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Ruling

Subject: Fringe benefits tax - otherwise deductible rule and self-education

Question 1

Can your fringe benefits tax liability for the reimbursement provided to your employee for their self-education expenses, be reduced by applying the 'otherwise deductible' rule pursuant to section 24 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

This ruling applies for the following period:

A specified number of fringe benefits tax years from 1 April 2012

The scheme commences on:

In the fringe benefits tax year beginning 1 April 2012

Relevant facts and circumstances

You have a 'studies assistance' policy (the policy) whereby at your discretion, you can provide studies assistance to approved employees.

In order to qualify for assistance under the policy, employees must undertake relevant work related self-education which meets the self-education guidelines found in Taxation Ruling TR 98/9 Income tax: deductibility of self-education expenses incurred by an employee or a person in business (TR 98/9).

Under the policy you may provide financial assistance, by way of reimbursement, to approved employees for certain self-education expenses.

Under the policy, costs that can be reimbursed include student fees, administration costs, tuition fees, prescribed text books and contributions to the Higher Education Loan Programs HECS-HELP and FEE-HELP and Post Graduate Education Loans Scheme.

In order to be reimbursed, employees must provide you with receipts for payments made and proof of results showing successful completion of the course of study.

Under the policy, you will reimburse up to a maximum specified percentage of the costs incurred by the employee, up to a particular limit per unit per semester and up to a specified maximum amount per year.

Your employee undertook a course of study which you have stated satisfies the self-education guidelines in TR 98/9.

Your employee applied for and obtained a FEE-HELP loan for their tuition fees.

After completing the subjects and receiving their results, your employee made a payment to the Australian Taxation Office (ATO) towards his/her FEE-HELP loan to pay for the tuition fees (less the discount for voluntary repayments).

Your employee sought reimbursement for their payment as an approved student in line with your policy.

In order to be reimbursed the employee provided you with the following items of evidence:

· university transcripts showing successful completion of the course of study

· a BPay receipt as evidence of their payment to the ATO

· a letter from the university confirming the employee's course of study, stating the courses enrolled in and the tuition fees charged and deferred to FEE-HELP

You advised that you have reimbursed a portion of the tuition fees incurred and paid by the employee.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 20

Fringe Benefits Tax Assessment Act 1986 paragraph 20(b)

Fringe Benefits Tax Assessment Act 1986 section 24

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision

Question 1

Can your fringe benefits tax liability for the reimbursement provided to your employee for their self education expenses, be reduced by applying the 'otherwise deductible' rule pursuant to section 24 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

You have reimbursed your employee for expenses they incurred for self education.

Section 20 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) sets out the circumstances in which a reimbursement will be an expense payment benefit. Section 20 states:

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

(a) 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

(b) 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 reimbursed your employee for expenses they incurred, the benefit is an expense payment benefit under paragraph 20(b) of the FBTAA.

The taxable value of an expense payment benefit can be reduced in certain circumstances by the 'otherwise deductible' rule if the employee would have been entitled to claim an income tax deduction for the expense if they hadn't been reimbursed by the employer. The requirements for the otherwise deductible rule to apply to expense payment benefits are set out in section 24 of the FBTAA. Section 24 states:

Where:

· the recipient of an expense payment fringe benefit in relation to an employer in relation to a year of tax is an employee of the employer; and

· if the recipient had, at the time when the recipients expenditure was incurred, incurred and paid unreimbursed expenditure (in this subsection called the gross expenditure), in respect of the same matter in respect of which the recipients expenditure was incurred, equal to:

· in the case of an in-house expense payment fringe benefit - the amount that, but for this subsection and Division 14 and the recipients contribution, would be the taxable value of the expense payment fringe benefit in relation to the year of tax; or

· in the case of an external expense payment - the amount of the recipients expenditure;

· a once-only deduction (in this subsection called the gross deduction) would, or would if not for section 82A of the Income Tax Assessment Act 1936, and Divisions 28 and 900 of the Income Tax Assessment Act 1997, have been allowable to the recipient under either of those Acts in respect of the gross expenditure; …

In summarising, the otherwise deductible rule as set out in section 24 of the FBTAA will apply to reduce the taxable value of an expense payment benefit if the following conditions are satisfied:

· the recipient of the benefit is your employee

· the employee who received the benefit, would have been entitled to a once-only deduction had you not reimbursed the employee for the expense incurred

A 'once-only' deduction is defined in subsection 136(1) to mean:

· once-only deduction, in relation to expenditure, means a deduction in a year of income in respect of a percentage of the expenditure where no deduction is allowable in respect of a percentage of the expenditure in any other year of income.

Was an expense payment benefit provided to an employee?

As established above, you provided an expense payment benefit to your employee.

Would the employee who received the benefit have been entitled to a once-only deduction for the expense had you not reimbursed them for the expense incurred?

The deductibility of self-education expenses is discussed in TR 98/9.

General guidelines for determining the deductibility of self-education expenses are provided in paragraphs 12 to 17 of TR 98/9. At these paragraphs the ruling states:

12. Self-education expenses are deductible under section 8-1 [of the Income Tax Assessment Act 1997 (ITAA 1997)] where they have a relevant connection to the taxpayer's current income-earning activities.

