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Ruling

Subject: Fringe benefits tax and acquisition of dwelling on relocation

Question 1

Is the reimbursement of a bank fee incurred by your employee that is applied by the bank to acquire mortgage insurance a benefit that is exempt under section 58C of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes

This ruling applies for the following period:

Year ended 31 March 2012

The scheme commences on:

December 2011

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.

At the time you offered your employee employment with you, the employee was living at her/his usual place of residence overseas.

Your employee relocated to Australia. Your employee purchased and occupied a place of residence in Australia. The date of the purchase was approximately six months from commencement of employment.

Your employee will be selling the residence overseas. The employee is aware of the requirement to sell the former residence within two years of commencing employment.

You reimbursed your employee's expense incurred in paying a bank fee which is applied by the bank to acquire mortgage insurance for itself with no benefit to the borrower.

The borrower's loan application confirmed that the former family home has significant equity however this will not be realised until it is sold. This meant that the borrowers did not have the funds at the time of purchase of the residence in Australia to contribute 20% of the purchase price from their own resources.

In circumstances where a borrower does not contribute 20% of the purchase price of the home, the bank offers loan funds on terms which include a condition that the borrower pays a bank fee. That bank fee can be comprised of a range of components and in where the borrowers do not contribute 20% of the purchase price the fee includes a component that reflects that the bank will obtain mortgage insurance for itself in connection with the transaction.

The borrowers sought to negotiate the quantum of the bank fee however the bank's position is not subject to negotiation. The provision of finance by the bank for the purchase of the home in Australia was strictly conditional on the borrowers paying this fee to the bank at or before the advance of the funds at settlement of the purchase.

The borrowers have no contact or communication with the providers of mortgage insurance as this is exclusively a transaction between the bank and their provider. The mortgage insurance contract solely benefits the bank.

According to a document from the bank, the fee is taken from the credit made available to the borrower and is payable to the bank. It is described as being 'in relation to credit fees and charges'.

Your employee has entered into a salary sacrifice arrangement whereby an amount per fortnight will be sacrificed until the total amount of the reimbursement is satisfied.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 58C,

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1) and

Fringe Benefits Tax Assessment Act 1986 Section 141A.

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.

In order for the provision of a benefit to be exempt under section 58C of the Fringe Benefits Tax Assessment Act 1986 (FBTAA), a number of preconditions must be met in subsection (1):

· during a particular period (in this subsection called the "former home holding period"), an employee of an employer, or an associate of an employee of an employer, holds:

· a prescribed interest in land on which:

· there is a building constituting or containing a dwelling;

· the employee or associate proposes to construct, or complete the construction of, a building constituting or containing a dwelling;

· a prescribed interest in a stratum unit in relation to a dwelling; or

· a proprietary right in respect of a dwelling, being a flat or home unit;

· the employee or associate sells, or proposes to sell, the interest or right solely because the employee is required to change his or her usual place of residence in order to perform the duties of his or her employment;

· the employer first notifies the employee at a time (in this subsection called the "notice time") during the former home holding period that the employee is required to perform the duties of that employment at the employee's new place of employment; and

· at the notice time, the employee occupied, or proposed to occupy, the dwelling, or proposed to occupy the proposed dwelling, as his or her usual place of residence…

Your employee owns a home overseas in which the employee was living at the time when you first made notification that to commence employment with you. Your employee intends to sell this place of residence. Therefore the preconditions in subsection 58C(1) of the FBTAA are satisfied.

Further conditions in subsection 58C(3) of the FBTAA must be satisfied for benefits in connection with the acquisition of a property to be exempt. That subsection states:

Where:

(a) at a particular time, the employee or an associate of the employee acquires:

(i) a prescribed interest in land on which:

(A) there is a building constituting or containing another dwelling;

(B) the employee or associate proposes to construct, or complete the construction of, a building constituting or containing another dwelling;

(ii) a prescribed interest in a stratum unit in relation to another dwelling; or

(iii) a proprietary right in respect of another dwelling, being a flat or home unit;

(b) the employee or associate acquires the interest or right solely because the employee is required to change his or her usual place of residence in order to perform the duties of that employment at the employee's new place of employment;

1. (c ) the employee or associate entered into a contract for the acquisition of the interest or right on a day (the contract day) within 4 years after the new employment day;

2. (ca) if, on the contract day, the employee or associate holds an interest or right in another dwelling in a situation where:

(i) if that interest or right were sold within 2 years after the new employment day; and

(ii) if a benefit of a kind referred to in subsection (2) were provided in relation to that interest or right;

3. the benefit would be an exempt benefit under subsection (2) - not more than 2 years have elapsed since the new employment day;

(c) immediately after the completion of the acquisition, the employee occupied the other dwelling, or proposed to occupy the other proposed dwelling, as his or her usual place of residence;

(d) any of the following benefits is provided in respect of that employment of the employee in, or in respect of, a year of tax:

(i) an expense payment benefit where the recipients expenditure is incidental to the acquisition of that interest or right;

(ii) a residual benefit where the recipients benefit is incidental to the acquisition of that interest or right;

