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Ruling

Subject: Fringe benefits tax: frequent flyer points

Issue 1

Question 1

Is Company B providing a fringe benefit as described by section 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to its director and employee, Mr X when he accumulates frequent flyer reward scheme points through the use of his personal credit card to pay expenses incurred by Company A in its business?

No

This ruling applies for the following period

1 April 2011 to 31 March 2012

1 April 2012 to 31 March 2013

1 April 2013 to 31 March 2014

The scheme commenced on

1 July 2011

Relevant facts

Mr X is a director, shareholder and employee of Company B.

Mr X uses a personal credit card to pay large bills for a consolidated group of companies headed by Company A as the company's credit card has a lower limit and interest free period.

Company B will not reimburse its employee Mr X for expenses he pays with his personal credit card on behalf of any other company.

As no reimbursements will be made, no transactions will be recorded in the company's accounts.

Mr X's credit card has an interest free credit period.

This arrangement provides a cash flow benefit to Company A.

Mr X's personal credit card accumulates frequent flyer reward scheme points.

Mr X is a director of Company A.

Mr X is a trustee and a beneficiary of the family discretionary trust.

The family trust owns the majority of the shares in Company A.

Mrs X owns the remaining shares in Company A.

Mrs X is also a trustee and beneficiary of the family trust.

Mr and Mrs X own Company B equally.

Mr X does not receive salary and wages as a director of Company A. No employment contract exists for him.

His income from the group arises from distributions from the family trust.

He intends to use the frequent flyer points to provide his wife and children with holidays and gifts.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986

Subsection 136(1)

Income Tax Assessment Act 1936

Section 318

Taxation Administration Act 1953

Item 2 of section 12-40 in Schedule 1

Reasons for decision

Issue 1

Question 1

Mr X will receive a benefit of frequent flyer points when he uses his personal credit card to pay expenses incurred by Company A which will provide the company with an interest free period and a higher credit limit than that offered by its company credit card.

Taxation Ruling TR 1999/6 Income tax and fringe benefits tax: flight rewards received under frequent flyer and other similar consumer loyalty programs addresses the tax implications of flight rewards received from consumer loyalty programs. At paragraph 7, it states.

Flight rewards, with the following exceptions, are not subject to FBT as they result from a personal (that is, non-employment) contractual relationship. The first exception is where the person with the personal contract is also an employer and provides the flight reward received to an employee in respect of the employment. That is, under the conditions of the flight reward program, FBT only applies where the employer and employee have a family relationship and the flight reward is received in connection with the employment. The second exception is where, in respect of the employment of an employee, a flight reward is provided to an employee, or the employee's associate, under an 'arrangement' for the purposes of the FBTAA, that results from business expenditure. It should be noted the Commissioner has determined that flight rewards accrued from membership of consumer loyalty programs are distinct and separate from any benefit resulting from the payment by the employer of membership fees.

Law Administration Practice Statement 2004/4(GA) Income tax and fringe benefits tax - rewards received under consumer loyalty programs provides further guidance in circumstances where a reward is received under a consumer loyalty program that results from points accrued from business expenditure where those rewards may be subject to fringe benefits tax.

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:

· provided to an employee or an associate of an employee;

· 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;

· is provided in respect of the employment of the employee; and

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

In considering each of these requirements:

Is the benefit provided to an employee or an associate of an employee?

An employee is defined in subsection 136(1) of the FBTAA to include a current, future and former employee. Subsection 136(1) defines a current employee to mean a person who receives, or is entitled to receive, salary or wages. Mr X has confirmed he is an employee of Company B.

Subsection 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 entity (in this subsection called the "primary entity") that is a natural person (otherwise than in the capacity of trustee):

(a) a relative of the primary entity;

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

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

Mr X is a natural person. He intends to use the frequent flyer points for the benefit of himself and his immediate family. The immediate family is by definition of subsection 318(a) of the ITAA 1997, 'associates'. The provision of non cash benefits to Mr X as an employee, and his immediate family, by his employer Company B, will be benefits provided to an employee or an associate of an employee.

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 and provider under subsection 136(1) of FBTAA:

Provide means:

(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.

