Edited version of your private ruling

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Ruling

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

Question 1:

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

Answer:

Yes

Question 2:

Is the fringe benefit that arises from the reimbursement of the expenses in respect of a service, an eligible fringe benefit for the purposes of section 62 of the FBTAA?

Answer:

Yes

Question 3:

Is the fringe benefit that arises from the reimbursement of the expenses in respect of a good, an eligible fringe benefit for the purposes of section 62 of the FBTAA?

Answer:

Yes

This ruling applies for the following periods:

1 April 2012 to 31 March 2013

1 April 2013 to 31 March 2014, and

1 April 2011 to 31 March 2015.

The scheme commenced on:

1 April 2012

Relevant facts and circumstances

Your commercialised business units control operations that provide goods and services for the entire region.

The business units report on financial indicators such as:

· state taxes such as payroll tax and land tax

· income tax

· local government rates and charges

· profit and loss statement

· statement of financial position

· sources of revenue

· resource allocation.

The business units also remit fringe benefit tax (FBT) and goods and service tax (GST).

You allow employees to salary sacrifice an amount towards the reimbursement of cost incurred in respect of these goods and services.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 20

Fringe Benefits Tax Assessment Act 1986 subsection 22A (1).

Fringe Benefits Tax Assessment Act 1986 subsection 22A (2).

Fringe Benefits Tax Assessment Act 1986 subsection 62(1)

Fringe Benefits Tax Assessment Act 1986 subsection 62(2)

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Income Tax Assessment Act 1997 subsection 995-1(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.

Question 1:

Does the reimbursement of the expenses incurred by your employees constitute an expense payment fridge benefit for the purposes of section 20 of the FBTAA?

Detailed reasoning

Section 20 of the FBTAA states:

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

· 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

· 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' for the cost of their expenditure, the benefits constitute expense payment benefits.

Question 2:

Is the fringe benefit that arises from the reimbursement of the expenses in respect of the provision of a service, an eligible fringe benefit for the purposes of section 62 of the FBTAA?

Detailed reasoning

Subsection 62(1) of the FBTAA states that:

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 the 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.

Subsection 62(2) of the FBTAA details the type of fringe benefits to which section 62 applies.

Subsection 62(2) of the FBTAA states:

In this section, "eligible fringe benefit" means:

(a) an in-house fringe benefit; or

(b) an airline transport fringe benefit.

An in-house fringe benefit is defined in subsection 136(1) of the FBTAA to mean:

· an in-house expense payment fringe benefit;

· an in-house property fringe benefit; or

· an in-house residual fringe benefit.

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

An in-house expense payment fringe benefit is defined in subsection 136(1) of the FBTAA to mean:

· an in-house property expense payment fringe benefit; or

· 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 is in respect of the provision of services rather than the purchase of property the benefit will not be an in-house property expense payment fringe 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 the provision of services does not fall within Divisions 2 to 11 of the FBTAA the expenditure incurred by the employees is in respect of a residual benefit.

'In-house residual expense payment fringe benefit' is defined in subsection 136(1) of the FBTAA as:

· 'in-house residual expense payment fringe benefit', in relation to an employer, means an expense payment fringe benefit in relation to the employer where:

· 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")

· 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;

· if the residual benefit provider is not the employer or an associate of the employer:

· the residual benefit provider purchased the benefit from the employer or an associate of the employer (which employer or associate is in the definition called the "seller"); and

· 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 a business that consisted of or included the provision of identical or similar benefits principally to outsiders; and

· 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, in basic terms, an 'in-house residual expense payment fringe benefit' requires that:

· The fringe benefit is an 'expense payment fringe benefit';

· 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);

· The residual benefit provider is either (as applicable):

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

· Not the employer nor an associate of the employer but who, at the relevant time, had 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.

· The required documentary evidence is given to the employer before the declaration date.

As discussed above, the employee's expenditure is incurred on the provision of a residual benefit. Therefore, the reimbursement will be an in-house residual expense payment fringe benefit if the following conditions are satisfied:

· the residual benefit provider is either:

· the employer or an associate of the employer who, at the relevant time, carried on a business that consisted of, or included, the provision of identical or similar benefits principally to outsiders; or

· not the employer or an associate of the employer but who, at the relevant time, had purchased the benefit from the employer or an associate of the employer and both the residual benefit provider and the employer or associate carried on a business that consisted of, or included, the provision of identical or similar benefits principally to outsiders.

· the required documentary evidence is given to the employer before the declaration date.

1.(a) Is the Provider of the residual benefit the employer or an associate of the employer?

As you provide the services, through your business unit, to your employees you are the 'residual benefit provider'.

Are you carrying on a business of providing services?

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) provides guidance for determining whether the nature, extent and manner of the activities being undertaken amount to the carrying on of a business.

Paragraph 13 of TR 97/11 provides a number of indicators which are relevant in determining whether a person is carrying on a business for income tax purposes. The indicators are as follows:

· whether the activity has a significant commercial purpose or character; this indicator comprises many 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

· whether the activity is better described as a hobby, a form of recreation or a sporting activity.

The commercialised business unit provides services to the entire region.

In applying the relevant indicators listed in paragraph 13 of TR 97/11 it is relevant to note the following characteristics of the business unit provides goods and services on a commercial basis and a full cost pricing basis.

As a commercialised business unit it is also required to remit payments in respect to:

· state taxes such as payroll tax and land tax

· income tax

· local government rates and charges.

The business unit is required to report on financial indicators such as:

· profit and loss statement

· statement of financial position

· capital works delivery

· leverage, asset cover and gearing

· profitability

· liquidity.

