "residual benefit provider" purchased the benefit. This will be the State owned corporations that sold the electricity on the NEM.

Do the associated manufacturers and the other retailers carry on a business that consists of the provision of identical or similar benefits principally to outsiders?

On the basis of the information provided it is accepted that the associated manufacturers and the other retailers carry on a business that consists of the provision of identical or similar benefits principally to outsiders.

Therefore, the requirements in both subparagraphs of paragraph (c) are met in relation to the product purchased by an employee from the other retailers.

(d) Will documentary evidence of the employee's (or associates) expenditure be obtained from the employee?

Documentary evidence is defined in subsection 136(1) of the FBTAA as:

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.

This requirement will be met as employees seeking reimbursement of their costs will be required to provide evidence of the expenditure incurred.

Therefore, as each of the conditions contained within the definition of in-house residual expense payment fringe benefit are satisfied the reimbursement of the employee's (or associates) expenses will be an in-house residual expense payment fringe benefit.

3. If the answer to Question 2 is "Yes", is the taxable value under subsection 22A(2) of the FBTAA determined in accordance with section 48 of the FBTAA?

Subsection 22A(2) of the FBTAA states (as relevant here):

Subject to this Part, the taxable value in relation to a year of tax of an in-house residual expense payment fringe benefit (in this subsection called the "actual fringe benefit") provided during the year of tax is the amount that, if:

(a) the provision of the residual benefit to which the actual fringe benefit relates were an in-house residual fringe benefit (in this subsection called the "notional fringe benefit"); and

(b) …

would have been calculated under whichever of sections 48 and 49 is applicable as the taxable value… of the notional fringe benefit in relation to the year of tax.

In calculating what would have been the taxable value if the benefit had been a residual benefit the valuation rules in section 48 are used where the benefit is a non-period benefit. If the benefit is a period benefit the valuation rules in section 49 are used.

Section 149 of the FBTAA provides the test which is used to determine whether a benefit is provided during a period. Subsection 149(1) states:

For the purposes of this Act, a benefit shall be taken to be provided during a period if, and only if, the benefit:

(a) is provided, or subsists, during a period of more than 1 day; and

(b) is not deemed by a provision of this Act to be provided at a particular time or on a particular day.

However, subsection 46(2) of the FBTAA states that where residual benefit (not being a residual benefit constituting either a lease or a licence in respect of property) is provided on a regular billing basis and identical benefits are provided to the public in the ordinary course of the provider's business, the provision of the residual benefit during each billing period constitutes a separate benefit deemed to have been provided at the time the payment in respect of each billing period becomes due and payable.

As the residual benefits are provided on a regular billing basis the provision of the benefits during each billing period will be deemed to have been provided at the time the payment in respect of the billing period becomes due and payable.

As the relevant benefits are not period benefits, they cannot be "in-house period residual fringe benefit".

Therefore, the relevant method for valuing the benefits is that contained within section 48 of the FBTAA.

Section 48 states;

Subject to this Part, the table value of an in-house non-period residual fringe benefit in relation to a year of tax is:

(a) where at or about the comparison time, identical overall benefits were provided

by the provider:

(i) in the ordinary course of business to members of the public under an arm's length transaction or arm's length transactions; and

(ii) in similar circumstances and subject to identical terms and conditions (other than as to price) as those that applied in relation to the provision of the recipients benefit to the recipient;

an amount equal to 75% of the lowest price at which an identical benefit was sold to a member of the public; or

(b) in any other case - an amount equal to 75% of the notional value at the comparison time

reduced by the amount of the recipients contribution.

The relevant benefits will be valued under section 48 of the FBTAA as "in-house non-period residual fringe benefits" as all the necessary requirements are met.

4. If the answer to Question 2 is "Yes", will the taxable value of the in-house residual expense payment fringe benefits be included in the sum of the taxable values of the fringe benefits to which the reduction in section 62 of the FBTAA applies?

Subsection 62(1) of the FBTAA states:

Where one or more eligible fringe benefits in relation to an employer in relation to a year of tax relate to a particular employee of the employer, the taxable value of that fringe benefit, or the sum of the taxable values of those fringe benefits, as the case may be, in relation to that year shall be reduced by:

(a) if the taxable value or sum of the taxable values does not exceed $1,000 - an amount equal to the taxable value or the sum of the taxable values; or

(b) in any other case - $1,000.

The term 'eligible fringe benefits' is defined under subsection 62(2) of the FBTAA to mean 'an in-house fringe benefit or an airline transport fringe benefit".

An 'in-house fringe benefit is defined under subsection 136(1) to mean:

(a) an in-house expense payment fringe benefit;

(b) an in-house property fringe benefit; or

(c) an in-house residual fringe benefit.

As the reimbursement is an in-house expense payment fringe benefit the taxable value will come within section 62 of the FBTAA.

Miscellaneous Taxation Ruling MT 2044 discusses whether the reduction of the taxable value available under section 62 of the FBTAA applies to associates.

Paragraph 5 of MT 2044 states:

Section 62 applies to benefits which "relate to a particular employee". The word "relate" is not specifically defined in the Act and therefore has its ordinary meaning. The Concise Oxford Dictionary defines "relate" to mean "…establish relation between; connected; allied". The Macquarie Dictionary, in so far as is relevant, defines "relate" to mean "to bring into or establish association, connection, or relation". It is therefore considered that a benefit will "relate" to an employee if the provision of that benefit is connected to or associated with the employee. As a benefit provided to an associate of an employee must be in respect of the employment of the employee, the provision of the benefit is therefore connected to or associated with the employee. In other words it relates to the employee.

Paragraph 6 concludes that in view of the above the reduction available under section 62 applies in respect of the total benefits provided to each employee and their associates. However, it should be noted that where an employee and their associates receive more than one eligible benefit the reduction is not applied to each benefit. Rather, the reduction applies to the total value of the eligible fringe benefits provided to an employee and their associates.