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Ruling

Subject: In-house fringe benefits

Question 1:

Will the reimbursement of the expenses incurred by the employee in purchasing a product from your associate be an in-house expense payment fringe benefit?

Answer:

Yes

Question 2:

Can the taxable value of the expense payment fringe benefit that arises from the reimbursement of the employee's private costs be reduced under section 62 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer:

Yes

This ruling applies for the following periods:

Year ended 31 March 2013

Year ended 31 March 2014

Year ended 31 March 2015

The scheme commenced on:

1 April 2012

Relevant facts and circumstances

You intend to allow your employees to include the reimbursement of a product produced by your associate in their salary sacrifice arrangements.

Reasons for decision

Will the reimbursement of the expenses incurred by the employee in purchasing a product from your associate be an in-house expense payment fringe benefit?

Under the proposed arrangement, you will reimburse an employee for the expenses incurred in purchasing a product from your associate.

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.

In general terms, section 20 of the FBTAA provides that an expense payment benefit will arise where an employer either:

· makes a payment to a third party to discharge an obligation of an employee, or

· reimburses the employee for expenses incurred by the employee.

As you intend to reimburse expenditure incurred by an employee, the benefit will be an expense payment benefit.

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

Subsection 136(1) of the FBTAA defines an in-house expense payment fringe benefit as:

· 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 tangible property of a kind sold by the provider 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 provider to members of the public in the ordinary course of business.

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

· animals, including fish; and

· gas and electricity.

As the expenditure is for the purchase of goods, the relevant definition to consider is 'in-house property expense payment fringe benefit'.

Will the reimbursement of the expenditure be an 'in-house property expense payment fringe benefit'?

Subsection 136(1) of the FBTAA defines an in-house property expense payment fringe benefit, in relation to an employer to mean:

… an expense payment fringe benefit in relation to the employer where:

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

(b) the provision of the property is a property benefit;

(c) 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 property principally to outsiders;

(d) if the property provider is not the employer or an associate of the employer:

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

(ii) 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 property principally to outsiders; and

(e) 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 an 'in-house residual expense payment fringe benefit' requires that:

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

The recipients expenditure is incurred on the provision of a property benefit;

Either the residual benefit provider:

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

· the provider 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 at the required time.

These criteria are discussed below.

(i) Will the fringe benefit be an expense payment fringe benefit?

As discussed above, the reimbursement will be an expense payment fringe benefit.

Will the expenditure be incurred on the provision of a property benefit?

As discussed above, the purchased goods come within the definition of property.

(iii) Is the provider of the property the employer or an associate of the employer that carries on a business that consists of or includes the provision of identical or similar property principally to outsiders?

The goods will be provided by an associate of the employer.

Is the associate carrying on a business?

The FBTAA does not define what constitutes carrying on a business for the purposes of the application of the in-house provisions.

It does however, define 'business operations' in subsection 136(1) of the FBTAA as:

In relation to a government body or a non-profit company, includes any operations or activities carried out by that body or company.

In discussing the meaning of the term 'business operations' paragraph 9 of Taxation Ruling TR 2000/4 Fringe benefits tax: meaning of business premises (TR 2000/4), states:

The term 'business operations' in the definition of 'business premises' includes a wide range of activities. The activities include those undertaken by a person in the ordinary course of carrying on a business. They also include those activities that, although not undertaken in the ordinary course of carrying on a business, are nevertheless undertaken in the course of carrying on a business. Profit making activities that fall short of being a business are also included in 'business operations' if they have a business or commercial character.

The term 'business' is also defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as:

· A business includes any profession, trade, vocation or calling, except the occupation as an employee.

The Macquarie media dictionary describes to 'be in business' as:

· To earn a living from a commercial activity; to be carrying out an activity, enterprise, etc., successfully.

These definitions indicate the requirement to be carrying on a business for the purpose of the FBTAA as capable of having a wide meaning.

Support for this conclusion was provided by the High Court decision in NT Power Generation Pty Ltd v. Power and Water Authority [2004] HCA 48; 219 CLR 90; 210 ALR 312; 79 ALJR 1 (Power and Water Authority case), where the phrase 'carrying on a business' was constructed broadly.

In its decision in the Power and Water Authority case, the Court held at paragraph 52 that the Power and Water Authority was carrying on a very substantial business. In making this statement, the Court referred to the references to carrying on a business contained within the Power and Water Authority's internal documents, its annual report which discussed indicators like rate of return on assets, the debt to capital ratio and the sales revenue.

Further, at paragraph 66 in the Power and Water Authority case, the Court stated:

While the word "business" in any particular context takes its meaning from that context, normally it is a "wide and general" word. Its meaning in the Act [Trade Practices Act 1974] is widened by s 4(1`), since "business" includes "a business not carried on for profit".

In the earlier decision of NT Power Generation Pty Ltd v. Power & Water Authority [2001] FCA 334, Mansfield J stated at paragraph 236:

Whether or not a business is being carried on is a question of fact, having regard, for example, to the nature of the activities carried out, and their continuous or repetitive character: Smith v Capewell (1979) 142 CLR 509; Fasold v Roberts (1997) 70 FCR 489.

Paragraph 13 of Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (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 business like 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.

In considering these factors it is accepted:

· the activity has a commercial purpose or character;

· the size of the activities including the substantial asset and infrastructure holdings together with the plans and strategies for the future indicates an intention to operate on a continuous basis into the future;

· the ongoing profits being generated and the manner in which the operations are being undertaken indicates both a prospect and purpose of profit;

· there is repetition and regularity of the activity;

· the activities are being conducted in a similar manner to that of other operators;

· the activities are planned, organised and are being carried on in a business like manner such that they are directed at making a profit;

· the activities have a considerable size and permanence; and

· can not be considered to be a hobby, form of recreation or a sporting activity.

On the basis of these factors it is accepted that the associate is carrying on a business.

Does the business consist of the provision of identical or similar property 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 '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;

· 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.

On the basis of the information provided it is accepted that the goods are principally provided for customers who are not an employee of the employer or an employee of an associate of the employer.

Will the required documentary evidence be given to the employer at the required time?

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.

In your situation employees seeking payment or reimbursement of their costs will be required to provide evidence of the expenditure incurred.

Conclusion

As all the conditions will be satisfied the reimbursement of an employee's expenses will be an in-house property expense payment fringe benefit.

Can the taxable value of the expense payment fringe benefit that arises from the reimbursement of an employee's costs be reduced under section 62 of the FBTAA?

Section 62 of the FBTAA enables the aggregate of the taxable values of the in-house fringe benefits provided to an employee and their associates in a particular year to be reduced by $1,000.

Subsection 62(1) of the FBTAA states:

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:

· if the taxable value or 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

· in any other case - $1,000.

The term 'eligible fringe benefits' under subsection 62(2) of the FBTAA is defined to mean 'an in-house fringe benefit or an airline transport fringe benefit.

An 'in-house fringe benefit is defined under subsection 136(1) to mean:

· an in-house expense payment fringe benefit;

· an in-house property fringe benefit; or

· an in-house residual fringe benefit.

As the reimbursement is an in-house expense payment fringe benefit the taxable value will come within section 62 of the FBTAA.