(iii) an expense payment benefit where the recipients expenditure is in respect of the act of connecting or re-connecting a telephone service to the other dwelling or proposed dwelling;

(iv) a residual benefit where the recipients benefit is constituted by the act of connecting or re-connecting a telephone service to the other dwelling or proposed dwelling;

(v) an expense payment benefit where the recipients expenditure is in respect of the act of re-connecting gas or electricity to the other dwelling or proposed dwelling;

(vi) a residual benefit where the recipients benefit is constituted by the act of re-connecting gas or electricity to the other dwelling or proposed dwelling;

(e) if subparagraph (e)(iii) or (iv) applies - immediately before the change, a telephone service was provided to the unit of accommodation that was the employee's usual place of residence before the change;

(f) if subparagraph (e)(i), (iii) or (v) applies - 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; and

(g) the benefit is not provided under a non-arm's length arrangement;

4. the benefit is an exempt benefit in relation to the year of tax.

Your employee has purchased a residence in Australia as a result of employment with you. Your employee purchased that residence approximately six months after commencing employment with you and lives there. Therefore paragraphs (a) to (c) and (d) of subsection 58C(3) of the FBTAA are satisfied.

You will also satisfy paragraph 58C(3)(ca) of the FBTAA as:

· two years have not yet elapsed since your employee commenced employment with you and

· on the assumption the residence in Ireland was sold within the two years any expense payment or residual benefit you provide that is incidental to the sale of the dwelling would also be exempt under subsection 58C(2) of the FBTAA.

Please note: if the employee fails to sell their old dwelling within two years of commencing employment, the benefit will become fringe benefits tax liable in the year of tax in which the period of two years since commencing employment expires.

You have reimbursed the expense your employee incurred in paying a bank fee. The reimbursement is an expense payment benefit. In order to determine if paragraph 58C(3)(e) of the FBTAA is satisfied we need to consider whether your employee's expenditure was incidental to the acquisition of the residence.

Under paragraph 141A (1)(b) of the FBTAA expenditure will be expenditure that is incidental to the purchase of a residence if the expenditure is in respect of any of the following matters:

· stamp duty

· advertising

· legal services

· agent's services

· discharge of a mortgage

· expenses of borrowing

· any similar matter,

· being a matter of a capital nature that is incidental to the acquisition of the residence.

According to paragraph 141A(1)(c) it does not include:

· interest

· repayments of principal

· loan service fees

· the discharge of a mortgage, or expenses of borrowing, where the money borrowed was not applied wholly in respect of the residence

· insurance or

· rates.

Out of the credit provided by the bank to your employee, an amount was deducted by the bank which is described as being in relation to credit fees and charges. Your employee thus incurred this expense.

Although it is for the purposes of the bank obtaining mortgage insurance, it is still considered to be an expense of borrowing as it is of a capital nature and your employee was required to pay it in order to obtain the loan from the bank.

Therefore paragraph 58C(3)(e) of the FBTAA is satisfied.

Paragraph 58C(3)(f) of the FBTAA does not apply, however paragraph 58C(3)(g) of the FBTAA does. It is satisfied because your employee provided you with documentary evidence of the expense prior to the declaration date, being 21 May 2012.

The final condition to be considered is in paragraph 58C(3)(h) of the FBTAA.

In subsection 136(1) of the FBTAA the expression 'non-arm's length arrangement' is defined to mean an arrangement other than an arm's length arrangement. The term 'arm's length arrangement' is not defined in the FBTAA. However subsection 136(1) of the FBTAA defines 'arm's length transaction' to mean a transaction where the parties to the transaction are dealing with each other at arm's length in relation to the transaction.

The expression 'at arm's length' is defined in The CCH Macquarie Concise Dictionary of Modern Law , 1988, CCH Australia Ltd/ Macquarie Library Pty Ltd, Sydney, as meaning that the parties to a transaction are not connected in such a way as to bring into question the ability of one to act independently of the other.

In Granby Pty Ltd v. FCT (1995) 30 ATR 400; 95 ATC 4240, where the expression 'dealing with each other at arm's length' in section 160ZH of the Income Tax Assessment Act 1936 was in question, Lee J said (at ATR 403; ATC 4243):

The expression "dealing with each other at arm's length" involves an analysis of the manner in which the parties to a transaction conducted themselves in forming that transaction. What is asked is whether the parties behaved in the manner in which parties at arm's length would be expected to behave in conducting their affairs. Of course, it is relevant to that enquiry to determine the nature of the relationship between the parties, for if the parties are not parties at arm's length the inference may be drawn that they did not deal with each other at arm's length.

Although you and your employee are not at arm's length, this alone does not mean that the benefit was not provided under a non-arm's length arrangement.

Your employee changed residence to Australia in order to perform duties of employment with you. The expense incurred was in order to purchase a place the residence in Australia. The provision of the benefit is a result of this, which is considered an arm's length transaction. Consequently, paragraph 58C(3)(h) of the FBTAA is satisfied.

Since all of the relevant conditions in subsection 58C(3) of the FBTAA and the preconditions in subsection 58C(1) of the FBTAA have been met, the reimbursement of the expense incurred by your employee will be exempt.