Based on the facts it is accepted that your business unit is part of your operations and you are carrying on a business of the provision of services.

Are the services 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:

· an employee of the employer;

· 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:

· the employer or an associate of the employer; and

· the provider or another person; or

· 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.

It is accepted that you carry on a business that consists of or includes the provision of identical or similar benefits principally to outsiders.

Therefore, the requirements in subparagraph (c)(i) of the definition of 'in-house residual expense payment fringe benefit are met.

Is documentary evidence of the recipient's expenditure is obtained by the employer and that documentary evidence, or copy, is given to the employer before the declaration date?

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.

Your employees' reimbursement of their services costs will be required to provide evidence of the expenditure.

The declaration date is defined in subsection 136(1) of the FBTAA as being the date of lodgement of the return of the fringe benefits taxable amount, or such later date as the Commissioner allows.

Therefore, if your employees provide the necessary documentation to you by the date of lodgement of the return this condition will be satisfied.

Conclusion

Therefore, as each of the conditions contained within the definition of an in-house residual expense payment fringe benefit are satisfied, the reimbursement of your employees' services expenses will be an eligible fringe benefit for the purposes of section 62 of the FBTAA.

section 62 of the FBTAA.

Question 3:

Is the fringe benefit that arises from the reimbursement of the expenses in respect of a good, an eligible fringe benefit for the purposes of section 62 of the FBTAA?

Detailed reasoning

As detailed above, a benefit will be an eligible benefit for the purposes of section 62 of the FBTAA if it is an:

· an in-house expense payment fringe benefit;

· an in-house property fringe benefit; or

· an in-house residual fringe benefit.

As discussed previously, you intend to reimburse the expenditure incurred by your employees; therefore the benefit will be an expense payment benefit.

As defined in subsection 136(1) of the FBTAA, in general terms, an in-house property expense payment benefit relates to a reimbursement of the cost of purchasing 'tangible property'.

'Tangible property' is defined in subsection 136(1) of the FBTAA to mean goods, and includes:

· animals, including fish; and

· gas and electricity.

Guidance for determining whether the provision of water as tangible property is provided by the Goods and Services Tax Ruling GSTR 2000/25 Goods and services: GST-free supplies of water, sewerage and sewerage-like services, storm water draining services and emptying of a septic tank (GSTR 2000/25).

Paragraph 21 of GSTR 2000/25 states:

A 'supply of water' is the provision of tangible personal property - that is, goods.

By applying paragraph 21 of GSTR 2000/25, it can be concluded that water is tangible property that will come within the definition of 'property'.

'In-house property expense payment fringe benefit' is defined in subsection 136(1) of the FBTAA as:

'in-house property expense payment fringe benefit', in relation to an employer, means an expense payment fringe benefit in relation to the employer where:

· the recipients expenditure was incurred in respect of the provision of tangible property by a person (in this definition called the "property provider")

· the provision of the property is a property benefit;

· if the property provider is the employer or an associate of the employer - at or about the provision time the property provider carried on a business that consisted of or included the provision of identical or similar benefits principally to outsiders;

· if the property provider is not the employer or an associate of the employer:

· the property was acquired by the property provider from the employer or an associate of the employer (which employer or associate is in the definition called the "seller"); and

· at or about the provision time both the property provider and the seller carried on a business that consisted of or included the provision of identical or similar benefits principally to outsiders; and

· 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, in basic terms, an 'in-house property expense payment fringe benefit' requires that:

· The fringe benefit is an 'expense payment fringe benefit';

· The employee's (or associate's) expenditure is incurred on the provision of a property benefit;

· The property provider is the employer or the employer's associate who, at the relevant time, carried on a business that consisted of, or included, the provision of identical or similar benefits principally to outsiders

· if the property provider is not the employer nor an associate of the employer but who, at the relevant time, had purchased the benefit from the employer or the employer's associate and both the property 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.

The required documentary evidence is given to the employer before the declaration date.

As discussed above, the employee's expenditure is incurred on the provision of a property benefit. Therefore, the reimbursement will be an in-house property expense payment fringe benefit if the following conditions are satisfied:

· the property provider is either:

· the employer or an associate of the employer who, at the relevant time, carried on a business that consisted of, or included, the provision of identical or similar benefits principally to outsiders; or

· not the employer or an associate of the employer but who, at the relevant time, had purchased the benefit from the employer or an associate of the employer and both the residual benefit provider and the employer or associate carried on a business that consisted of, or included, the provision of identical or similar benefits principally to outsiders.

· the required documentary evidence is given to the employer before the declaration date.

Who is the provider of the benefit?

The good is provided by you through your business unit, therefore you are the provider of the benefit.

Do you carry on a business that consists of the provision of identical or similar property principally to outsiders?

As discussed previously, to satisfy this condition you must be carrying on a business.

As discussed above you are considered to be carrying on a business that includes the provision of a good.

You provide identical benefits principally to the public.

Accordingly, the condition that you carried on a business that consisted of, or included, the provision of identical or similar benefits principally to outsiders is satisfied.

Is documentary evidence of the recipient's expenditure obtained you and that documentary evidence, or copy, is given to you before the declaration date?

As mentioned previously, your employees are required to provide documentary evidence of their expenditure. If your employees provide the necessary documentation to you by the date of lodgement of the return, this condition will be satisfied.

Conclusion

Therefore, as the conditions of an in-house property expense payment fringe benefit have been satisfied, the reimbursement of your employees' expenses in respect of the provision of a good will be an eligible fringe benefit for the purposes of section 62 of the FBTAA.