13. If a taxpayer's 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, the self-education expenses are allowable as a deduction.

14. If 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 his or her current income-earning activities in the future, the self education expenses are allowable as a deduction.

15. The fact that the study will enable a taxpayer to get employment, to obtain new employment or to open up a new income-earning activity (whether in business or in the taxpayer's current employment) is not a sufficient basis in itself for self-education expenses to be deductible. This includes studies relating to a particular profession, occupation or field of employment in which the taxpayer is not yet engaged. The expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

16. In practice, the above principles do not always operate on a mutually exclusive basis. It is always necessary to have regard to the words of section 8-1 and apply them to the facts.

17. An expense is deductible under section 8-1 when it has the essential character of an income-producing expense. The essential character is to be determined by an objective analysis of all the surrounding circumstances. There are circumstances where apportionment under section 8-1 is required. For example, if a study tour or attendance at a work-related conference or seminar is undertaken for income-earning purposes and for private purposes, it is appropriate to apportion the expenses between the purposes. If the income-earning purpose is merely incidental to the main private purpose, only the expenses which relate directly to the former purpose are allowable. However, if the private purpose is merely incidental to the main income-earning purpose, apportionment is not appropriate.

You have stated that the course of study your employee undertook satisfies these general guidelines.

Your employee has incurred expenses for tuition fees which they initially funded with a FEE-HELP loan.

The deductibility of tuition fees and higher education loan repayments is specifically discussed at paragraphs 23 to 24 of TR 98/9 as follows:

23. Subject to the general tests under 8-1 being met, the following types of expenses related to self-education are allowable:

(a) course or tuition fees of attending an educational institution, work-related conference or seminar, including student union fees;

…

24. The following expenses related to self-education are not allowable under section 8-1:

(a) a student contribution amount or debt repayment amount specified in section 26-20 of the ITAA 1997;

…

Paragraph 85 then provides further detail on these general statements:

85. Course or tuition fees incurred in attending an educational institution or attending work-related conferences or seminars, including student union fees, are allowable under section 8-1. However, you cannot deduct a student contribution amount paid to a higher education provider under the Higher Education Support Act 2003: paragraph 26-20(1)(ca) of the ITAA 1997. Such payments are made by a student to cover the cost of a course of study at a tertiary educational institution. Repayment amounts for a Higher Education Loan Program (HELP) debt or a Student Financial Supplement Scheme (SFSS) debt are also not deductible: paragraph 26-20(1)(cb) and paragraph 26-20(1)(d) of the ITAA 1997, respectively.

These general principles were discussed in regards to studies funded by FEE-HELP loans in ATO Interpretative Decision ATO ID 2005/26 Income Tax Deductions: self-education - course fees paid from FEE-HELP loan funds (ATO ID 2005/26) and, ATO Interpretative Decision ATO ID 2005/27 Income Tax Deductions: self education - payments made to reduce FEE-HELP debt (ATO ID 2005/27).

In ATOID 2005/26 a taxpayer was allowed a deduction under section 8-1 of the ITAA 1997 for university course fees paid where they obtained a FEE-HELP loan for the fees. In providing the reasoning for this decision ATO ID 2005/26 applies paragraphs 13-15 of TR 98/9 and states:

· The course of study is directly related to the taxpayer's current income earning activities and is likely to lead to an increase in the taxpayer's income. Even though the taxpayer has obtained a loan for all or part of the fees for the course under FEE-HELP, this does not preclude the taxpayer from claiming a deduction for the expenses incurred in relation to the course.

Comparatively ATO ID 2005/27 considers payments made to reduce a FEE-HELP debt, as opposed to the payment of course fees that were initially funded by a FEE-HELP loan. ATO ID 2005/27 confirms that the taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 in these circumstances. In providing the reasoning, ATOID 2005/27 states:

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. However, a deduction will not be allowed where another provision of the ITAA 1997 specifically prevents it.

Paragraphs 26-20(1)(cb) of the ITAA 1997 specifically prevents a deduction for payments made to reduce a debt to the Commonwealth under Chapter 4 of the HESA 2003 [Higher Education Support Act 2003]. Chapter 4 of the HESA governs debts raised as a result of loans made under Chapter 3 of the HESA 2003, which includes FEE-HELP loans.

In considering the principles set out in TR 98/9 and applied in ATO ID 2005/26 and ATO ID 2005/27 the employee would have been entitled to claim a once only deduction for the course fees.

Conclusion

You have advised that you have reimbursed a portion of your employee's tuition fees.

Your policy states that you can reimburse an employee for tuition fees or contributions paid to the Higher Education Loan Programs (including FEE-HELP). Thus, as distinguished by ATO ID 2005/26 and ATO ID 2005/27, we consider that you have reimbursed your employee for tuition fees paid. It is accepted therefore, that the 'otherwise deductible' rule can be applied to reduce your FBT liability on the reimbursement of your employee's self education expense.