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

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

The right to frequent flyer points is provided to the employee by the credit card provider. As the credit card 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.

The frequent flyer points are provided by the credit card provider under a personal agreement with Company B' employee, Mr X. The agreement is not between Company B and the credit card provider. Therefore paragraph (e) does not apply.

A fringe benefit will arise under paragraph (ea) where the employer or an associate of the employer participates, facilitates or promotes the provision or receipt of a third party benefit. A third party benefit will be a fringe benefit only if the employer knew, or ought to have known, that the employer was participating, facilitating or promoting the provision or receipt of the benefit.

Mr X is a director of both Company A and Company B. He is a shareholder of Company B and is a trustee and beneficiary of the family trust which owns the majority of Company A. Company A is an associate of Company B, Mr X's employer by virtue of section 318 of the ITAA 1936. Mr X has offered to use his credit limit and extended interest free period to benefit Company A by paying the company's business expenses. Company A will be aware that Mr X obtains a benefit of frequent flyer points from his credit card provider when he uses his personal credit card as he is a director of the company. The credit card statements will be presented for reimbursement by Mr X to Company A, who will keep a record of the transactions. Company A, as an associate of Company B is therefore knowingly facilitating the provision of a third party benefit provided by Mr X's credit card provider in the form of frequent flyer points.

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

'In respect of' is defined in subsection 136(1) of the FBTAA in relation to the employment of an employee, so that a benefit will be regarded as provided in respect of the employment if it is provided by reason of, by virtue of, or for in relation directly or indirectly to that employment.

The meaning of 'in respect of employment' was considered by the Full Federal Court in J & G Knowles & Associates v. Federal Commissioner of Taxation [2000] FCA 196; (2000) 96 FCR 402; 2000 ATC 4151; (2000) 45 ATR 1101 (Knowles Case). In that case a trustee company that built and operated retirement villages provided interest-free loans to its directors via their family trusts. The Full Federal Court said that there must be a sufficient and material connection or relationship between the loans and the employment for a fringe benefit to exist, but remitted the matter back to the Administrative Appeals Tribunal (AAT) to determine that question of fact. In AAT Case [2000] AATA 846, Re J&G Knowles & Associates Pty Ltd v. FCT the AAT decided that although the directors did not own the business in law, the loans were provided to them in their capacity as effective owners of the business, and not in respect of their employment.

The benefit of the frequent flyer points is obtained when he uses his personal credit card to pay Company A's expenses. Company A will record the loan in its books of account and credit the account when it pays the credit card account on behalf of Mr X. Company A has not incurred costs related to the credit card. The fees are paid on an annual basis by Mr X himself. It is not a situation where Company A provides a loan to an employee but one where Mr X is effectively providing a short term loan to the company. This type of transaction is more likely to be made by the owner of a business rather than an employee. However even when loan repayments are made by an employer to an employee it is unlikely that a benefit of frequent flyer points in connection with the loan would be a benefit as defined in subsection 136(1) but rather a benefit derived from the discharge of a pre-existing right. Slade Bloodstock Pty Ltd v FCT [2007] FCAFC 173; 2007 ATC 5276.

Mr X is an employee of Company B. It is unlikely an employee would have the funds to sustain the debt of an employer's associate in the hope of a future reimbursement. He has stated that he will be using his personal credit card to pay liabilities incurred by Company A in his capacity as a director of Company A. None of these transactions will be recorded in Company B's accounts. He is not paying these liabilities in his capacity as an employee of Company B.

It is considered that the use of the credit card to accumulate frequent flyer points cannot be sufficiently and materially connected, per the Knowles Case, to those activities in the context of his employment relationship with Company B. It is, therefore, concluded that the frequent flyer points accumulated from the use of his personal credit card to pay Company A's business expenses was obtained in respect of the ownership of the company via the family trust rather than in respect of any employment relationship and, consequently, a fringe benefit cannot arise.

When Mr X uses his personal frequent flyer points to provide holidays and other gifts to his immediate family who are his associates, the benefits provided are not in respect of his employment and are not a fringe benefit as defined by subsection 136(1) of the FBTAA.