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Ruling

Subject: Product selected from product range for home use

Question 1

Will a fringe benefits tax liability arise from an employee's use of the provider's products under the program?

Answer

No

This ruling applies for the following periods:

1 April 2011 - 31 March 2012

1 April 2012 - 31 March 2013

1 April 2013 - 31 March 2014

The scheme commences on:

When a favourable ruling is provided.

Relevant facts and circumstances

The employer is a statutory authority

The employer is a party to an agreement with the provider to access the provider's product. This agreement provides the employer with updates to the product and various other services in relation to the product (eg support, training).

As part of the product package, the provider offers the employer the opportunity to have the (product) made available to its employees. The offer of the product is an initiative, available as part of the provider's programs. Its purpose is to increase employee productivity through the availability of the product. It is a standard feature of the product and has not been negotiated by the employer. The employer is not required to pay any additional amount in order for the product to be made available to its employees.

The employees of the employer are offered one selection of the products within the product range.

Under the product, employees can obtain the use of the provider products for their personal use. The functionality of the products available through the product are the same as the retail product, however, the employees' right to use the products is tied to the employer's continued product lease and the employee's ongoing employment with the employer.

The employer is proposing to have the product range made available to their employees. To do this, the employer needs to agree with the provider that the product range will be available to the employer employees. The employer will use information provided by the provider to communicate the availability of the product range. This will include a relevant product code which will need to be quoted by employees to the provider.

When ordering the employee will be required to enter their work email address and the relevant product code to begin the order process. The provider will then send an email to the employee (on the work email address provided by the employee) with instructions as to how to proceed with the order.

An employee who wishes to take up the product will order directly from the provider via an internet site. Employees can either acquire the products directly for a charge of $XX or $YY for delivery of the product. Each employee can only order one product selected from the product range, and the employer will not be aware of the product selected by that employee.

The employee will enter into a separate agreement with the provider. Some employees will work from home. However most employees will be using the product primarily for personal use.

There are restrictions on use. If the employee ceases to be employed by the employer, the employee agrees to remove the product from their possession and (if applicable) destroy the product. The monitoring and enforcement of this provision would be a matter for the provider and not a responsibility of the employer.

Identical products offered in the program can be purchased with through the internet for under $xxx.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 58X

Fringe Benefits Tax Assessment Act 1986 section 58P

Fringe Benefits Tax Assessment Act 1986 section 45

Fringe Benefits Tax Assessment Act 1986 section 51

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision

Will a fringe benefit arise from the employee's use of the provider products under the program?

An employee who participates in the program is able to obtain the use of the provider's products for personal use.

The term 'benefit' is defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to:

Include any right (including a right in relation to, and an interest in, real or personal property, privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be provided under:

(a) an arrangement for or in relation to:

(i) the performance of work (including work of a professional nature), whether with or without the provision of property; . . .

The use of the product obtained from the provider's product range meets the definition of a benefit.

Is the benefit a fringe benefit?

The definition of 'fringe benefit' in subsection 136(1) of the FBTAA provides that a benefit will be a fringe benefit where it is:

(i) provided to an employee or an associate of an employee;

(ii) by the employer, an associate of the employer or a third party either under an arrangement that comes within paragraph (e) of the 'fringe benefit' definition or in circumstances that come within paragraph (ea) of the 'fringe benefit' definition;

(iii) is provided in respect of the employment of the employee; and

(iv) does not come within paragraphs (f) to (s) of the 'fringe benefit' definition.

In considering each of these requirements:

(i) Is the benefit provided to an employee or an associate of an employee?

The product is available to the current employees of the employer. Therefore this requirement is satisfied.

(ii) Is the benefit provided by the employer, an associate of the employer or a third party in a situation that comes within either paragraph (e) or (ea) of the 'fringe benefit' definition?

The definition of provide under section 136(1) of FBTAA is:

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

(b) in relation to property - means dispose of (whether by sale, gift, declaration of trust or otherwise):

(i) if the property is a beneficial interest in property but does not include legal ownership - the beneficial interest; or

(ii) in any other case - the legal ownership of the property.

provider , in relation to a benefit, means the person who provides the benefit.

The definition of provider under section 136(1) of FBTAA is:

In relation to a benefit, means the person who provides the benefit.

The right to use the product is provided to the employee by the provider. As the provider is not the employer or an associate of the employer it is necessary to consider the application of paragraphs (e) and (ea) of the 'fringe benefit' definition.

Paragraph (e) applies where the benefit is provided by a person who is not the employer or an associate of the employer under an arrangement covered by paragraph (a) of the 'arrangement' definition.

