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Ruling

Subject: FBT - expense payment fringe benefit and otherwise deductible rule

Question 1

Are the payment of university course fees and reimbursement of related costs an expense payment fringe benefit under section 20 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Advice/Answers

Yes

Question 2

If yes, is the taxable value of expense payment fringe benefit able to be reduced due to the otherwise deductible rule under subsection 24(1) of the FBTAA?

Advice/Answers

Yes

This ruling applies for the following period:

1 April 2012 to 31 March 2015

Relevant facts and circumstances

A company wants to send their engineer to do relevant financial accounting studies at university.

The employee's existing role is in negotiating, managing and supervising large contracts which involve commercial, technical and major legal issues.

The studies are required for the employee to perform their current responsibilities and not for any future or separate business or activity.

The employee's role requires a strong understanding of international finance, accounting, review of balance sheets and profit and loss statements and presenting financial modelling options to clients to enable them to convince the client on their proposal.

The current system of sending a third party financial adviser/accountant with your engineer during the financial contractual discussions with your client is not only expensive but cumbersome and unacceptable as you have no control or understanding the financial modelling involved in your presentation.

The employee will be enrolled as a full fee paying part-time student. The university will invoice the employee directly. You will pay the university course fees directly to the university on behalf of the employee. You will reimburse your employee for any out of pocket related expenses.

In addition, you will provide the required time for your employee to attend lectures and study time.

Assumptions

There is no government loan scheme (HECS or HELP etc) being utilized.

Relevant legislative provisions

Section 24 of the Fringe Benefits Tax Assessment Act 1986

Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986

Section 20 of the Fringe Benefits Tax Assessment Act 1986

Section 23 of the Fringe Benefits Tax Assessment Act 1986

Section 8-1 of the Income Tax Assessment Act 1997

Issue 1

Question 1

Summary

The payment of university course fees and reimbursement of related costs is an expense payment fringe benefit under section 20 of the FBTAA.

Detailed reasoning

Fringe benefits

The term fringe benefit is defined under subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). In general terms, a fringe benefit is a payment to an employee, but in a different form to salary or wages provided in respect of employment.

A benefit provided in respect of employment effectively means a benefit provided to somebody because he or she is an employee.

The term benefit includes rights, privileges or services.

Where an employer pays a third party on behalf of an employee or reimburses an employee in relation to expenses in respect of the employee's employment then a fringe benefit would be provided.

The definition of an expense payment fringe benefit which is also contained within subsection 136(1) of the FBTAA provides that a fringe benefit which comes within the expense payment definition in section 20 of the FBTAA will be an expense payment fringe benefit.

Expense payment benefit

Section 20 of the FBTAA provides that an expense payment benefit will arise in two ways:

· where the provider (in this case the employer) reimburses the recipient (in this case the employee) for expenses they incur,

· where the provider (in this case the employer) pay a third party in satisfaction of expenses incurred by the recipient (in this case the employee).

In this case the employer has advised that you will pay a third party, the university, directly and also reimburse the employee any related expenses.

A reimbursement is a payment to a recipient for an expense incurred.

The term incurred implies an existing obligation or liability owed by the recipient. Therefore, where the employer reimburses an employee for expenses either paid or incurred by the employee, the expenses will be an expense payment benefit under paragraph 20(b) of the FBTAA.

As the employee will be a full fee paying student, invoiced by the university and the employer will pay the university course fees directly to the university on behalf of the employee, an expense payment benefit will arise.

Question 2

Summary

The taxable value of expense payment fringe benefit can be reduced due to the otherwise deductible rule under subsection 24(1) of the FBTAA.

Detailed reasoning

Taxable value of expense payment fringe benefits

The taxable value of an external expense payment fringe benefit is determined under Section 23 of the FBTAA.

Section 23 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) states as follows:

Subject to this Part, the taxable value in relation to a year of tax of an external expense payment fringe benefit provided during the year of tax is the amount of the payment referred to in paragraph 20(a), or the reimbursement referred to in paragraph 20(b), as the cases requires, reduced, in a case to which paragraph 20(a) applies, by the amount of the recipients contribution.

The taxable value of an expense payment fringe benefit is either the amount of payment made by the employer on behalf of the employee for an employee obligation or an amount of reimbursement paid by the employer to the employee for an obligation the employee has paid or incurred.

