Edited version of your private ruling

Authorisation Number: 1012126069032

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Subject: Fringe benefits tax; 'otherwise deductible' expenses

Question

Are expenses incurred for airfares and car hire by the employee expenses to which the otherwise deductible rule under section 24 of the Fringe Benefits Tax Assessment Act 1986 would apply if they were paid or reimbursed by the employer?

Answer

Yes

This ruling applies for the following fringe benefits tax years:

Year ending 31 March 2012

Year ending 31 March 2013

Year ending 31 March 2014

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The employee is required to travel interstate as part of his employment duties.

The employee incurs expenses for air fares and car hire for the purpose of attending business meetings.

The employee maintains diary records of business trips.

The employer will consider paying the expenses or reimbursing the employee for the expenses incurred if this would not give rise to any liability for fringe benefits tax.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 23

Fringe Benefits Tax Assessment Act 1986 section 24

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Income Tax Assessment Act 1997 section 8-1.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Fringe benefits and the 'otherwise deductible rule'

Where an employer pays a third party to satisfy a debt incurred by an employee or reimburses an employee for expenses they incur, an expense payment benefit arises under section 20 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Benefits provided in respect of the employment of the employee will be fringe benefits as defined in subsection 136(1) of the FBTAA.

If the employer pays or reimburses air fare and car hire expenses incurred by the employee, the employer will be providing the employee with expense payment fringe benefits.

The benefits would be external expense payment fringe benefits which means that, where the obligation for the expenses is paid by the employer, the taxable value would be the amount paid less any contribution made by the employee. In accordance with section 23 of the FBTAA where the expenses are reimbursed, the taxable value would be the amount of the reimbursement.

The taxable value of an expense payment fringe benefit may be reduced in accordance with the otherwise deductible rule under section 24 of the FBTAA. Broadly, this means that the taxable value may be reduced to the extent that the employee would have been entitled to an income tax deduction for the expenses if the employer had not paid or reimbursed them.

Deductibility of expenses

The extent to which travelling expenses would be an allowable income tax deduction if incurred by an employee is determined under the general deduction provisions in section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Prior to the income tax year ended 30 June 1998 the general deduction provision was subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

Taxation Ruling TR 95/33 considers the decision in the Full High Court of Australia in Fletcher & Ors v. FC of T 91 ATC 4950; (1991) 22 ATR 613 and in particular, considers the availability of an income tax deduction under subsection 51(1) of the ITAA 1936.

The general deduction provisions allow a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.

As stated in TR 95/33, expenditure will generally be deductible if its essential character is that of expenditure that has a sufficient connection with the operations or activities which more directly gain or produce the taxpayer's assessable income. The essential character of an expense is a question of fact to be determined by reference to all the circumstances.

A deduction is not allowable for travel undertaken for private purposes including the cost of transport between an employee's home and the normal work place. However travelling expenses incurred by an employee to carrying out their duties of employment are incurred in gaining or producing assessable income and, therefore, are allowable income tax deductions under
section 8-1 of the ITAA 1997.

The employee's duties require him to attend a number of locations for business purposes. In these circumstances the expenditure incurred by the employee for air fares and car hire are not private expenses and can be directly attributed to the earning of assessable income.

Accordingly, the employee would be entitled to income tax deductions for those expenses under section 8-1 of the ITAA if the expenses were not paid or reimbursed by the employer and the taxable value of the expense payment fringe benefits could be reduced to nil under section 24 of the FBTAA.

Substantiation Requirements

To use the otherwise deductible rule the company must obtain from the employee documentary evidence of the expenses incurred and an employee declaration.

The documentation must be obtained before lodging the relevant fringe benefits tax return or, if the employer is not required to lodge a return, by 21 May.

An employee declaration shows the nature of the expenses and the percentage of the expenses incurred in earning assessable income.

The employee declaration must be in a form approved by the Commissioner and is available on the ATO website www.ato.gov.au