Paragraph (a) of the 'arrangement' definition in subsection 136(1) states:

any agreement, arrangement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings.

This requirement will be satisfied as the employer will arrange with the provider for the product to be offered to the employees and will provide the employees with the relevant program code number which enables the employees to order the product from the provider via their work email.

Alternatively, if paragraph (e) is not satisfied, paragraph (ea) will be satisfied as the employer is participating in, facilitating or promoting a scheme or plan involving the provision of the benefit when the employer advertises the availability of the product range to its employees.

Is the benefit provided in respect of the employee's employment?

The benefit is provided in respect of employment as the employee's use of the licensed product is contingent on the employee's employment with the employer. If the employee's employment with the employer ceases the employee is required to remove or destroy the product in their possession.

Does the benefit come within paragraphs (f) to (s) of the 'fringe benefit' definition?

For the purpose of this ruling the relevant paragraph is paragraph (g) which provides that a benefit that is an exempt benefit will not be a fringe benefit. This includes benefits that are exempt under section 58P or 58X of the FBTAA.

Will the benefit be an exempt minor benefit under section 58X of the FBTAA?

Section 58X exempts certain eligible work related items used primarily for work purposes from fringe benefits where the benefit is provided by the employer to the employee in respect of the employee's employment.The products in the range are identified eligible work related items in paragraph 58X (2)(?) of the FBTAA. Most of the employer's employees will be using the products provided under the product range for private purposes. However some of the employees work from home and will be using the product primarily for business use. A product obtained under the product range offer is not provided by the employer to its employees but by the provider. Therefore the benefit of the product is not provided by the employer to the employee and the benefit will not be an exempt benefit pursuant to section 58X of the FBTAA.

Will the benefit be an exempt minor benefit under section 58P of the FBTAA?

Section 58P of the FBTAA states:

Where:

(a) a benefit (in this section called a ``minor benefit'') is provided in, or in respect of, a year of tax (in this section called the ``current year of tax'') in respect of the employment of an employee of an employer;

(b) the benefit is not an airline transport benefit;

(c) in the case of an expense payment benefit, a property benefit or a residual benefit - if the minor benefit were an expense payment fringe benefit, a property fringe benefit or a residual fringe benefit, as the case may be, in relation to the employer, the expense payment fringe benefit, the property fringe benefit or the residual fringe benefit, as the case requires, would not be an in-house fringe benefit;

(d) in the case of a tax-exempt body entertainment benefit where the provider incurs non-deductible exempt entertainment expenditure that is wholly or partly in respect of the provision of entertainment to the employee or an associate of the employee:

(i) the provision of entertainment to the employee or the associate of the employee, as the case may be:

(A) is incidental to the provision of entertainment to outsiders; and

(B) neither consists of, nor is provided in connection with, the provision of a meal (other than a meal consisting of light refreshments) to the employee or the associate of the employee, as the case may be; or

(ii) the entertainment is provided to the employee or the associate of the employee, as the case may be:

(A) on eligible premises of The employer; and

(B) solely as a means of recognising the special achievements of the employee in a matter relating to the employment of the employee;

(e) the notional taxable value of the minor benefit in relation to the current year of tax is less than $300; and

(f) having regard to:

(i) the infrequency and irregularity with which associated benefits, being benefits that are identical or similar to:

(A) the minor benefit; or

(B) benefits provided in connection with the provision of the minor benefit;

have been or can reasonably be expected to be provided;

(ii) the amount that is, or might reasonably be expected to be, the sum of the notional taxable values of the minor benefit and any associated benefits, being benefits that are identical or similar to the minor benefit, in relation to the current year of tax or any other year of tax;

(iii) the amount that is, or might reasonably be expected to be, the sum of the notional taxable values of any other associated benefits in relation to the current year of tax or any other year of tax;

(iv) the practical difficulty for The employer in determining the notional taxable values in relation to the current year of tax of:

(A) if the minor benefit is not a car benefit - the minor benefit; and

(B) if there are any associated benefits that are not car benefits - those associated benefits; and

(v) the circumstances surrounding the provision of the minor benefit and any associated benefits including, but without limiting the generality of the foregoing:

(A) whether the benefit concerned was provided to assist the employee to deal with an unexpected event; and

(B) whether the benefit concerned was provided otherwise than wholly or principally by way of a reward for services rendered, or to be rendered, by the employee;

it would be concluded that it would be unreasonable to treat the minor benefit as a fringe benefit in relation to The employer in relation to the current year of tax; the minor benefit is an exempt benefit in relation to the current year of tax.

Guidance on the possible application of section 58P is contained within Taxation Ruling TR 2007/12 Fringe benefits tax: minor benefits.