In this case, the employer has indicated that the expense payment fringe benefit relates to payment of costs for a university course under paragraph 20(a) and reimbursements of any related costs under paragraph 20(b) of the FBTAA.

Paragraph 20(b) of the FBTAA provides two options for reimbursement by the employer to the employees. They are:

· the employee has paid an expense (obligation) and the employer reimburses the employee for that amount; or

· the employee has incurred an expense where the employee may or may not have paid and the employer reimburses the employee for that amount.

Therefore, the taxable value of the expense payment fringe benefit under section 23 of the FBTAA will be the amount paid to the third party for the university course costs and/or related expenses reimbursed to the employee by the employer.

Otherwise deductible rule

The taxable value of an expense payment fringe benefit may be reduced in accordance with the otherwise deductible rule (ODR) under section 24 of the FBTAA.

Subsection 24(1) of the FBTAA permits a reduction of the taxable value of an expense payment fringe benefit under the otherwise deductible rule where all the necessary conditions of that section are met.

Broadly, this means that the taxable value may be reduced by any amount an employee would hypothetically been entitled to claim as an income tax deduction if the employer had not paid a third party or reimbursed the employee in satisfaction of an expense incurred by the employee.

However, the ODR only applies where the employee would have been entitled to a once-only deduction for the expenditure paid or reimbursed by the employer. A once-only deduction is defined, in subsection 136(1) of the FBTAA, to mean one that is wholly or partly allowable under the income tax law in only one year (for example, this would exclude deductions for depreciation expenses).

For an employer to reduce the taxable value of a fringe benefit under the otherwise deductible rule an employee would have had to incur the expense solely relating to the performance of their employment related duties and that expense would have to be wholly deductible to that employee for income tax purposes.

The employee must substantiate to the employer each year prior to lodgement of the relevant FBT return, the extent to which the expense payment fringe benefit would have been otherwise deductible to the employee. This can be supplied as a declaration in the approved form by the Commissioner. Based on the information provided the employee will be providing a declaration to you as the employer, therefore, this condition will be met.

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or outgoing incurred in gaining or producing assessable income.

However, no deduction is allowed for losses or outgoings to the extent to which they are of a capital, private or domestic nature or are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible by a specific provision of ITAA 1997.

For any deduction to be allowable under section 8-1 of the ITAA 1997 you must be able to demonstrate that there is a real and direct connection between the outgoing and the gaining of your assessable income, so that the outgoing is incidental and relevant to the actual activities that gain assessable income.

Self-education expenses

The Commissioner's view on the deductibility of self-education expenses is contained in Taxation Ruling TR 98/9.

Taxation Ruling TR 98/9 examines the deductibility of self-education expenses.

Where your income-earning activities are based on the exercise of a skill or some specific knowledge and the subject of self-education enables your employee to maintain or improve that skill or knowledge, the self-education expenses are allowable as a deduction.

In accordance with TR 98/9, expenses of self-education will satisfy the requirements of section 8-1 of the ITAA 1997 if:

· your income-earning activities are based on the exercise of a skill or some specific knowledge, and the subject of self-education enables the taxpayer to maintain or improve that skill or knowledge; or

· the study of a subject of self-education objectively leads to, or is likely to lead to, an increase in a taxpayer's income from their current income-earning activities in the future.

Therefore, provided there is sufficient connection between your course of self-education and your current income earning activities, you are entitled to claim a deduction for your self-education expenses.

However, as stated in paragraph 15 of TR 98/9, self-education expenses will not be allowable if the study is intended to:

· enable you to get employment;

· enable you to obtain new employment; or

· open up a new income earning activity (whether in business or in your current employment).

The requisite connection is not shown by demonstrating only that there is some causal connection between the expenditure and derivation of the income, nor by demonstrating that the expenditure was incurred 'in connection with' the derivation of assessable income or 'for the purpose of' deriving assessable income. What must be shown is closer and more immediate connection. The expenditure must be incurred 'in the course of' gaining or producing the assessable income.

In your case, your employee is undertaking a financial accounting course in order to increase their knowledge and skills to be used in their current role.

Your employee is not undertaking the self-education in order to obtain new employment, nor are they undertaking the study in order to gain employment in a new field or endeavour.

Therefore the self-education expenses are deductible under section 8-1 of the ITAA 1997.

Conclusion

The employer would be able to reduce the taxable value of the expense payment fringe benefit under the otherwise deductible rule, as the employee would be entitled to claim a deduction if they had incurred the expenses themself.