Paragraph 11 and 12 of Taxation Ruling TR 2007/12 state:

11. First, there are certain benefits that are specifically excluded from section 58P. These are:

· airline transport benefits;

· expense payment benefits where, if the benefit was an expense payment fringe benefit, it would be an in-house fringe benefit;

· property benefits where, if the benefit was a property fringe benefit, it would be an in-house fringe benefit; and

· residual benefits where, if the benefit was a residual fringe benefit, it would be an in-house fringe benefit.

12. Secondly, where:

· tax-exempt body entertainment is provided, and

· the provider incurs non-deductible exempt entertainment expenditure that is wholly or partly in respect of the provision of entertainment to an employee or an associate of the employee,

· such benefits are excluded from consideration for exemption under section 58P, except in two limited circumstances.

The benefit being provided is the use of a selected product. This benefit is not an airline transport benefit. The purpose of making the product available to employees is to improve productivity and assist with training. Therefore the benefit is not for the entertainment of the employee. The employer is a statutory authority and is not a tax exempt body.

The benefit will not be an expense payment benefit as it does not involve a payment to discharge an obligation of the employee nor is it a reimbursement. Furthermore, it will not be a property benefit as ownership is not passed to the employee. The benefit does not fit into the specific categories for expense payment benefits (Division 5) or property benefits (Division 11).

A residual benefit is defined under section 45 of the FBTAA to be a benefit that does not fit within the specific categories contained in Division 2 to 11 of the FBTAA. Therefore, the benefit will be a residual fringe benefit.

In general terms, an in-house residual fringe benefit requires the employer or an associate of the employer to be carrying on a business that consists of, or includes the provision of identical or similar benefits principally to outsiders. As neither the employer, nor an associate of the employer carry on a business that consists of providing the products on offer or their like principally to outsiders, the benefit will be an external residual fringe benefit.

Therefore, the fringe benefit provided by the employer in this case is not excluded for consideration under section 58P.

Paragraph 8 of TR 2007/12 states:

A minor benefit is an exempt benefit under section 58P where:

the notional taxable value of the minor benefit in relation to the current year is less than $300; and

it would be concluded that it would be unreasonable, having regard to the specified criteria in paragraph 58P (1)(f), to treat the minor benefit as a fringe benefit.

So in applying these guidelines in Taxation Ruling TR 2007/12, we need to look at a notional value of the benefit. The notional value of a benefit is defined in subsection 136(1) of the FBTAA to effectively be the taxable value of a benefit.

The taxable value of the fringe benefit

To calculate the taxable value of the fringe benefit it is necessary to first determine the type of fringe benefit that has been provided. The FBTAA is divided into thirteen different categories. Each category has its own valuation rules. As explained before, the benefit being provided is the use of a product and it will be an external residual fringe benefit.

The next step in determining the method to be used to calculate the taxable value of the fringe benefit is to determine whether the benefit is a period benefit. In general terms a benefit will be a period benefit if it is provided for a period of more than one day. As the benefit being provided (the use of the product) is provided for more than one day the fringe benefit will be an external period residual fringe benefit.

The methods that are used to calculate the taxable value of an external period residual fringe benefit are contained within section 51 of the FBTAA. Section 51 of the FBTAA states:

Subject to this Part, the taxable value of an external period residual fringe benefit in relation to an employer in relation to a year of tax is:

(a) where the provider was the employer or an associate of the employer and the recipients overall benefit was purchased by the provider under an arm's length transaction - the amount paid or payable by the provider in respect of the recipients current benefit;

(b) where the provider was not the employer or an associate of the employer and the employer, or an associate of the employer, incurred expenditure to the provider under an arm's length transaction in respect of the provision of the recipients current benefit - the amount of that expenditure; or

(c) in any other case - the notional value of the recipients current benefit;

reduced by the amount of the recipients contribution insofar as it relates to the recipients current benefit.

As the provider is not the employer, or an associate of the employer paragraph 51(a) will not apply. Paragraph 51(b) also will not apply as neither the employer, nor an associate of the employer incur expenditure to the provider.

Therefore, as neither paragraph 51(a), nor paragraph 51(b) applies, paragraph 51(c) will be used to calculate the taxable value of the fringe benefit. The taxable value under paragraph 51(c) is 'the notional value of the recipients current benefit reduced by the amount of the recipient's contribution insofar as it relates to the recipients current benefit'.

Subsection 136(1) of the FBTAA defines the term 'notional value' to mean:

. . . the amount that the person could reasonably be expected to have been required to pay to obtain the property or other benefit from the provider under an arm's length transaction.

Taxation Determination TD 93/231 Fringe benefits tax: what is an acceptable method for determining the 'notional value' of a property fringe benefit for the purpose of sections 42 and 43 of the Fringe Benefits Tax Assessment Act 1986 provides guidance on how to determine the 'notional value' of a property fringe benefit.

Paragraphs 2 to 4 of Taxation Determination TD 93/231 state

2. To ascertain the 'notional value' of a property fringe benefit The employer must determine the amount the employee would have to pay for a comparable (on the basis of age, type and condition) benefit under an arm's length transaction.

3. This Office will accept a number of ways of obtaining the notional value including:

- the price of comparable goods advertised in local newspapers and/or relevant magazines or similar publications;

- the price paid for comparable goods at a public auction;

- the price of comparable goods at a second-hand store; or

- the market value of the goods determined by a qualified valuer.

4. The lowest value obtained using any of these methods will be acceptable.

Although this Taxation Determination relates to the 'notional value' of a property fringe benefit it can also be used to calculate the 'notional value' of a residual fringe benefit.

In this case the benefit being provided to an employee is the use of a restricted licence product. Each identical product to those currently offered in the product range can be purchased through the internet for under $300.

The notional value is the amount that an employee would expect to pay for the use of the product under an arms length arrangement. It is relevant to consider the following factors as well as the above information:

· The provider makes the product available to employees of all employers who are volume customers of the provider and who have active product package coverage;

· the amount charged by the provider is stated on the provider's website;

· the product is only available for the period in which the employee is employed and the employer is a volume customer with an active product package coverage; and

· the amount paid by the employer for the services provided by the provider is not affected by whether the product is made available for the use of employees.

These factors indicate that the amount an employee expects to pay to obtain the use of the products for one year is less than $x00 under an arm's length transaction. The employee can pay up to a maximum of $ZZ for the product selected. The taxable value of the benefit in relation to one year of tax is determined to be below $300 and therefore the notional value for determining whether section 58P applies is also less than $x00.

Is it unreasonable to treat the benefit as a fringe benefit?

We also need to consider whether it would be unreasonable, having regard to the specified criteria in paragraph 58P(1)(f) of the FBTAA to treat the minor benefit as a fringe benefit. Paragraph 58P(1)(f) contains five specific criteria which must be considered in determining whether it would be unreasonable to treat the benefit as a fringe benefit. The five criteria are:

1. the infrequency and irregularity with which associated identical or similar benefits are provided;

2. the sum of the notional taxable values of the minor benefit and associated benefits which are identical or similar to the minor benefit;

3. the sum of the notional taxable values of any other associated benefits;

4. the practical difficulty in determining the notional taxable values of the minor benefit and any associated benefits; and

5. the circumstances surrounding the provision of the minor benefit and any associated benefits.

For the purposes of the minor benefits exemption the term 'associated benefits' is defined in subsection 58P(2) of the FBTAA to mean a benefit that is any of the following:

· identical or similar to the minor benefit;

· provided in connection with the provision of the minor benefit; or

· identical or similar to a benefit provided in connection with the provision of the minor benefit.

Once the employee chooses one of the products offered under the product range there are no further benefits provided of a similar nature or in connection with the product chosen. There are no associated benefits to be considered when examining the criteria listed under paragraph 58P (1) (f) of the FBTAA.

The benefit provided by the product is a once only benefit. Even if the employee does receive the use of other products, the use of the other productswill not be provided on a frequent or regular basis.

As the employee orders the product directly from the provider, the employer will not be aware of which product has been selected by a particular employee or its price.. Therefore, there will be practical difficulties in determining the notional taxable values.

In considering the circumstances in which the benefit is provided, paragraph 58P(1)(v) provides that it is necessary to consider whether the benefit was provided to assist the employee to deal with an unexpected event and whether the benefit was provided as a reward for services rendered. The benefit will not be provided to assist with an unexpected event when it is offered to all the employer's employees for personal use.

Finally, for section 58P to apply the benefit cannot be provided as a reward for service. Given this program will made available to all employees of the employer it could not be said that it is being provided as a reward for service as it is not linked to the services provided by the employee.

In looking at the facts of this case and the application of section 58P of the FBTAA it would be unreasonable to treat the benefit as a fringe benefit.

Therefore, as the notional value of the benefit in this case is less than $x00 and the specified conditions are satisfied, section 58P of the FBTAA will apply to exempt this benefit. As the benefit is an exempt benefit, then it is not a fringe benefit as defined in subsection 136(1) of the FBTAA. Therefore there will not be a fringe benefits tax liability arising from an employee's use of the provider's products.